TABLE OF CONTENTS
PART I | Page | |
Item 1. | 1 | |
Item 1A. | 16 | |
Item 1B. | 39 | |
Item 2. | 41 | |
Item 3. | 41 | |
Item 4. | 42 | |
PART II | ||
Item 5. | 43 | |
Item 6. | 44 | |
Item 7. | 44 | |
Item 7A. | 71 | |
Item 8. | 73 | |
Item 9. | 73 | |
Item 9A. | 73 | |
Item 9B. | 75 | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 75 |
PART III | ||
Item 10. | 75 | |
Item 11. | 75 | |
Item 12. | 75 | |
Item 13. | 75 | |
Item 14. | 75 | |
PART IV | ||
Item 15. | 75 | |
76 | ||
Item 16. | 79 | |
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F-1 | ||
Table of Contents
PART I
ITEM 1. BUSINESS
BUSINESS.Our Company
Except where the context otherwise requires or where otherwise indicated, references in this Annual Report on Form 10-K to “we,” “us,” “our,” “our company,” the “Company” or “Guaranty” refer to Guaranty Bancshares, Inc. and our wholly-owned banking subsidiary, Guaranty Bank & Trust, N.A. and the terms “Bank” and "Guaranty Bank & Trust" refersrefer to Guaranty Bank & Trust, N.A..
N.A.We are a bank holding company, with corporate headquarters in Addison, Texas and operational headquarters in Mount Pleasant, Texas, and additional executive offices in Dallas and Bryan, Texas. Through our wholly owned subsidiary, Guaranty Bank & Trust, a national banking association, we provide a wide range of relationship-driven commercial and consumer banking, as well as trust and wealth management products and services that are tailored to meet the needs of small- and medium-sized businesses, professionals and individuals. TheAs of December 31, 2023, the Bank currently operates 2833 full service banking locations in East Texas, Central Texas, and the Dallas/Fort Worth, metroplex.Houston and Central Texas regions of the state. As of December 31, 2017,2023, we had total assets of $1.96$3.18 billion, total net loans of $1.35$2.29 billion, total deposits of $1.68$2.63 billion and total shareholders’ equity of $207.3$303.8 million.
We completed an initial public offering of our common stock in May 2017 as an emerging growth company under the JOBS Act.2017. Our common stock is listedwas traded on the NASDAQNasdaq Global Select Market through March 6, 2023, and commenced trading on the New York Stock Exchange on March 7, 2023, where it continues to trade under the symbol "GNTY."
Our History and Growth
Guaranty Bank & Trust was originally chartered as a Texas state banking association over a century ago in 1913, and converted its charter to a national banking association in 2012. Guaranty was incorporated in 1990 to serve as the holding company for Guaranty Bank & Trust. Since our founding, we have built a strong reputation based on financial stability and community leadership. Our growth has been consistent and primarily organic, both through growth in our established markets and the entry into new markets with
de novo banking locations. In 2013, we expanded from our East Texas markets by opening a de novo banking location in Bryan/College Station, Texas. In 2017, we opened de novo banking locations in Fort Worth and Austin, Texas. In late 2021, we opened a second de novo location just outside of Austin in the town of Georgetown, Texas, and we opened a third Austin location in January 2022. We have achieved organic growth over time by enhancing our lending and deposit relationships with existing customers and attracting new customers, as well as cross-selling our deposit, mortgage, trust and wealth management and treasury management products.We have also supplemented our organic growth and leveraged our strong deposit base with strategic acquisitions. In 2015, we acquired both Texas Leadership Bank and DCB Financial, allowing us to expand our footprint into the Dallas/Fort Worth MSA. In 2018, we entered the Houston MSA through our acquisition of Westbound Bank. Our expansion strategy has enabled us to access markets with stronger loan demand, achieve consistent growth, maintain stable operating efficiencies, recruit top bankers, preserve our historically conservative credit culture, and provide shareholders with stable earnings throughout credit cycles.
During the past five years, we have supplemented our organic growth and leveraged our strong deposit base with strategic acquisitions, primarily to assist with our growth in the Dallas/Fort Worth metroplex. The following table summarizes, with fair value historical balances at the date of acquisition, our whole bank acquisitions during the last five years.Institution Acquired Location Date Completed Acquired Assets Acquired Loans Acquired Deposits Number of Branches (Dollars in millions) Texas Leadership Bank Dallas/Fort Worth April 2015 $ 76,715
$ 43,568
$ 65,496
1 DCB Financial Dallas/Fort Worth March 2015 $ 130,170
$ 118,154
$ 94,451
2 The First State Bank Hallsville, Texas July 2013 $ 32,027
$ 10,735
$ 28,880
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Since our initial expansion outside of East Texas in 2013, we have grown our network of banking locations from 18 banking locations in 11 Texas communities to 2833 banking locations in 2026 Texas communities. Additionally, we recently announced the entry into a definitive agreement for the acquisitioncommunities as of Westbound Bank and its four banking locations in four different communities in the Houston, Texas market, which is described in more detail below in "
Recent Developments."
December 31, 2023.Our Community Banking Philosophy and Culture
We focus on a community-based relationship model, as opposed to a line of business model, because we believe the community-based relationship model promotes an entrepreneurial attitude within our Company while providing personal attention and solutions tailored to our customers. Our culture is one of employee ownership and it is something we take very seriously. In 2016, weWe have formally documented our culture in a book called “The Guaranty Culture,” which we give to all prospective new hires and directors before they join our team so that they clearly understand who we are, how we work, what we believe, how we make decisions and what we admire in people.
We believe a great bank requires the right amount of two forms of capital: financial and human. We understand that our ability to successfully deploy our financial capital is directly related to our ability to bring the right talents together to lead our teams. This focus on human capital has rewarded us with a cohesive group of directors, officers and employees that we believe is our greatest asset. We have invested in a robust management trainingdevelopment program designed to develop comprehensive bankers who understand all aspects of our operations and embrace our core values. The training program
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generally lasts 18-24 months and includes rotations through each primary department of the Bank. Successful graduates of our training program are typically promoted to a leadership or managerial position upon completion and wecompletion. We currently have graduates in management, lending and operational roles. Several of the Bank’s market presidents and managers are graduates of our training program.
We continue to expand and grow the offerings provided via Guaranty University, an online professional and continuing education resource for our employees. In addition, certain up and coming leaders participate in our Leadership Development Program (LDP). The LDP program caters to our Senior Vice Presidents (VPs), VPs and Assistant VPs, including department heads, market leaders and lenders and other high potential employees and has proven to be a valuable source of growth and improvement to our leadership participants. For employees at various levels who exhibit leadership aptitude, they frequently participate in online courses, in-person leadership classes and team building activities that allow them to learn about and improve upon various leadership traits and skills.
We have developed a network of banking locations strategically positioned in separate and distinct communities. Each community where we have a banking location is overseen by a local market president or manager, and we emphasize local decision-making by experienced bankers supported by centralized risk and credit oversight. We believe that employing local decision makers, supported by industry-leading technology and centralized operational and credit administration support from our corporate headquarters, allows us to serve our customers’ individual needs while managing risk on a uniform basis. We intend to repeat this scalable model in each market in which we are able to identify high-caliber bankers with a strong banking team. We empower these bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service possible. We believe our organizational approach enables us to attract and retain talented bankers and banking teams who desire the combination of the Bank’s size and loan limits, dedication to culture, commitment to our communities, local decision-making authority, compensation structure and focus on relationship banking.
Growth and Expansion Strategies
Our strategic plan is to be a leading Texas bank holding company with a commitment to operate as a community bank as we continue to execute our expansion strategy. Our expansionlong term growth strategy isand to generate shareholder value through the following:
•Maintain Focus on Organic Growth. Focusing Although we made a strategic choice to shrink our balance sheet during 2023 given the recent uncertainty resulting from bank failures, economic factors and geopolitical issues, our longer term strategy is to focus on organic growth, with greater emphasis on high-quality credits. This is a strategy that allows us to generate stable funding sources without the non-amortizing goodwill assets and core deposit intangibles that strategic acquisitions might add to our balance sheet. We believe that a strong core deposits will become significantly moredeposit base is extremely valuable and desirable because the abilityin allowing our bank to attract core deposits at a low cost will diminish asgrow despite continued interest rates increaserate competition from bank and non-bank sources, and serves us well when alternative funding sources become more expensive. As such, we also believe that our significant core deposit franchise in East Texas provides a stable funding source for meaningful loan growth in our existing markets. In addition, we strive to build comprehensive banking relationships with new borrowers through deposit and new markets.treasury management products and services.•Pursue Strategic Acquisitions. We When the economic environment is favorable toward accretive acquisitions, we intend to continue to grow through strategic acquisitions within our current markets and in other complementary markets. However, the culture, economics and location of potential new acquisitions is critical in our decision making. Recent market valuations of bank stocks industry-wide have generally caused the economic aspect of acquisitions to be less desirable for our shareholders. We seek acquisitions that provide meaningful financial benefits through long-term organic growth opportunities and expense reductions, while maintaining our current risk profile. We believe that many smaller financial institutions will consider us an ideal long-term partner due to our community banking philosophy, commitment to employee stock ownership and our culture of teamwork.•Establish De Novo Banking Locations. We intend to open de novo banking locations in our existing and other attractive markets in Texas to further diversify our banking location network. In 2017,Most recently, in May of 2023, we opened a second de novo banking location in Georgetown, Texas and in January 2022, we opened a de novo location in the Lakeway area of Austin, bringing our total de novo locations in each ofthe Austin and Fort Worth, Texas.surrounding suburbs to four.•Expand Revenue Sources.Increase Earnings Streams. We seek to providemaintain asset quality in a manner that allows us to maintain our current earnings streams, while also providing additional services such as robust treasury management, trust2
and wealth management and Small Business Association guaranteed loans to our customers in order to augment and diversify our revenue sources. For the year ended December 31, 2017,2023, noninterest income represented approximately $14.3$22.5 million, or 20.1%18.8%, of our total revenue of $71.1$119.5 million (defined as net interest income after the provision for credit losses plus noninterest income).
The charts below illustrate our meaningful asset, loan, deposit and net income growth for the last five years:
(1)Total loans, including loans held for sale.
Although we are devoting substantial resources in furtherance of our longer term expansion strategy, there are no assurances that we will be able to further implement our expansion strategy or that any of the components of our expansion strategy will be successful.
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We believe the following competitive strengths support our long term growth and expansion strategy:
•Experienced Executive Management Team. The Bank has a seasoned and experienced executive management team with more than 275nearly 357 years of experience in financial services businesses. Our executive management team has successfully managed profitable organic growth, executed acquisitions, developed a strong credit culture and implemented a relationship-based approach to commercial and consumer banking. In addition, our executive management team has extensive knowledge of the bank regulatory landscape, significant experience navigating interest rate and credit cycles, including high inflation and recessionary periods, and has a long history of working together.•Employee Ownership Mentality. As of December 31, 2017,2023, our Company-only directors, our executive officers and employees,our employee stock ownership plan, or KSOP, as a group, beneficially owned approximately 36.0%26.2% of our outstanding shares of common stock (including 11.9%stock. Our KSOP owned 8.9% of our outstanding shares which are owned by our employee stock ownership plan, or KSOP).shares. Many of our employees’ interests in the KSOP represent material portions of their net worth, particularly our long-tenured employees. We believe that the KSOP’s material ownership position promotes an owner-operator mentality among our employees, from senior officers to entry-level employees, which we believe enhances our employees’ dedication to our organization and the execution of our strategy.•Proven Successful Execution of Growth Strategies. We have developed a strategic growth plan that allows the Company to quickly identify and efficiently execute corporate transactions that we believe enhance our geographic footprint and enterprise value. Since 2011,During the prior 15 years, we have successfully integrated sixten acquired locations into our Company through what we believe is an effective combination of comprehensive integration planning, extensive management experience with expansion, and a welcoming and flexible culture of employee ownership. In that same time period, we also established eight twelve de novo locations outside of our
historical East Texas market, achieving our objectives for organic growth within our anticipated time periods and successfully integrating new local management teams and employees into our Company. Accordingly, we have a proven track record of executing value-added acquisitions and achieving consistent, meaningful organic growth.•Scalable Platform. Utilizing the significant prior experience of our management team and employees, we believe that we have built a strong and scalable operational platform, including technology and banking processes and infrastructure, capable of supporting future organic growth and acquisitions when the right opportunities arise. We maintain operational systems and staffing that we believe are stronger than necessarily required for a financial institution of our size in order to successfully execute integrations when needed and accommodate future growth without a commensurate need for expansion of our back office capabilities. We believe our platform allows us to focus on growing the revenue-generating divisions of our business while maintaining our operational efficiencies, resulting in improved profitability.•Disciplined Credit Culture and Robust Risk Management Systems. We seek to prudently mitigate and manage our risks through a disciplined, enterprise-wide approach to risk management, particularly credit, compliance, operational and interest rate risk. All of the Bank’s executive officers serve on the Bank’s Enterprise Risk Management Committee.key operational and risk management committees. We endeavor to maintain asset quality through an emphasis on local market knowledge, long-term customer relationships, consistent and thorough underwriting for all loans and a conservative credit culture.•Brand Strength and Reputation. We believe our brand recognition, including the Guaranty name and our iconic “G” logo, which is prominently displayed in all of our advertising and marketing materials and has been trademarked to preserve its integrity, is an important element of our business model and a key driver of our future growth. We believe our reputation for providing personal and dependable service and active community involvement is well established in our traditional East Texas market, and we are continuously striving to replicate that brand awareness and reputation in our newer markets of the Dallas/Fort Worth metroplex, Greater Houston and Central Texas through a high level of community involvement, deliberate and effective digital marketing and the targeted hiring of employees with strong relationships and reputations within these markets. In addition, in 2022, we appointed a Community Development Officer who works closely with bank leadership, employees and community members to develop plans to improve quality of life across the Texas communities that we serve.•Stable Core Deposit Base. We believe our traditional East Texas market provides a historically stable source of core deposits and will becomethat serves as a greatergood source of funding aswhen there is volatility in interest rates increase and an increasing desire for core deposits becomemake them more difficult and more expensive to attract, especially in more competitive markets. As we enter newHowever, a significant emphasis is impressed upon our banker's in all of markets to develop core deposits because we believe that our stable core deposit base enhances our ability to pursue4
loans in large, high growth markets and to fund other new revenue sources such as our mortgage and warehouse lending division.Our Banking Services
Lending Activities.
We offer a variety of loans, including commercial lines of credit, working capital loans, commercial real estate-backed loans (including loans secured by owner occupied commercial properties), term loans, equipment financing, acquisition, expansion and development loans, borrowing base loans, real estate construction loans, homebuilder loans, letters of credit and other loan products to small- and medium-sized businesses, real estate developers, mortgage lenders, manufacturing and industrial companies and other businesses. We also offer various consumer loans to individuals and professionals including residential real estate loans, home equity loans, installment loans, unsecured and secured personal lines of credit, and standby letters of credit. Lending activities originate from the efforts of our bankers, with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies located in our market areas. Although all lending involves a degree of risk, we believe that commercial business loans and commercial real estate loans present greater risks than other types of loans in our portfolio. We work to mitigate these risks through conservative underwriting policies and consistent monitoring of credit quality indicators.We adhere to what we believe are disciplined underwriting standards, but also remain cognizant of the need to serve the credit needs of customers in our primary market areas by offering flexible loan solutions in a responsive and timely manner. We maintain asset quality through an emphasis on local market knowledge, long-term customer relationships, consistent and thorough underwriting for all loans and a conservative credit culture. We also seek to maintain a broadly diversified loan portfolio across customer, product and industry types. Our lending policies do not provide for any loans that are highly speculative, subprime, or that have high loan-to-value ratios. These components, together with active credit management, are the foundation of our credit culture, which we believe is critical to enhancing the long-term value of our organization to our customers, employees, shareholders and communities.
We have a service-driven, relationship-based, business-focused credit culture, rather than a price-driven, transaction-based culture. Substantially all of our loans are made to borrowers located or operating in our primary
market areas with whom we have ongoing relationships across various product lines. The limited number of loans secured by properties located in out-of-market areas have been made strictly to borrowers who are well-known to us.Our credit approval policies provide for various levels of officer and senior management lending authority for new credits and renewals, which are based on position, capability and experience. Loans in excess of an individual officer’s lending limit may be approved by two or more executive officers, with stacking authority, combining their individual lending limits, up to a current maximum of $2.5$5.0 million. Loans presenting aggregate lending exposure in excess of $2.5$5.0 million are subject to approval of the Bank’s Directors’ Loan Committee.Committee, although all loans with aggregate exposure over $1.0 million are provided for review. These limits are reviewed periodically by the Bank’s board of directors. We believe that our credit approval process provides for thorough underwriting and efficient decision making.
Credit risk management involves a partnership between our loan officers and our credit approval, credit administration and collections personnel. We conduct monthly loan meetings, attended by substantially all of our loan officers, related loan production staff and credit administration staff at which asset quality and delinquencies are reviewed. Our evaluation and compensation program for our loan officers includes significant goals, such as the percentages of past due loans and charge-offs to total loans in the officer’s portfolio, that we believe motivate the loan officers to focus on the origination and maintenance of high quality credits consistent with our strategic focus on asset quality.
Deposit Activities.
Our deposits serve as the primary funding source for lending, investing and other general banking purposes. We provide a full range of deposit products and services, including a variety of checking and savings accounts, certificates of deposit, money market accounts, debit cards, remote deposit capture, online banking, mobile banking, e-Statements, bank-by-mail and direct deposit services. We also offer business accounts and cash management services, including business checking and savings accounts and treasury management services. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community focused marketing. We also seek to cross-sell deposit products at loan origination.Given the diverse nature of our banking location network and our relationship-driven approach to our customers, we believe our deposit base is comparatively less sensitive to interest rate variations than our competitors. Nevertheless, we attempt to competitively price our deposit products to promote core deposit growth. We believe that our loan pricing encourages deposits from our loan customers.
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Guaranty Bank & Trust Wealth Management Group. We deliver a comprehensive suite of trust services through Guaranty Bank & Trust Wealth Management Group, a division of our Bank. We provide traditional trustee, custodial and escrow services for institutional and individual accounts, including corporate escrow accounts, serving as custodian for self-directed individual retirement accounts and other retirement accounts. In addition, we offer clients comprehensive investment management solutions whereby we manage all or a portion of a client’s investment portfolio on a discretionary basis. Finally, we provide retirement plan services, such as 401(k) programs, through a national vendor.
Other Products and Services.
We offer banking products and services that are attractively priced with a focus on customer convenience and accessibility. We offer a full suite of online banking services including access to account balances, online transfers, online bill payment and electronic delivery of customer statements, as well as ATMs, and banking by telephone, mail and personal appointment. We also offer debit cards, night depository, direct deposit, cashier’s checks, and letters of credit, as well as treasury management services, including wire transfer services, positive pay, remote deposit capture and automated clearinghouse services.Investments
We manage our investment portfolio primarily for liquidity purposes, with a secondary focus on returns. We separate our portfolio into two categories: (1) short-term investments with maturities less than one year, including federal funds sold; and (2) investments with maturities exceeding one year (the currenteffective duration is approximately 5.3 years)4.09 years as of December 31, 2023), all of which are classified as either available-for-sale or held-to-maturityavailable for sale and can be used for pledging on public deposits, selling under repurchase agreements and meeting unforeseen liquidity needs. We regularly evaluate the composition of this category as changes occur with respect to the interest rate yield curve. Although we may sell investment securities from time to time to take advantage of changes in interest rate spreads, it is our policy not to sell investment securities unless we can reinvest the proceeds at a similar or higher spread, so as not to take gains to the detriment of future income.
Our Markets
We consider our current market regions to be East Texas, Central Texas, and the Dallas/Fort Worth metroplex.MSA and the Houston MSA. We serve these communities from our corporate headquarters in Addison, Texas, our operational headquarters in Mount Pleasant, Texas and through a network of 1715 banking locations within East Texas, fourseven banking locations in Central Texas, and seven banking locations in the Dallas/Fort Worth metroplex and four banking locations in the Houston metroplex. As part of our strategic plan, we intend to further diversify our markets through entry into other large metropolitan markets in Texas.
Texas and/or continued expansion in our existing newer markets.Competition
The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within our markets, including local, regional and national commercial banks and credit unions. We also compete with mortgage companies, brokerage firms, consumer finance companies, mutual funds, securities firms, insurance companies, third-party payment processors, fintech companies and other financial intermediaries for certain of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory supervision applicable to us.
Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors within banking and financial services industry. Many of our competitors are much larger financial institutions that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market share through their financial product mix, pricing strategies and banking center locations. Other important competitive factors in our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of personnel and services, capacity and willingness to extend credit, and ability to offer sophisticated banking products and services. While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that our broad and sophisticated commercial banking product suite, our high-quality customer service culture, our positive reputation and long-standing community relationships will enable us to compete successfully within our markets and enhance our ability to attract and retain customers.
Our EmployeesHuman Capital Resources
As of December 31, 2017,2023, we employed 407488 full-time equivalent persons. We provide extensive training to our employees in an effort to ensure that our customers receive superior customer service. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We consider our relations with our employees to be good. For additional information regarding our human capital resources, please see the Definitive
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Proxy Statement for our Annual Meeting of Shareholders being held on May 15, 2024, a copy of which will be filed with the SEC.
Our Corporate Information
Our principal executive offices are located at 201 South Jefferson Avenue, Mount Pleasant,16475 Dallas Parkway, Suite 600, Addison, Texas 75455,75001, and our telephone number is (903)(888) 572-9881. Our website is www.gnty.com. We make available at this address, free of charge, our annual report on Form 10-K, our annual report to shareholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, or the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These documents are also available on the SEC's website at www.sec.gov. The information contained on or accessible from our website does not constitute part of this Annual Report on Form 10-K and is not incorporated by reference herein.
Recent DevelopmentsOn January 29, 2018, the Company entered into a definitive agreement, which we refer to as the merger agreement, with Katy, Texas-based Westbound Bank. The merger agreement provides for the merger of Westbound Bank with and into Guaranty Bank & Trust, with Guaranty Bank & Trust surviving the merger. As of December 31, 2017, Westbound Bank reported, per their regulatory Call Report, total assets of $228.0 million, total loans of $160.3 million and total deposits of $188.5 million. Upon the completion of the proposed acquisition of Westbound Bank, the Company will have acquired Westbound Bank's four branches in the Houston, Texas metropolitan area. Under the terms of the merger agreement, the Company will issue 900,000 shares of its common stock and will pay cash in the aggregate amount of approximately $6.4 million to the shareholders and option holders of Westbound, subject to certain potential adjustments as described in the merger agreement. The merger agreement contains customary representations, warranties and covenants by the Company and Westbound Bank. The transaction is subject to
customary closing conditions, including the receipt of regulatory approvals and approval of the merger agreement by the shareholders of Westbound Bank. The transaction is expected to close during the second quarter of 2018.Supervision and Regulation
The U.S. banking industry is highly regulated under federal and state law. Consequently, our growth and earnings performance will be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These authorities include the Board of Governors of the Federal Reserve (“Federal Reserve”), Federal Deposit Insurance Corporation ("FDIC"), Consumer Financial Protection Bureau ("CFPB"), Office of the Comptroller of the Currency ("OCC), Internal Revenue Service ("IRS") and state taxing authorities. The effect of these statutes, regulations and policies, and any changes to such statutes, regulations and policies, can be significant and cannot be predicted.
The material statutory and regulatory requirements that are applicable to the Company and its subsidiaries are summarized below. The description below is not intended to summarize all laws and regulations applicable to the Company and its subsidiaries, and is based upon the statutes, regulations, policies, interpretive letters and other written guidance that are in effect as of the date of this Annual Report on Form 10-K.
Guaranty Bancshares, Inc.
As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, or the BHC Act, and to supervision, examination and enforcement by the Federal Reserve. The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The Federal Reserve’s jurisdiction also extends to any company that we directly or indirectly control, such as any nonbank subsidiaries and other companies in which we own a controlling investment.
Financial Services Industry Reform.
On July 21,In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, was enacted. The Dodd-Frank Act broadly affectsaffected the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services sector, including provisions that, among other things:establish the CFPB, an independent organization within the Federal Reserve dedicated to promulgating and enforcing consumer protection laws applicable to all entities offering consumer financial products or services;apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will require us to deduct all trust preferred securities issued on or after May 19, 2010 from our Tier 1 capital (existing trust preferred securities issued prior to May 19, 2010 for all bank holding companies with less than $15.0 billion in total consolidated assets as of December 31, 2009 are exempt from this requirement);broaden the base for FDIC insurance assessments from the amount of insured deposits to average total consolidated assets less average tangible equity during the assessment period (subject to risk-based adjustments that would further reduce the assessment base for custodial banks) rather than domestic deposits;permanently increase FDIC deposit insurance maximum to $250,000;eliminate the upper limit for the reserve ratio designated by the FDIC each year, increase the minimum designated reserve ratio of the deposit insurance fund from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020 and eliminate the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds;permit banking organizations with less than $15.0 billion in consolidated assets as of December 31, 2009 to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a permanent basis, without any phase out;permit banks to engage in de novo interstate branching if the laws of the state where the new branch is to be established would permit the establishment of the branch if it were part of a bank that were chartered by such state;repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;requires bank holding companies and banks to be “well capitalized” and “well managed” in order to acquire banks located outside of their home state and requires any bank holding company electing to be treated as a financial holding company to be “well capitalized” and “well managed;”
directs the Federal Reserve to establish interchange fees for debit cards under a “reasonable and proportional cost” per transaction standard;increases regulation of consumer protections regarding mortgage originations, including originator compensation, minimum repayment standards, and prepayment consideration;restricts the preemption of select state laws by federal banking law applicable to national banks and removes federal preemption for subsidiaries and affiliates of national banks;implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions; andincrease the authority of the Federal Reserve to examine us and any nonbank subsidiaries.sector.In addition, the Dodd-Frank Act addressesaddressed many investor protection, corporate governance and executive compensation matters that will affectaffecting publicly-traded companies. However, under the Jumpstart our Business Startups Act of 2012, or JOBS Act, there areprovided certain exceptions to these requirements for so long as a publicly-traded company qualifies as an emerging growth company.
The requirements In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or EGRRCPA, revised certain aspects of the Dodd-Frank ActAct. Among other things, EGRRCPA exempts banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading and clarifies definitions pertaining to HVCRE, which require higher capital allocations, so that only loans with increased risk are still in the process of being implemented over time and most will be subject to regulations implemented over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implementedhigher risk weightings. Further changes effected by the various regulatory agencies and through regulations, the full extentpassage of the impact such requirements will have on our operations is unclear. Changes resulting from further implementation of, changes to, or repeal of the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition.EGRRCPA are discussed below.Revised Rules on Regulatory Capital.
Regulatory capital rules pursuant to the Basel III requirements, released in July 2013 and effective January 1, 2015, implementimplemented higher minimum capital requirements for bank holding companies and banks. These rules include a new common equity Tier 1, or CET1, capital requirement and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. These enhancements are designed to both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to cope with adverse economic conditions. The revised capital rules require banks and bank holding companies to maintain a minimum CET1 capital ratio of 4.5% of risk-based assets, a total Tier 1 capital ratio of 6.0% of risk-based assets, a total capital ratio of 8.0% of risk-based assets and a leverage ratio of 4.0% of average assets. In addition, the revised capital rules require banks and bank holding companies to maintain a 2.5% "capital conservation buffer" above these minimum risk-based capital requirements. This buffer will help7
to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk-weighted assets. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio. Including the buffer, the rules require banks and bank holding companies to maintain a minimum CET1 capital ratio of 7.0%, Tier 1 capital ratio of 8.5% and total capital ratio of 10.5%.
The capital rules also require banks to maintain a CET1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8.0%, a total capital ratio of 10.0% and a leverage ratio of 5.0% to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements.
The risk-based ratios includeEGRRCPA directed the federal banking agencies to develop a “capital conservation buffer” of 2.5% above its minimum risk-basednew, optional capital requirements that must be composed of common equity Tierratio for use by eligible community banks. Effective January 1, capital. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk-weighted assets. The capital conservation buffer began phasing in in January 2016 at 0.625% of risk-weighted assets2020, certain banks and will increase by that amount each year until fully implemented in January 2019. Although these new capital ratios do not become fully phased in until 2019, the banking regulators will generally expect banktheir holding companies and banks to meet these requirements well ahead of that date. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio.
The new capital rules also attempt to improve the quality of capital by implementing changes tosatisfy the definition of capital. Amonga qualifying community banking organization, or QCBO, have the most important changes are stricter eligibility criteria for regulatoryoption to elect out of complying with the Basel III Capital Rules and to instead comply with the community bank leverage ratio, or CBLR, of 9%. QCBOs whose leverage ratios fall between 8% and 9% have a two-quarter grace period to comply with the 9% requirement.A QCBO is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:
•total consolidated assets of less than $10 billion;•total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets;•total trading assets and trading liabilities of 5% or less of total consolidated assets;•MSAs of 25% or less of CBLR tangible equity; and•temporary difference DTAs of 25% or less of CBLR tangible equity.A QCBO may elect out of complying with the Basel III Capital Rules if, at the time of the election, the QCBO has a CBLR above 9%. The numerator of the CBLR is referred to as ‘‘CBLR tangible equity’’ and is calculated as the QCBO’s total capital instrumentsas reported in compliance with Call Report and FR Y-9C instructions, or Reporting Instructions (prior to including non-controlling interests in consolidated subsidiaries) less:
•Accumulated other comprehensive income (referred to in the industry as AOCI);•Intangible assets, calculated in accordance with Reporting Instructions, other than mortgage servicing assets; and•Deferred tax assets that would disallowarise from net operating loss and tax credit carry forwards net of any related valuations allowances.The denominator of the inclusion of certain instruments, such as trust preferred securities (other than grandfathered trust preferred securities such as those issued byCBLR is the Company),QCBO’s average assets, calculated in Tier 1 capital going forwardaccordance with reporting instructions and new constraints on the inclusion of minority interests, mortgage-servicingless intangible assets and deferred tax assets and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be madededucted from CET1 capital.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.CBLR tangible equity. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements
to meet well-capitalized standardsCompany and future regulatory change could impose higher capital standards as a routine matter. The Company’s regulatory capital ratios and those of the Bank are in excess ofhave not elected to comply with the levels established for “well-capitalized” institutions undercommunity bank leverage ratio framework, but the rules.These rules also set forth certain changesCompany and the Bank will continue to consider making such election in the methods of calculating certain risk-weighted assets, which in turn will affect the calculation of risk based ratios. Under the new rules, higher or more sensitive risk weights have been assigned to various categories of assets, including, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on non-accrual status, foreign exposures and certain corporate exposures. In addition, these rules include greater recognition of collateral and guarantees, and revised capital treatment for derivatives and repo-style transactions.future.Imposition of Liability for Undercapitalized Subsidiaries.
Bank regulators are required to take prompt corrective action to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes undercapitalized, it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5.0% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or critically undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
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Acquisitions by Bank Holding Companies. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it acquires all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank or bank holding company if after such acquisition it would own or control, directly or indirectly, more than 5.0% of the voting shares of such bank or bank holding company. In approving bank or bank holding company acquisitions by bank holding companies, the Federal Reserve is required to consider, among other things, the effect of the acquisition on competition, the financial condition, managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served (including the record of performance under the CRA), the effectiveness of the applicant in combating money laundering activities and the extent to which the proposed acquisition would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. Our ability to make future acquisitions will depend on our ability to obtain approval for such acquisitions from the Federal Reserve. The Federal Reserve could deny our application based on the above criteria or other considerations. For example, we could be required to sell banking centers as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of a proposed acquisition.
Control Acquisitions.
Federal and state laws, including the BHC Act and the Change in Bank Control Act, or CBCA, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. Whether an investor “controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25.0% or more of any class of voting securities. Subject to rebuttal, an investor is presumed to control a depository institution or other company if the investor owns or controls 10.0% or more of any class of voting securities and either the depository institution or company is a public company or no other person will hold a greater percentage of that class of voting securities after the acquisition. If an investor’s ownership of our voting securities were to exceed certain thresholds, the investor could be deemed to “control” us for regulatory purposes, which could subject such investor to regulatory filings or other regulatory consequences. The requirements of the BHCABHC Act and the CBCA could limit our access to capital and could limit parties who could acquire shares of our common stock.Regulatory Restrictions on Dividends; Source of Strength.
We areGuaranty Bancshares, Inc. is regarded as a legal entity separate and distinct from Guaranty Bank & Trust. The principal source of ourthe Company’s revenues is dividends received from Guaranty Bank & Trust. Federal law currently imposes limitations upon certain capital distributions by national banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The Federal Reserve and OCC regulate all capital distributions by the Bank directly or indirectly to the Company, including dividend payments. The Federal
Reserve has issued a policy statement that provides that a bank holding company should not pay dividends unless (1) its net income over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly, we should not pay cash dividends that exceed our net income in any year or that can only be funded in ways that weaken our financial strength, including by borrowing money to pay dividends.Under Federal Reserve policy, bank holding companies have historically been required to act as a source of financial and managerial strength to each of their banking subsidiaries, and the Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, we arethe Company is expected to commit resources to support Guaranty Bank & Trust, including at times when we may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary. If the capital of Guaranty Bank & Trust were to become impaired, the Federal Reserve could assess usthe Company for the deficiency. If wethe Company failed to pay the assessment within three months, the Federal Reserve could order the sale of ourthe Company’s stock in Guaranty Bank & Trust to cover the deficiency.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and will be required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.
Scope of Permissible Activities.
Under the BHC Act, we arethe Company is prohibited from acquiring a direct or indirect interest in or control of more than 5.0% of the voting shares of any company that is not a bank or financial holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing9
services to or performing services for its subsidiary banks, except that wethe Company may engage in, directly or indirectly, and may own shares of companies engaged in certain activities found by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, nonoperating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the Federal Reserve considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, effective March 11, 2000, or the GLB Act, amended the BHC Act and eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The GLB Act permitspermitted bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to include, among other things, securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. We currently have no plans to make a financial holding company election, although we may make a financial holding company election in the future if we desire to engage in any lines of business that are impermissible for bank holding companies but permissible for financial holding companies.
Safe and Sound Banking Practices.
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a bank holding company to provide the Federal Reserve with prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10.0% or more of the bank holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate
any law or regulation. In certain circumstances, the Federal Reserve could take the position that paying a dividend would constitute an unsafe or unsound banking practice.The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices, result in breaches of fiduciary duty or which constitute violations of laws or regulations, and can assess civil money penalties or impose enforcement action for such activities. The penalties can be as high as $1,000,000in excess of $2,200,000 for each day the activity continues.
Anti-tying Restrictions.
Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other nonbanking services offered by a bank holding company or its affiliates.Guaranty Bank & Trust, N.A.
The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation, supervision and examination by the OCC. The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC, although the OCC is the Bank’s primary federal regulator. The OCC and the FDIC have the power to enforce compliance with applicable banking statutes and regulations. Such requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank.
Capital Adequacy Requirements.
The OCC monitors the capital adequacy of the Bank by using a combination of risk-based guidelines and leverage ratios. The OCC considers the Bank’s capital levels when taking action on various types of applications and when conducting supervisory activities related to the safety and soundness of the Bank and the banking system. Under the revised capital rules which became effective on January 1, 2015, national banks are required to maintain four minimum capital standards: (1) a Tier 1 capital to adjusted total assets ratio, or “leverage capital ratio,” of at least 4.0%, (2) a Tier 1 capital to risk-weighted assets ratio, or “Tier 1 risk-based capital ratio,” of at least 6.0%, (3) a total risk-based capital (Tier 1 plus Tier 2) to risk-weighted assets ratio, or “total risk-based capital ratio,” of at least 8.0%, and (4) a CET1 capital ratio of 4.5%. In addition, the OCC’s prompt corrective action standards discussed below, in effect, increase the10
minimum regulatory capital ratios for banking organizations. These capital requirements are minimum requirements. Higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions, or if required by the banking regulators due to the economic conditions impacting our market. For example, OCC regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Corrective Measures for Capital Deficiencies.
The federal banking regulators are required by the Federal Deposit Insurance Act, or FDI Act, to take “prompt corrective action” with respect to capital-deficient institutions that are FDIC-insured. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the revised capital rules, which became effective on January 1, 2015, a “well capitalized” bank has a total risk-based capital ratio of 10.0% or higher, a Tier 1 risk-based capital ratio of 8.0% or higher, a leverage ratio of 5.0% or higher, a CETICET1 capital ratio of 6.5% or higher, and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An “adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher, a Tier 1 risk-based capital ratio of 6.0% or higher, a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth), a CETICET1 capital ratio of 4.5% or higher, and does not meet the criteria for a well-capitalized bank. A bank is “undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized.In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
As a national bank’s capital decreases, the OCC’s enforcement powers become more severe. A significantly undercapitalized national bank is subject to mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. The OCC has very limited discretion in dealing with a critically undercapitalized national bank and is virtually required to appoint a receiver or conservator.Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
Branching.
National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under the Dodd-Frank Act, de novo interstate branching by national banks is permitted if, under the laws of the state where the branch is to be located, a state bank chartered in that state would have been permitted to establish a branch. Under current Texas law, banks are permitted to establish branch offices throughout Texas with prior regulatory approval. In addition, with prior regulatory approval, banks are permitted to acquire branches of existing banks located in Texas. Banks located in Texas may also branch across state lines by merging with banks or by purchasing a branch of another bank in other states if allowed by the applicable states’ laws.Restrictions on Transactions with Affiliates and Insiders.
Transactions between the Bank and its nonbanking subsidiaries and/or affiliates, including us,the Company, are subject to Section 23A and 23B of the Federal Reserve Act and Regulation W. Regulation.In general, Section 23A of the Federal Reserve Act imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries. Covered transactions with any single affiliate may not exceed 10.0% of the capital stock and surplus of the Bank, and covered transactions with all affiliates may not exceed, in the aggregate, 20.0% of the Bank’s capital and surplus. For a bank, capital stock and surplus refers to the bank’s Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for credit losses excluded from Tier 2 capital. The Bank’s transactions with all of its affiliates in the aggregate are limited to 20.0% of the foregoing capital. “Covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, in connection with covered transactions that are extensions of credit, the Bank may be required to hold collateral to provide added security to the Bank, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the restrictions on
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transactions with affiliates, including an expansion of what types of transactions are covered transactions to include credit exposures related to derivatives, repurchase agreement and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve has also issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in Section 22(h) of the Federal Reserve Act and in Regulation O promulgated by the Federal Reserve apply to all insured institutions and their subsidiaries and bank holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. Generally, the aggregate of these loans cannot exceed the institution’s total unimpaired capital and surplus, although a bank’s regulators may determine that a lesser amount is appropriate. Loans to senior executive officers of a bank are even further restricted. Insiders are subject to enforcement actions for accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of ourthe Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to usthe Company will continue to be our principal source of operating funds. Earnings and capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. In general terms, federal law provides that the Bank’s board of directors may, from time to time and as it deems expedient, declare a dividend out of its net profits. Generally, the total of all dividends declared in a year shall not, unless approved by the OCC, exceed the net profits of that year combined with its net profits of the past two years. At December 31, 2017,2023, the Bank had $10.8$56.5 million available for payment of dividends.
In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, the Bank may not pay any dividend if it is undercapitalized or the payment of the dividend would cause it to become undercapitalized. The OCC may further restrict the payment of dividends by requiring that the Bank maintain a higher level of capital than otherwise required for it to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the OCC, the Bank is engaged in an unsound practice (which could include the payment of dividends), it may require, generally after notice and hearing, that the Bank cease such practice. The OCC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice. The OCC has also issued policy statements providing that insured depository institutions generally should pay dividends only out of current operating earnings.
Further, in the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as us) or any shareholder or creditor thereof.
Incentive Compensation Guidance.
The federal banking agencies have issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives, (2) compatibility with effective controls and risk management and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, a provision of the Basel III capital standards described above would limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. A number of federal regulatory agencies proposed rules that would require enhanced disclosure of incentive-based compensation arrangements initially in April 2011, and again in April and May 2016, but the rules have not been finalized and would mostly apply to banking organizations with over $50 billion in total assets. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.12
Audit Reports. For insured institutions with total assets of $1.0 billion or more, requirements include financial statements prepared in accordance with GAAP, management’s certifications signed by our and the Bank’s chief executive officer and chief accounting or financial officer concerning management’s responsibility for the financial statements, and an attestation by the auditors regarding the Bank’s internal controls must be submitted. For institutions with total assets of more than $3.0 billion, independent auditors may be required to review quarterly financial statements. FDICIA requires that the Bank have an independent audit committee, consisting of outside directors only, or that we have an audit committee that is entirely independent.who are independent of management of the Bank. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. The Bank’s audit committee consists entirely of independent directors.
Deposit Insurance Assessments.
The FDIC insures the deposits of federally insured banks up to prescribed statutory limits for each depositor through the Deposit Insurance Fund and safeguards the safety and soundness of the banking and thrift industries. The maximum amount of deposit insurance for banks and savings institutions is $250,000 per depositor. The amount of FDIC assessments paid by each insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors and is calculated based on an institution’s average consolidated total assets minus average tangible equity.We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. At least semi-annually, the FDIC will update its loss and income projections for the Deposit Insurance Fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required. If there are additional bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates, the Bank may be required to pay higher FDIC insurance premiums. Any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, or FICO, an agency of the federal government established to recapitalize the predecessor to the Deposit Insurance Fund. These assessments, which are included in Deposit Insurance Premiums on the Consolidated Statements of Income, will continue until the FICO bonds mature between 2017 and 2019.Financial Modernization.
Under the GLB Act, banks may establish financial subsidiaries and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting as principal, insurance company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well managed and have a CRA rating from its primary federal regulator of satisfactory or better. Subsidiary banks of financial holding companies or banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions. Such actions or restrictions could include divestiture of the “financial in nature” subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory of better. Neither we nor the Bank maintains a financial subsidiary.Brokered Deposit Restrictions.
Insured depository institutions that are categorized as adequately capitalized institutions under the FDI Act and corresponding federal regulations cannot accept, renew or roll over brokered deposits, without receiving a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on any deposits. The EGRRCPA exempted reciprocal deposits from the definition of brokered deposits. Insured depository institutions that are categorized as undercapitalized capitalized institutions under the FDI Act and corresponding federal regulations may not accept, renew, or roll over brokered deposits. The Bank is not currently subject to such restrictions.Concentrated Commercial Real Estate Lending Regulations.
The federal banking regulatory agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for acquisition, construction, land development, and other land represent 100.0% or more of total capital or (2) total reported loans secured by multifamily and nonfarm residential properties and loans for acquisition, construction, land development, and other land represent 300.0% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address, among other things, Board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. We are currently operating with real estate loan portfolios within such percentage levels.Community Reinvestment Act.
The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire assessment area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its assessment area when considering applications to establish branches, merger13
applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institution Reform Recovery and Enforcement Act, or FIRREA, requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory CRA record could substantially delay approval or result in denial of an application. The Bank received a “satisfactory” rating in its most recent CRA examination.
Consumer Laws and Regulations.
The Bank is subject to numerous laws and regulations intended to protect consumers in transactions with the Bank. These laws include, among others, laws regarding unfair, deceptive and abusive acts and practices, usury laws, and other federal consumer protection statutes. These federal laws include the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Real Estate Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act and the Truth in Savings Act, among others. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those enacted under federal law. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans and conducting other types of transactions. Failure to comply with these laws and regulations
could give rise to regulatory sanctions, customer rescission and registration rights, action by state and local attorneys general and civil or criminal liability.In addition, the Dodd-Frank Act created the CFPB. The CFPB has broad authority to regulate the offering and provision of consumer financial products. The CFPB officially came into being on July 21, 2011, and rulemaking authority for a range of consumer financial protection laws (such as the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act, among others) transferred from the Federal Reserve and other federal regulators to the CFPB on that date. The Dodd-Frank Act gives the CFPB authority to supervise and examine depository institutions with more than $10.0 billion in assets for compliance with these federal consumer laws. The authority to supervise and examine depository institutions with $10.0 billion or less in assets for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. Accordingly, the CFPB may participate in examinations of the Bank, which currently has assets of less than $10.0 billion, and could supervise and examine our other direct or indirect subsidiaries that offer consumer financial products or services. The CFPB also has supervisory and examination authority over certain nonbank institutions that offer consumer financial products. The Dodd-Frank Act identifies a number of covered nonbank institutions, and also authorizes the CFPB to identify additional institutions that will be subject to its jurisdiction. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
Mortgage Lending Rules.
The Dodd-Frank Act authorized the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act and related rules, financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure but provides a full or partial safe harbor from such defenses for loans that are “qualified mortgages.” On January 10, 2013, the CFPB published final rules to, among other things, specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for income verification, and the required methods of calculating the loan’s monthly payments. Since then the CFPB made certain modifications to these rules. The rules extend the requirement that creditors verify and document a borrower’s income and assets to include all information that creditors rely on in determining repayment ability. The rules also provide further examples of third-party documents that may be relied on for such verification, such as government records and check-cashing or funds-transfer service receipts. The new rules became effective on January 10, 2014. The rules also define “qualified mortgages,” imposing both underwriting standards - for example, a borrower’s debt-to-income ratio may not exceed 43.0% - and limits on the terms of their loans. Points and fees are subject to a relatively stringent cap, and the terms include a wide array of payments that may be made in the course of closing a loan. Certain loans, including interest-only loans and negative amortization loans, cannot be qualified mortgages. EGRRCPA, among other matters, expanded the definition of qualified mortgages for banks with less than $10 billion in assets.Anti-Money Laundering and OFAC.
Under federal law, including the Bank Secrecy Act, or BSA, and the USA PATRIOT Act of 2001 and the Anti-Money Laundering Act of 2020, certain financial institutions, such as the Bank, must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated BSA officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification especially in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. The Financial Crimes Enforcement Network, or FinCEN, has issued final rules under the BSA in July 2016 that clarify and strengthen the due diligence requirements for banks with regard to their customers, which must be complied with no later than May 2018.customers.The Office of Foreign Assets Control, or OFAC, administers laws and Executive Orders that prohibit U.S. entities from engaging in transactions with certain prohibited parties. OFAC publishes lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Generally,
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if a bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for bank
mergers and acquisitions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing and comply with OFAC sanctions, or to comply with relevant laws and regulations, could have serious legal, reputational and financial consequences for the institution.Privacy.
The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through financial services companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services. In addition to applicable federal privacy regulations, the Bank is subject to certain state privacy laws.Federal Home Loan Bank System.
The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board, or FHFB. The FHLBs serve as reserve or credit facilities for member institutions within their assigned regions. The reserves are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. The FHLBs make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the Boards of directors of each regional FHLB.As a system member, according to currently existing policies and procedures, the Bank is entitled to borrow from the Dallas FHLB provided it posts acceptable collateral. The Bank is also required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock ownership rules with respect to such advances, commitments and letters of credit and collateral requirements with respect to home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the respective mortgage loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.
Enforcement Powers.
The federal banking agencies, including our primary federal regulator, the OCC, have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements, breaches of fiduciary duty or the maintenance of unsafe and unsound conditions or practices could subject the Company or the Bank and their subsidiaries, as well as their respective officers, directors, and other institution-affiliated parties, to administrative sanctions and potentially substantial civil money penalties. For example, the regulatory authorities may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital restoration plan.Effect of Governmental Monetary Policies
The commercial banking business is affected not only by general economic conditions but also by U.S. fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and certain borrowings by banks and their affiliates and assets of foreign branches. These policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on deposits. We cannot predict the nature of future fiscal and monetary policies or the effect of these policies on our operations and activities, financial condition, results of operations, growth plans or future prospects.
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Impact of Current Laws and Regulations
The cumulative effect of these laws and regulations, while providing certain benefits, adds significantly to the cost of our operations and thus have a negative impact on our profitability. There has also been a notable expansion in recent years of financial service providers that are not subject to the examination, oversight, and other rules and regulations to which we are subject. Those providers, because they are not so highly regulated, may have a competitive
advantage over us and may continue to draw large amounts of funds away from traditional banking institutions, with a continuing adverse effect on the banking industry in general.Future Legislation and Regulatory Reform
In light of current economic conditions, regulators have increased their focus on the regulation of financial institutions. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute. Future legislation, regulation and policies, and the effects of that legislation and regulation and those policies, may have a significant influence on our operations and activities, financial condition, results of operations, growth plans or future prospects and the overall growth and distribution of loans, investments and deposits. Such legislation, regulation and policies have had a significant effect on the operations and activities, financial condition, results of operations, growth plans and future prospects of commercial banks in the past and are expected to continue to do so.
ITEM 1A. RISK FACTORS
FACTORS.Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should carefully consider the risks described below, together with all other information included in this Annual Report on Form 10‑10‑K, including the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in “Item 8. Financial Statements and Supplementary Data.” The following is a summary of the significant risk factors that we believe could adversely affect our business, followed by more detailed descriptions of those risks. We believe the risks described below are the risks that are material to us as of the date of this Annual Report on Form 10‑10‑K. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. In that case, you could experience a partial or complete loss of your investment.
Risks Related to Our Business
•We may not be able to implement aspects of our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends.•We may not be able to overcome the integration and other risks associated with acquisitions, which could have an adverse effect on our ability to implement our business strategy.•As a business operating in the financial services industry, adverse conditions in the general business or economic environment could adversely affect our business, financial condition and results of operations in the future.•We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.•We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.•The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.•Our commercial real estate and real estate construction loan portfolio exposes us to credit risks that may be greater than the risks related to other types of loans.•Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.16
•Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.•Our allowance for credit losses may prove to be insufficient to absorb potential losses in our loan portfolio.•If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, we could be subject to regulatory penalties and the price of our common stock may decline.•We rely heavily on our executive management team and other key employees, and we could be adversely affected by the unexpected loss of their services.•A lack of liquidity could impair our ability to fund operations and adversely impact our business, financial condition and results of operations.•We may need to raise additional capital in the future, and such capital may not be available when needed or at all.•We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.•Our business is concentrated in, and largely dependent upon, the continued growth and welfare of our primary markets, and adverse economic conditions in these markets could negatively impact our operations and customers.•We face strong competition from financial services companies and other companies that offer banking services.•Our trust and wealth management division derives its revenue from noninterest income and is subject to operational, compliance, reputational, fiduciary and strategic risks that could adversely affect our business, financial condition and results of operations.•Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.•We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.•The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.•System failure or cyber security breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.•We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology or technology needed to compete effectively with larger institutions may not be available to us on a cost effective basis.•We are subject to certain operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.•Our primary markets are susceptible to natural disasters and other catastrophes that could negatively impact the economies of our markets, our operations or our customers, any of which could have an adverse effect on us.•If the goodwill that we have recorded or may record in connection with a business acquisition becomes impaired, it could require charges to earnings.•We may be adversely affected by changes in U.S. tax laws.
PART I
ITEM 1. BUSINESS
Our Company
Except where the context otherwise requires or where otherwise indicated, references in this Annual Report on Form 10-K to “we,” “us,” “our,” “our company,” the “Company” or “Guaranty” refer to Guaranty Bancshares, Inc. and our wholly-owned banking subsidiary, Guaranty Bank & Trust, N.A. and the terms “Bank” and "Guaranty Bank & Trust" refersrefer to Guaranty Bank & Trust, N.A..
We are a bank holding company, with corporate headquarters in Addison, Texas and operational headquarters in Mount Pleasant, Texas, and additional executive offices in Dallas and Bryan, Texas. Through our wholly owned subsidiary, Guaranty Bank & Trust, a national banking association, we provide a wide range of relationship-driven commercial and consumer banking, as well as trust and wealth management products and services that are tailored to meet the needs of small- and medium-sized businesses, professionals and individuals. TheAs of December 31, 2023, the Bank currently operates 2833 full service banking locations in East Texas, Central Texas, and the Dallas/Fort Worth, metroplex.Houston and Central Texas regions of the state. As of December 31, 2017,2023, we had total assets of $1.96$3.18 billion, total net loans of $1.35$2.29 billion, total deposits of $1.68$2.63 billion and total shareholders’ equity of $207.3$303.8 million.
We completed an initial public offering of our common stock in May 2017 as an emerging growth company under the JOBS Act.2017. Our common stock is listedwas traded on the NASDAQNasdaq Global Select Market through March 6, 2023, and commenced trading on the New York Stock Exchange on March 7, 2023, where it continues to trade under the symbol "GNTY."
Our History and Growth
Guaranty Bank & Trust was originally chartered as a Texas state banking association over a century ago in 1913, and converted its charter to a national banking association in 2012. Guaranty was incorporated in 1990 to serve as the holding company for Guaranty Bank & Trust. Since our founding, we have built a strong reputation based on financial stability and community leadership. Our growth has been consistent and primarily organic, both through growth in our established markets and the entry into new markets with
de novo banking locations. In 2013, we expanded from our East Texas markets by opening a de novo banking location in Bryan/College Station, Texas. In 2017, we opened de novo banking locations in Fort Worth and Austin, Texas. In late 2021, we opened a second de novo location just outside of Austin in the town of Georgetown, Texas, and we opened a third Austin location in January 2022. We have achieved organic growth over time by enhancing our lending and deposit relationships with existing customers and attracting new customers, as well as cross-selling our deposit, mortgage, trust and wealth management and treasury management products.We have also supplemented our organic growth and leveraged our strong deposit base with strategic acquisitions. In 2015, we acquired both Texas Leadership Bank and DCB Financial, allowing us to expand our footprint into the Dallas/Fort Worth MSA. In 2018, we entered the Houston MSA through our acquisition of Westbound Bank. Our expansion strategy has enabled us to access markets with stronger loan demand, achieve consistent growth, maintain stable operating efficiencies, recruit top bankers, preserve our historically conservative credit culture, and provide shareholders with stable earnings throughout credit cycles.
| Institution Acquired | Location | Date Completed | Acquired Assets | Acquired Loans | Acquired Deposits | Number of Branches | ||||||||||||
| (Dollars in millions) | ||||||||||||||||||
| Texas Leadership Bank | Dallas/Fort Worth | April 2015 | $ | 76,715 | $ | 43,568 | $ | 65,496 | 1 | |||||||||
| DCB Financial | Dallas/Fort Worth | March 2015 | $ | 130,170 | $ | 118,154 | $ | 94,451 | 2 | |||||||||
| The First State Bank | Hallsville, Texas | July 2013 | $ | 32,027 | $ | 10,735 | $ | 28,880 | 2 | |||||||||
Since our initial expansion outside of East Texas in 2013, we have grown our network of banking locations from 18 banking locations in 11 Texas communities to 2833 banking locations in 2026 Texas communities. Additionally, we recently announced the entry into a definitive agreement for the acquisitioncommunities as of Westbound Bank and its four banking locations in four different communities in the Houston, Texas market, which is described in more detail below in "
Our Community Banking Philosophy and Culture
We focus on a community-based relationship model, as opposed to a line of business model, because we believe the community-based relationship model promotes an entrepreneurial attitude within our Company while providing personal attention and solutions tailored to our customers. Our culture is one of employee ownership and it is something we take very seriously. In 2016, weWe have formally documented our culture in a book called “The Guaranty Culture,” which we give to all prospective new hires and directors before they join our team so that they clearly understand who we are, how we work, what we believe, how we make decisions and what we admire in people.
We believe a great bank requires the right amount of two forms of capital: financial and human. We understand that our ability to successfully deploy our financial capital is directly related to our ability to bring the right talents together to lead our teams. This focus on human capital has rewarded us with a cohesive group of directors, officers and employees that we believe is our greatest asset. We have invested in a robust management trainingdevelopment program designed to develop comprehensive bankers who understand all aspects of our operations and embrace our core values. The training program
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generally lasts 18-24 months and includes rotations through each primary department of the Bank. Successful graduates of our training program are typically promoted to a leadership or managerial position upon completion and wecompletion. We currently have graduates in management, lending and operational roles. Several of the Bank’s market presidents and managers are graduates of our training program.
We continue to expand and grow the offerings provided via Guaranty University, an online professional and continuing education resource for our employees. In addition, certain up and coming leaders participate in our Leadership Development Program (LDP). The LDP program caters to our Senior Vice Presidents (VPs), VPs and Assistant VPs, including department heads, market leaders and lenders and other high potential employees and has proven to be a valuable source of growth and improvement to our leadership participants. For employees at various levels who exhibit leadership aptitude, they frequently participate in online courses, in-person leadership classes and team building activities that allow them to learn about and improve upon various leadership traits and skills.
We have developed a network of banking locations strategically positioned in separate and distinct communities. Each community where we have a banking location is overseen by a local market president or manager, and we emphasize local decision-making by experienced bankers supported by centralized risk and credit oversight. We believe that employing local decision makers, supported by industry-leading technology and centralized operational and credit administration support from our corporate headquarters, allows us to serve our customers’ individual needs while managing risk on a uniform basis. We intend to repeat this scalable model in each market in which we are able to identify high-caliber bankers with a strong banking team. We empower these bankers to implement our operating strategy, grow our customer base and provide the highest level of customer service possible. We believe our organizational approach enables us to attract and retain talented bankers and banking teams who desire the combination of the Bank’s size and loan limits, dedication to culture, commitment to our communities, local decision-making authority, compensation structure and focus on relationship banking.
Growth and Expansion Strategies
Our strategic plan is to be a leading Texas bank holding company with a commitment to operate as a community bank as we continue to execute our expansion strategy. Our expansionlong term growth strategy isand to generate shareholder value through the following:
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The charts below illustrate our meaningful asset, loan, deposit and net income growth for the last five years:
Although we are devoting substantial resources in furtherance of our longer term expansion strategy, there are no assurances that we will be able to further implement our expansion strategy or that any of the components of our expansion strategy will be successful.
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We believe the following competitive strengths support our long term growth and expansion strategy:
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Our Banking Services
Lending Activities.
We offer a variety of loans, including commercial lines of credit, working capital loans, commercial real estate-backed loans (including loans secured by owner occupied commercial properties), term loans, equipment financing, acquisition, expansion and development loans, borrowing base loans, real estate construction loans, homebuilder loans, letters of credit and other loan products to small- and medium-sized businesses, real estate developers,We adhere to what we believe are disciplined underwriting standards, but also remain cognizant of the need to serve the credit needs of customers in our primary market areas by offering flexible loan solutions in a responsive and timely manner. We maintain asset quality through an emphasis on local market knowledge, long-term customer relationships, consistent and thorough underwriting for all loans and a conservative credit culture. We also seek to maintain a broadly diversified loan portfolio across customer, product and industry types. Our lending policies do not provide for any loans that are highly speculative, subprime, or that have high loan-to-value ratios. These components, together with active credit management, are the foundation of our credit culture, which we believe is critical to enhancing the long-term value of our organization to our customers, employees, shareholders and communities.
We have a service-driven, relationship-based, business-focused credit culture, rather than a price-driven, transaction-based culture. Substantially all of our loans are made to borrowers located or operating in our primary
Our credit approval policies provide for various levels of officer and senior management lending authority for new credits and renewals, which are based on position, capability and experience. Loans in excess of an individual officer’s lending limit may be approved by two or more executive officers, with stacking authority, combining their individual lending limits, up to a current maximum of $2.5$5.0 million. Loans presenting aggregate lending exposure in excess of $2.5$5.0 million are subject to approval of the Bank’s Directors’ Loan Committee.Committee, although all loans with aggregate exposure over $1.0 million are provided for review. These limits are reviewed periodically by the Bank’s board of directors. We believe that our credit approval process provides for thorough underwriting and efficient decision making.
Credit risk management involves a partnership between our loan officers and our credit approval, credit administration and collections personnel. We conduct monthly loan meetings, attended by substantially all of our loan officers, related loan production staff and credit administration staff at which asset quality and delinquencies are reviewed. Our evaluation and compensation program for our loan officers includes significant goals, such as the percentages of past due loans and charge-offs to total loans in the officer’s portfolio, that we believe motivate the loan officers to focus on the origination and maintenance of high quality credits consistent with our strategic focus on asset quality.
Deposit Activities.
Our deposits serve as the primary funding source for lending, investing and other general banking purposes. We provide a full range of deposit products and services, including a variety of checking and savings accounts, certificates of deposit, money market accounts, debit cards, remote deposit capture, online banking, mobile banking, e-Statements, bank-by-mail and direct deposit services. We also offer business accounts and cash management services, including business checking and savings accounts and treasury management services. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community focused marketing. We also seek to cross-sell deposit products at loan origination.Given the diverse nature of our banking location network and our relationship-driven approach to our customers, we believe our deposit base is comparatively less sensitive to interest rate variations than our competitors. Nevertheless, we attempt to competitively price our deposit products to promote core deposit growth. We believe that our loan pricing encourages deposits from our loan customers.
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Guaranty Bank & Trust Wealth Management Group. We deliver a comprehensive suite of trust services through Guaranty Bank & Trust Wealth Management Group, a division of our Bank. We provide traditional trustee, custodial and escrow services for institutional and individual accounts, including corporate escrow accounts, serving as custodian for self-directed individual retirement accounts and other retirement accounts. In addition, we offer clients comprehensive investment management solutions whereby we manage all or a portion of a client’s investment portfolio on a discretionary basis. Finally, we provide retirement plan services, such as 401(k) programs, through a national vendor.
Other Products and Services.
We offer banking products and services that are attractively priced with a focus on customer convenience and accessibility. We offer a full suite of online banking services including access to account balances, online transfers, online bill payment and electronic delivery of customer statements, as well as ATMs, and banking by telephone, mail and personal appointment. We also offer debit cards, night depository, direct deposit, cashier’s checks, and letters of credit, as well as treasury management services, including wire transfer services, positive pay, remote deposit capture and automated clearinghouse services.Investments
We manage our investment portfolio primarily for liquidity purposes, with a secondary focus on returns. We separate our portfolio into two categories: (1) short-term investments with maturities less than one year, including federal funds sold; and (2) investments with maturities exceeding one year (the currenteffective duration is approximately 5.3 years)4.09 years as of December 31, 2023), all of which are classified as either available-for-sale or held-to-maturityavailable for sale and can be used for pledging on public deposits, selling under repurchase agreements and meeting unforeseen liquidity needs. We regularly evaluate the composition of this category as changes occur with respect to the interest rate yield curve. Although we may sell investment securities from time to time to take advantage of changes in interest rate spreads, it is our policy not to sell investment securities unless we can reinvest the proceeds at a similar or higher spread, so as not to take gains to the detriment of future income.
Our Markets
We consider our current market regions to be East Texas, Central Texas, and the Dallas/Fort Worth metroplex.MSA and the Houston MSA. We serve these communities from our corporate headquarters in Addison, Texas, our operational headquarters in Mount Pleasant, Texas and through a network of 1715 banking locations within East Texas, fourseven banking locations in Central Texas, and seven banking locations in the Dallas/Fort Worth metroplex and four banking locations in the Houston metroplex. As part of our strategic plan, we intend to further diversify our markets through entry into other large metropolitan markets in Texas.
Competition
The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within our markets, including local, regional and national commercial banks and credit unions. We also compete with mortgage companies, brokerage firms, consumer finance companies, mutual funds, securities firms, insurance companies, third-party payment processors, fintech companies and other financial intermediaries for certain of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory supervision applicable to us.
Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors within banking and financial services industry. Many of our competitors are much larger financial institutions that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market share through their financial product mix, pricing strategies and banking center locations. Other important competitive factors in our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of personnel and services, capacity and willingness to extend credit, and ability to offer sophisticated banking products and services. While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that our broad and sophisticated commercial banking product suite, our high-quality customer service culture, our positive reputation and long-standing community relationships will enable us to compete successfully within our markets and enhance our ability to attract and retain customers.
Human Capital Resources
As of December 31, 2017,2023, we employed 407488 full-time equivalent persons. We provide extensive training to our employees in an effort to ensure that our customers receive superior customer service. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We consider our relations with our employees to be good. For additional information regarding our human capital resources, please see the Definitive
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Proxy Statement for our Annual Meeting of Shareholders being held on May 15, 2024, a copy of which will be filed with the SEC.
Our Corporate Information
Our principal executive offices are located at 201 South Jefferson Avenue, Mount Pleasant,16475 Dallas Parkway, Suite 600, Addison, Texas 75455,75001, and our telephone number is (903)(888) 572-9881. Our website is www.gnty.com. We make available at this address, free of charge, our annual report on Form 10-K, our annual report to shareholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, or the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These documents are also available on the SEC's website at www.sec.gov. The information contained on or accessible from our website does not constitute part of this Annual Report on Form 10-K and is not incorporated by reference herein.
Supervision and Regulation
The U.S. banking industry is highly regulated under federal and state law. Consequently, our growth and earnings performance will be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These authorities include the Board of Governors of the Federal Reserve (“Federal Reserve”), Federal Deposit Insurance Corporation ("FDIC"), Consumer Financial Protection Bureau ("CFPB"), Office of the Comptroller of the Currency ("OCC), Internal Revenue Service ("IRS") and state taxing authorities. The effect of these statutes, regulations and policies, and any changes to such statutes, regulations and policies, can be significant and cannot be predicted.
The material statutory and regulatory requirements that are applicable to the Company and its subsidiaries are summarized below. The description below is not intended to summarize all laws and regulations applicable to the Company and its subsidiaries, and is based upon the statutes, regulations, policies, interpretive letters and other written guidance that are in effect as of the date of this Annual Report on Form 10-K.
Guaranty Bancshares, Inc.
As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, or the BHC Act, and to supervision, examination and enforcement by the Federal Reserve. The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The Federal Reserve’s jurisdiction also extends to any company that we directly or indirectly control, such as any nonbank subsidiaries and other companies in which we own a controlling investment.
Financial Services Industry Reform.
In addition, the Dodd-Frank Act addressesaddressed many investor protection, corporate governance and executive compensation matters that will affectaffecting publicly-traded companies. However, under the Jumpstart our Business Startups Act of 2012, or JOBS Act, there areprovided certain exceptions to these requirements for so long as a publicly-traded company qualifies as an emerging growth company.
Revised Rules on Regulatory Capital.
Regulatory capital rules pursuant to the Basel III requirements, released in July 2013 and effective January 1, 2015,7
to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk-weighted assets. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio. Including the buffer, the rules require banks and bank holding companies to maintain a minimum CET1 capital ratio of 7.0%, Tier 1 capital ratio of 8.5% and total capital ratio of 10.5%.
The capital rules also require banks to maintain a CET1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8.0%, a total capital ratio of 10.0% and a leverage ratio of 5.0% to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements.
The risk-based ratios includeEGRRCPA directed the federal banking agencies to develop a “capital conservation buffer” of 2.5% above its minimum risk-basednew, optional capital requirements that must be composed of common equity Tierratio for use by eligible community banks. Effective January 1, capital. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk-weighted assets. The capital conservation buffer began phasing in in January 2016 at 0.625% of risk-weighted assets2020, certain banks and will increase by that amount each year until fully implemented in January 2019. Although these new capital ratios do not become fully phased in until 2019, the banking regulators will generally expect banktheir holding companies and banks to meet these requirements well ahead of that date. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio.
A QCBO is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:
A QCBO may elect out of complying with the Basel III Capital Rules if, at the time of the election, the QCBO has a CBLR above 9%. The numerator of the CBLR is referred to as ‘‘CBLR tangible equity’’ and is calculated as the QCBO’s total capital instrumentsas reported in compliance with Call Report and FR Y-9C instructions, or Reporting Instructions (prior to including non-controlling interests in consolidated subsidiaries) less:
The denominator of the inclusion of certain instruments, such as trust preferred securities (other than grandfathered trust preferred securities such as those issued byCBLR is the Company),QCBO’s average assets, calculated in Tier 1 capital going forwardaccordance with reporting instructions and new constraints on the inclusion of minority interests, mortgage-servicingless intangible assets and deferred tax assets and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be madededucted from CET1 capital.
Imposition of Liability for Undercapitalized Subsidiaries.
Bank regulators are required to take prompt corrective action to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes undercapitalized, it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5.0% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or critically undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
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Acquisitions by Bank Holding Companies. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it acquires all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank or bank holding company if after such acquisition it would own or control, directly or indirectly, more than 5.0% of the voting shares of such bank or bank holding company. In approving bank or bank holding company acquisitions by bank holding companies, the Federal Reserve is required to consider, among other things, the effect of the acquisition on competition, the financial condition, managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served (including the record of performance under the CRA), the effectiveness of the applicant in combating money laundering activities and the extent to which the proposed acquisition would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. Our ability to make future acquisitions will depend on our ability to obtain approval for such acquisitions from the Federal Reserve. The Federal Reserve could deny our application based on the above criteria or other considerations. For example, we could be required to sell banking centers as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of a proposed acquisition.
Control Acquisitions.
Federal and state laws, including the BHC Act and the Change in Bank Control Act, or CBCA, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. Whether an investor “controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25.0% or more of any class of voting securities. Subject to rebuttal, an investor is presumed to control a depository institution or other company if the investor owns or controls 10.0% or more of any class of voting securities and either the depository institution or company is a public company or no other person will hold a greater percentage of that class of voting securities after the acquisition. If an investor’s ownership of our voting securities were to exceed certain thresholds, the investor could be deemed to “control” us for regulatory purposes, which could subject such investor to regulatory filings or other regulatory consequences. The requirements of theRegulatory Restrictions on Dividends; Source of Strength.
Under Federal Reserve policy, bank holding companies have historically been required to act as a source of financial and managerial strength to each of their banking subsidiaries, and the Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, we arethe Company is expected to commit resources to support Guaranty Bank & Trust, including at times when we may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary. If the capital of Guaranty Bank & Trust were to become impaired, the Federal Reserve could assess usthe Company for the deficiency. If wethe Company failed to pay the assessment within three months, the Federal Reserve could order the sale of ourthe Company’s stock in Guaranty Bank & Trust to cover the deficiency.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and will be required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.
Scope of Permissible Activities.
Under the BHC Act,9
services to or performing services for its subsidiary banks, except that wethe Company may engage in, directly or indirectly, and may own shares of companies engaged in certain activities found by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, nonoperating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the Federal Reserve considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, effective March 11, 2000, or the GLB Act, amended the BHC Act and eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The GLB Act permitspermitted bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to include, among other things, securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. We currently have no plans to make a financial holding company election, although we may make a financial holding company election in the future if we desire to engage in any lines of business that are impermissible for bank holding companies but permissible for financial holding companies.
Safe and Sound Banking Practices.
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a bank holding company to provide the Federal Reserve with prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10.0% or more of the bank holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violateThe Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices, result in breaches of fiduciary duty or which constitute violations of laws or regulations, and can assess civil money penalties or impose enforcement action for such activities. The penalties can be as high as $1,000,000in excess of $2,200,000 for each day the activity continues.
Anti-tying Restrictions.
Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other nonbanking services offered by a bank holding company or its affiliates.Guaranty Bank & Trust, N.A.
The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation, supervision and examination by the OCC. The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC, although the OCC is the Bank’s primary federal regulator. The OCC and the FDIC have the power to enforce compliance with applicable banking statutes and regulations. Such requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank.
Capital Adequacy Requirements.
The OCC monitors the capital adequacy of the Bank by using a combination of risk-based guidelines and leverage ratios. The OCC considers the Bank’s capital levels when taking action on various types of applications and when conducting supervisory activities related to the safety and soundness of the Bank and the banking system. Under the revised capital rules which became effective on January 1, 2015, national banks are required to maintain four minimum capital standards: (1) a Tier 1 capital to adjusted total assets ratio, or “leverage capital ratio,” of at least 4.0%, (2) a Tier 1 capital to risk-weighted assets ratio, or “Tier 1 risk-based capital ratio,” of at least 6.0%, (3) a total risk-based capital (Tier 1 plus Tier 2) to risk-weighted assets ratio, or “total risk-based capital ratio,” of at least 8.0%, and (4) a CET1 capital ratio of 4.5%. In addition, the OCC’s prompt corrective action standards discussed below, in effect, increase the10
minimum regulatory capital ratios for banking organizations. These capital requirements are minimum requirements. Higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions, or if required by the banking regulators due to the economic conditions impacting our market. For example, OCC regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Corrective Measures for Capital Deficiencies.
The federal banking regulators are required by the Federal Deposit Insurance Act, or FDI Act, to take “prompt corrective action” with respect to capital-deficient institutions that are FDIC-insured. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the revised capital rules, which became effective on January 1, 2015, a “well capitalized” bank has a total risk-based capital ratio of 10.0% or higher, a Tier 1 risk-based capital ratio of 8.0% or higher, a leverage ratio of 5.0% or higher, aIn addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
As a national bank’s capital decreases, the OCC’s enforcement powers become more severe. A significantly undercapitalized national bank is subject to mandated capital raising activities, restrictions on interest rates paid and
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
Branching.
National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under the Dodd-Frank Act, de novo interstate branching by national banks is permitted if, under the laws of the state where the branch is to be located, a state bank chartered in that state would have been permitted to establish a branch. Under current Texas law, banks are permitted to establish branch offices throughout Texas with prior regulatory approval. In addition, with prior regulatory approval, banks are permitted to acquire branches of existing banks located in Texas. Banks located in Texas may also branch across state lines by merging with banks or by purchasing a branch of another bank in other states if allowed by the applicable states’ laws.Restrictions on Transactions with Affiliates and Insiders.
Transactions between the Bank and its nonbanking subsidiaries and/or affiliates, includingIn general, Section 23A of the Federal Reserve Act imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries. Covered transactions with any single affiliate may not exceed 10.0% of the capital stock and surplus of the Bank, and covered transactions with all affiliates may not exceed, in the aggregate, 20.0% of the Bank’s capital and surplus. For a bank, capital stock and surplus refers to the bank’s Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for credit losses excluded from Tier 2 capital. The Bank’s transactions with all of its affiliates in the aggregate are limited to 20.0% of the foregoing capital. “Covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, in connection with covered transactions that are extensions of credit, the Bank may be required to hold collateral to provide added security to the Bank, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the restrictions on
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transactions with affiliates, including an expansion of what types of transactions are covered transactions to include credit exposures related to derivatives, repurchase agreement and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve has also issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in Section 22(h) of the Federal Reserve Act and in Regulation O promulgated by the Federal Reserve apply to all insured institutions and their subsidiaries and bank holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. Generally, the aggregate of these loans cannot exceed the institution’s total unimpaired capital and surplus, although a bank’s regulators may determine that a lesser amount is appropriate. Loans to senior executive officers of a bank are even further restricted. Insiders are subject to enforcement actions for accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part ofIn addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, the Bank may not pay any dividend if it is undercapitalized or the payment of the dividend would cause it to become undercapitalized. The OCC may further restrict the payment of dividends by requiring that the Bank maintain a higher level of capital than otherwise required for it to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the OCC, the Bank is engaged in an unsound practice (which could include the payment of dividends), it may require, generally after notice and hearing, that the Bank cease such practice. The OCC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice. The OCC has also issued policy statements providing that insured depository institutions generally should pay dividends only out of current operating earnings.
Further, in the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as us) or any shareholder or creditor thereof.
Incentive Compensation Guidance.
The federal banking agencies have issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives, (2) compatibility with effective controls and risk management and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, a provision of the Basel III capital standards described above would limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds.12
Audit Reports. For insured institutions with total assets of $1.0 billion or more, requirements include financial statements prepared in accordance with GAAP, management’s certifications signed by our and the Bank’s chief executive officer and chief accounting or financial officer concerning management’s responsibility for the financial statements, and an attestation by the auditors regarding the Bank’s internal controls must be submitted. For institutions with total assets of more than $3.0 billion, independent auditors may be required to review quarterly financial statements. FDICIA requires that the Bank have an independent audit committee, consisting of outside directors only, or that we have an audit committee that is entirely independent.who are independent of management of the Bank. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. The Bank’s audit committee consists entirely of independent directors.
Deposit Insurance Assessments.
The FDIC insures the deposits of federally insured banks up to prescribed statutory limits for each depositor through the Deposit Insurance Fund and safeguards the safety and soundness of the banking and thrift industries. The maximum amount of deposit insurance for banks and savings institutions is $250,000 per depositor. The amount of FDIC assessments paid by each insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors and is calculated based on an institution’s average consolidated total assets minus average tangible equity.We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. At least semi-annually, the FDIC will update its loss and income projections for the Deposit Insurance Fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required. If there are additional bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates, the Bank may be required to pay higher FDIC insurance premiums. Any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings.
Financial Modernization.
Under the GLB Act, banks may establish financial subsidiaries and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting as principal, insurance company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well managed and have a CRA rating from its primary federal regulator of satisfactory or better. Subsidiary banks of financial holding companies or banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions. Such actions or restrictions could include divestiture of the “financial in nature” subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory of better. Neither we nor the Bank maintains a financial subsidiary.Brokered Deposit Restrictions.
Insured depository institutions that are categorized as adequately capitalized institutions under the FDI Act and corresponding federal regulations cannot accept, renew or roll over brokered deposits, without receiving a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on any deposits. The EGRRCPA exempted reciprocal deposits from the definition of brokered deposits. Insured depository institutions that are categorized as undercapitalized capitalized institutions under the FDI Act and corresponding federal regulations may not accept, renew, or roll over brokered deposits. The Bank is not currently subject to such restrictions.Concentrated Commercial Real Estate Lending Regulations.
The federal banking regulatory agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for acquisition, construction, land development, and other land represent 100.0% or more of total capital or (2) total reported loans secured by multifamily and nonfarm residential properties and loans for acquisition, construction, land development, and other land represent 300.0% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address, among other things, Board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. We are currently operating with real estate loan portfolios within such percentage levels.Community Reinvestment Act.
The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire assessment area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its assessment area when considering applications to establish branches, merger13
applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institution Reform Recovery and Enforcement Act, or FIRREA, requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory CRA record could substantially delay approval or result in denial of an application. The Bank received a “satisfactory” rating in its most recent CRA examination.
Consumer Laws and Regulations.
The Bank is subject to numerous laws and regulations intended to protect consumers in transactions with the Bank. These laws include, among others, laws regarding unfair, deceptive and abusive acts and practices, usury laws, and other federal consumer protection statutes. These federal laws include the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Real Estate Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act and the Truth in Savings Act, among others. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those enacted under federal law. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans and conducting other types of transactions. Failure to comply with these laws and regulationsIn addition, the Dodd-Frank Act created the CFPB. The CFPB has broad authority to regulate the offering and provision of consumer financial products. The CFPB officially came into being on July 21, 2011, and rulemaking authority for a range of consumer financial protection laws (such as the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act, among others) transferred from the Federal Reserve and other federal regulators to the CFPB on that date. The Dodd-Frank Act gives the CFPB authority to supervise and examine depository institutions with more than $10.0 billion in assets for compliance with these federal consumer laws. The authority to supervise and examine depository institutions with $10.0 billion or less in assets for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. Accordingly, the CFPB may participate in examinations of the Bank, which currently has assets of less than $10.0 billion, and could supervise and examine our other direct or indirect subsidiaries that offer consumer financial products or services. The CFPB also has supervisory and examination authority over certain nonbank institutions that offer consumer financial products. The Dodd-Frank Act identifies a number of covered nonbank institutions, and also authorizes the CFPB to identify additional institutions that will be subject to its jurisdiction. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
Mortgage Lending Rules.
The Dodd-Frank Act authorized the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act and related rules, financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure but provides a full or partial safe harbor from such defenses for loans that are “qualified mortgages.”Anti-Money Laundering and OFAC.
Under federal law, including the Bank Secrecy Act, or BSA,The Office of Foreign Assets Control, or OFAC, administers laws and Executive Orders that prohibit U.S. entities from engaging in transactions with certain prohibited parties. OFAC publishes lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Generally,
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if a bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for bank
Privacy.
The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through financial services companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services. In addition to applicable federal privacy regulations, the Bank is subject to certain state privacy laws.Federal Home Loan Bank System.
The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board, or FHFB. The FHLBs serve as reserve or credit facilities for member institutions within their assigned regions. The reserves are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. The FHLBs make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the Boards of directors of each regional FHLB.As a system member, according to currently existing policies and procedures, the Bank is entitled to borrow from the Dallas FHLB provided it posts acceptable collateral. The Bank is also required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock ownership rules with respect to such advances, commitments and letters of credit and collateral requirements with respect to home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the respective mortgage loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.
Enforcement Powers.
The federal banking agencies, including our primary federal regulator, the OCC, have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements, breaches of fiduciary duty or the maintenance of unsafe and unsound conditions or practices could subject the Company or the Bank and their subsidiaries, as well as their respective officers, directors, and other institution-affiliated parties, to administrative sanctions and potentially substantial civil money penalties. For example, the regulatory authorities may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital restoration plan.Effect of Governmental Monetary Policies
The commercial banking business is affected not only by general economic conditions but also by U.S. fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and certain borrowings by banks and their affiliates and assets of foreign branches. These policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on deposits. We cannot predict the nature of future fiscal and monetary policies or the effect of these policies on our operations and activities, financial condition, results of operations, growth plans or future prospects.
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Impact of Current Laws and Regulations
The cumulative effect of these laws and regulations, while providing certain benefits, adds significantly to the cost of our operations and thus have a negative impact on our profitability. There has also been a notable expansion in recent years of financial service providers that are not subject to the examination, oversight, and other rules and regulations to which we are subject. Those providers, because they are not so highly regulated, may have a competitive
Future Legislation and Regulatory Reform
In light of current economic conditions, regulators have increased their focus on the regulation of financial institutions. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute. Future legislation, regulation and policies, and the effects of that legislation and regulation and those policies, may have a significant influence on our operations and activities, financial condition, results of operations, growth plans or future prospects and the overall growth and distribution of loans, investments and deposits. Such legislation, regulation and policies have had a significant effect on the operations and activities, financial condition, results of operations, growth plans and future prospects of commercial banks in the past and are expected to continue to do so.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should carefully consider the risks described below, together with all other information included in this Annual Report on Form 10‑10‑K, including the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in “Item 8. Financial Statements and Supplementary Data.” The following is a summary of the significant risk factors that we believe could adversely affect our business, followed by more detailed descriptions of those risks. We believe the risks described below are the risks that are material to us as of the date of this Annual Report on Form 10‑10‑K. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. In that case, you could experience a partial or complete loss of your investment.
Risks Related to Our Business
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Risk Related to Regulation of Our Industry
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Risks Related to an Investment in Our Common Stock
Risks Related to Our Business
We may not be able to implement aspects of our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends.
Our expansion strategy focuses on organic growth, supplemented by strategic acquisitions and expansion of the Bank’s banking location network, or de novo branching. We may not be able to execute on aspects of our expansion strategy, which may impair our ability to sustain our historical rate of growth or prevent us from growing at all. More specifically, we may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as economic conditions and competition with other financial institutions, may impede or prohibit the growth of our operations, the opening of new banking locations and the consummation of acquisitions. Further, we may be unable to attract and retain experienced bankers, which could adversely affect our growth. The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt our credit, operational, technology and governance infrastructure to accommodate expanded operations. If we fail to implement one or more aspects of our strategy, we may be unable to maintain our historical earnings trends, which could have an adverse effect on our business, financial condition and results of operations.
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We may not be able to manage the risks associated with our anticipated growth and expansion through de novo branching.
Our business strategy includes evaluating strategic opportunities to grow through
de novo branching, and we believe that banking location expansion has been meaningful to our growth since inception. De novo branching carries with it certain potential risks, including significant startup costs and anticipated initial operating losses; an inability to gain regulatory approval; an inability to secure the services of qualified senior management to operate the de novo banking location and successfully integrate and promote our corporate culture; poor market reception for de novo banking locations established in markets where we do not have a preexisting reputation; challenges posed by local economic conditions; challenges associated with securing attractive locations at a reasonable cost; and the additional strain on management resources and internal systems and controls. Failure to adequately manage theWe may not be able to overcome the integration and other risks associated with acquisitions, which could have an adverse effect on our ability to implement our business strategy.
Although we plan to continue to grow our business organically and through
de novo branching, we also intend to pursue acquisition opportunities that we believe complement our activities and have the ability to enhance our profitability and provide attractive risk-adjusted returns. Our acquisition activities could be material to our business and involve a number of risks, including the following:Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy, which, in turn, could have an adverse effect on our business, financial condition and results of operations.
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A key piece of our expansion strategy is a focus on decision-making authority at the branch and market level, and our business, financial condition, results of operations and prospects could be adversely affected if our local teams do not follow our internal policies or are negligent in their decision-making.
In order to be able to provide the responsive and individualized customer service that distinguishes us from competitors and in order to attract and retain management talent, we empower our local management teams to make certain business decisions on the local level. Lending authorities are assigned to branch presidents and their banking teams based on their experience, with all loan relationships in excess of internal specified maximums being reviewed by the Bank’s Directors’ Loan Committee, comprised of senior management of the Bank, or the Bank’s board of directors, as the case may be. Our local lenders may not follow our internal procedures or otherwise act in our best interests with respect to their decision-making. A failure of our employees to follow our internal policies, or actions taken by our employees that are negligent or not in our best interests could have an adverse effect on our business, financial condition and results of operations.
As a business operating in the financial services industry, adverse conditions andin the general business or economic trends have recently and adversely affected the banking industry andenvironment could adversely affect our business, financial condition and results of operations in the future.
Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. Uncertainty about the federal fiscal policymaking process, and the medium and long-term fiscal outlook of the federal government and U.S. economy, is a concern for businesses, consumers and investors in the U.S. In addition, economic conditions in foreign countries, including global political hostilities or public health outbreaks and uncertainty over the stability of foreign currency, could affect the stability of global financial markets, which could hinder domestic economic growth. The current economic environment is characterized by interest rates that have increased at a historically rapid rate, from historically low levels, which impacts our ability to retain deposits, causes unrealized losses in the investment security portfolio and can effect borrowers' ability to cover debt service. We are operatingunable to predict changes in an uncertain economic environment, including generally uncertain conditions nationally and locally in our industry and markets. Although economic conditions have improved in recent years, financial institutions continue to be affected by volatility in the real estate market in some parts of the country and uncertain
Business and consumer customers of the Bank may experience varying degrees of financial distress resulting from economic conditions and Federal Reserve monetary policies, which may adversely affect their ability to assess the creditworthiness of customerstimely pay interest and to estimate the losses inherent in our loan portfolio is made more complex by uncertain marketprincipal on their loans and economic conditions. Another national economic downturn or deterioration of conditions in our markets could result in losses beyond those that are provided for in our allowance for loan losses and lead to the following consequences:
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Many of our loans are made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio could lead to unexpected losses and have an adverse effect on our business, financial condition and results of operations.
We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.
The use of statistical and quantitative models and other quantitative analyses is endemic to bank decision-making, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to annual
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Dodd-Frank Act stress testing, or DFAST, and the Comprehensive Capital Analysis and Review, or CCAR, submissions, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.
We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements are able to be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively
The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.
We focus our business development and marketing strategy primarily on small- to medium-sized businesses. As of December 31, 2017,2023, we had approximately $782.4 million$1.71 billion of loans to businesses, which represents approximately 57.6%73.8% of our total loan portfolio. Small- to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small- and medium-sized business often depends on the management skills, talents and efforts of a small group of people, and the death, disability or resignation of one or more of these people could have an adverse effect on the business and its ability to repay its loan. If our borrowers are unable to repay their loans, our business, financial condition and results of operations could be adversely affected.
Our commercial real estate and real estate construction loan portfolio exposes us to credit risks that may be greater than the risks related to other types of loans.
As of December 31, 2017,2023, approximately $710.5 million,$1.41 billion, or 52.3%60.5%, of our total loans were nonresidential real estate loans, (includingincluding owner occupied commercial real estate loans), which included approximately $196.8loans of $323.7 million, or 14.5%13.9%, and approximately $296.6 million, or 12.8%, of our total loans, that were construction and land development loans. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. The availability of such income for repayment may be adversely affected by changes in the economy or local market conditions. These loans expose a lender to greater credit risk than loans secured by other types of collateral because the collateral securing these loans is typically more difficult to liquidate due to the fluctuation of real estate values. Additionally, non-owner occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Unexpected deterioration in the credit quality of our non-owner occupied commercial real estate loan portfolio could require us to increase our allowance for loancredit losses, which would reduce our profitability and could have an adverse effect on our business, financial condition and results of operations.
Construction and land development loans also involve risks because loan funds are secured by a project under construction and the project is of uncertain value prior to its completion. It can be difficult to accurately evaluate the total funds required to complete a project, and construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, we may be unable to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project, incur taxes, maintenance and compliance costs for a foreclosed property and may have to hold the property for an indeterminate period of time, any of which could adversely affect our business, financial condition and results of operations.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
As of December 31, 2017,2023, approximately $1.08$1.99 billion, or 79.8%85.7%, of our total loans were loans with real estate as a primary or secondary component of collateral. Real estate values in many Texas markets have experienced periods of fluctuation over the last five years. The market value of real estate can fluctuate significantly in a short period of time. As a result, adverse developments affecting real estate values and the liquidity of real estate in our primary markets, in particular industries or other segments of our loan portfolio, or in Texas generally could increase the credit risk associated with our loan portfolio, and could result in losses that adversely affect credit quality, financial condition and results of operations. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without
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a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses would have an adverse effect on our business, financial condition and results of operations. If real estate values decline, it is also more likely that we would be required to increase our allowance for loancredit losses, which would adversely affect our business, financial condition and results of operations.
Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in value in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of our other real estate owned, or OREO, and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments.estimated losses. If any of these valuations are inaccurate, our combined and consolidated financial statements may not reflect the correct value of our OREO, and our allowance for loancredit losses may not reflect accurate loan impairments.estimate losses. This could have an adverse effect on our business, financial condition or results of operations. As of December 31, 2017,2023, we held OREO and$234,000 of repossessed property and equipment, that was valued at $2.2 million and $2.5 million, respectively.
We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs and potential risks associated with the ownership of the real property, or consumer protection initiatives or changes in state or federal law may substantially raise the cost of foreclosure or prevent us from foreclosing at all.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we would be exposed to the risks inherent in the ownership of real estate. As of December 31, 2017,2023, we held approximately $2.2 millionno assets in OREOOREO. In the prior year we held $38,000 assets in a special purpose subsidiary that is currently marketed for sale.OREO. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to general or local economic condition, environmental cleanup liability, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged properties, ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules, and natural disasters. Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate, or writedownswrite-downs in the value of other real estate owned, could have an adverse effect on our business, financial condition and results of operations.
Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the time and expense associated with the foreclosure process or prevent us from foreclosing at all. While historically Texas has had foreclosure laws that are favorable to lenders, a number of states in recent years have either considered or adopted foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in default, and we cannot be certain that Texas will not adopt similar legislation in the future. Foreclosure and eviction moratoria were put in place in many markets in response to the COVID-19 pandemic, and similar moratoria may delay or prevent foreclosures in the future. Additionally, federal regulators have prosecuted a number of mortgage servicing companies for alleged consumer law violations. If new state or federal laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers, such could have an adverse effect on our business, financial condition and results of operation.
A portion of our loan portfolio is comprised of commercial loans secured by receivables, inventory, equipment or other commercial collateral, the deterioration in value of which could expose us to credit losses.
As of December 31, 2017,2023, approximately $197.5$235.5 million, or 14.5%10.1%, of our total loans were commercial loans to businesses. In general, these loans are collateralized by general business assets, including, among other things, accounts receivable, inventory and equipment, and most are backed by a personal guaranty of the borrower or principal. These commercial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes moveable property such as equipment and inventory, which may decline in value more rapidly than we anticipate exposing us to increased credit risk. In addition, a portion of our customer base, including customers in the energy and real estate business, may be in industries which are particularly sensitive to commodity prices or market fluctuations, such as energy prices. Accordingly, negative changes in commodity prices and real estate values and liquidity could impair the value of the collateral securing these loans. Significant adverse
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changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage that may expose us to credit losses and could adversely affect our business, financial condition and results of operations.
Our allowance for loancredit losses may prove to be insufficient to absorb potential losses in our loan portfolio.
We maintain an allowance for loancredit losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio. As of December 31, 2017,2023, our allowance for credit losses in our loan lossesportfolio totaled $12.9$30.9 million, which represents approximately 0.95%1.33% of our total loans. The level of the allowance reflects management’s continuing evaluation of general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. The determination of the appropriate level of the allowance for loancredit losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes. Inaccurate management assumptions, deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification or deterioration of additional problem loans, acquisition of problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loancredit losses. In addition, our regulators, as an integral part of their periodic examination, review our methodology for calculating, and the adequacy of, our allowance for loancredit losses and may direct us to make additions to the allowance based on their judgments about information available to them at the time of their examination. Further, if actual charge-offs in future periods exceed the amounts allocated to the allowance for loancredit losses, we may need additional provisions for loancredit losses to restore the adequacy of our allowance for loancredit losses. Finally, the measure of our allowance for loancredit losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board recently issued a new credit impairment model,Under the Current Expected Credit Loss, or CECL impairment model, which will becomebecame applicable to us on January 1, 2020, though we may choose to adopt CECL on January 1, 2019, or may be encouraged by our regulators to do so. CECL will require financial institutions are required to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model, credit deterioration would beis reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. Accordingly, the CECL model could requirerequired many financial institutions, like the Bank, to increase their allowances for loancredit losses. Moreover, the CECL model likely would create more volatilityIncreases in our level of allowance for loan losses. If we are required to materially increase our level of allowance for loancredit losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, we could be subject to regulatory penalties and the price of our common stock may decline.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on that system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act beginning within our second annual report on Form 10-K, which will require us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth companies, our independent registered public accounting firm may beis required to report on the effectiveness of our internal control over financial reporting beginning as of that secondin our annual report on Form 10-K.
We will continue to periodically test and update, as necessary, our internal control systems, including our financial reporting controls. Our actions, however, may not be sufficient to result in an effective internal control environment, and any future failure to maintain effective internal control over financial reporting could impair the reliability of our financial statements which in turn could harm our business, impair investor confidence in the accuracy and completeness of our financial reports and our access to the capital markets and cause the price of our common stock to decline and subject us to regulatory penalties.
We rely heavily on our executive management team and other key employees, and we could be adversely affected by the unexpected loss of their services.
Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and
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of skills, attributes and business relationships required to execute our business plan may be lengthy. We may not be successful in retaining our key employees, and the unexpected loss of services of one or more of our key personnel could have an adverse effect on our business because of their skills, knowledge of and business relationships within our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have an adverse effect on our business, financial condition, results of operations and future prospects.
We earn income by originating residential mortgage loans and SBA 7(a) loans for resale in the secondary mortgage market, and disruptions in that market could reduce our operating income.
Historically, we have earned income by originating mortgage loans and Small Business Administration 7(a) loans for sale in the secondary market. AFor the mortgage loans, a historical focus of our loan origination and sales activities has been to enter into formal commitments and informal agreements with larger banking companies and mortgage investors. Under these arrangements, we originate single family mortgages that are priced and underwritten to conform to previously agreed criteria before loan funding and are delivered to the investor shortly after funding. For the SBA 7(a) loans, we obtain various bids for the purchase of the SBA guaranteed portion of the loan from investors and will generally sell the guaranteed portion to the investor with the highest bid. For the years ended December 31, 20172023 and 2016,2022, we earned approximately $2.0$1.2 million and $1.7$2.4 million, respectively, from these activities. However, in the recent past, disruptions in the secondary market for residential mortgage loans have limited the market for, and liquidity of, most mortgage loans other than conforming Fannie Mae and Federal Home Loan Mortgage Corporation, or Freddie Mac, loans. Additionally, the risk appetite for purchasing of SBA 7(a) guaranteed loans fluctuates, occasionally resulting in bids that are not favorable for us to sell the guaranteed portion of the loan. The effects of these disruptions in the secondary market for residential mortgage loans and SBA 7(a) loans may reappear.
In addition, because government-sponsored entities like Fannie Mae and Freddie Mac, who account for a substantial portion of the secondary market, are governed by federal law, any future changes in laws that significantly affect the activity of these entities could, in turn, adversely affect our operations. In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the federal government. The federal government has for many years considered proposals to reform Fannie Mae and Freddie Mac, but the results of any such reform and their impact on us are difficult to predict. To date, no reform proposal has been enacted.
These disruptions may not only affect us but also the ability and desire of mortgage investors and other banks to purchase residential mortgage or SBA 7(a) loans that we originate. As a result, we may not be able to maintain or grow the income we receive from originating and reselling residential mortgage and SBA 7(a) loans, which would reduce our operating income. Additionally, we may be required to hold mortgage loans that we originated for sale, increasing our exposure to interest rate risk and the value of the residential real estate that serves as collateral for the mortgage loan.
Delinquencies, defaults and foreclosures in residential mortgages create a higher risk of repurchases and indemnity requests.
We originate residential mortgage loans for sale to government-sponsored enterprises, such as Fannie Mae, Freddie Mac and other investors. As a part of this process, we make various representations and warranties to these purchasers that are tied to the underwriting standards under which the investors agreed to purchase the loan. If a representation or warranty proves to be untrue, we could be required to repurchase one or more of the mortgage loans or indemnify the investor. Repurchase and indemnity obligations tend to increase during weak economic times, as investors seek to pass on the risks associated with mortgage loan delinquencies to the originator of the mortgage. If we are forced to repurchase additional mortgage loans that we have previously sold to investors, or indemnify those investors, our business, financial condition and results of operations could be adversely affected.
A lack of liquidity could impair our ability to fund operations and adversely impact our business, financial condition and results of operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans, and other sources could have a substantial negative effect on our liquidity.
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Our most important source of funds is deposits. As of December 31, 2017,2023, approximately $1.38$1.92 billion, or 82.3%72.9%, of our total deposits were demand, savings and money market accounts. Historically our savings, money market deposit accounts and demand accounts have been stable sources of funds. However, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors that may be outside of our
The $296.8$705.2 million remaining balance of deposits consisted of certificates of deposit, of which $224.8$647.0 million, or 13.4%24.6% of our total deposits, were due to mature within one year. Historically, a majority of our certificates of deposit are renewed upon maturity as long as we pay competitive interest rates. These customers are, however, interest-rate conscious and may be willing to move funds into higher-yielding investment alternatives. If customers transfer money out of the Bank’s deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities, and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by our ability to borrow from the Federal Reserve Bank of Dallas and the Federal Home Loan Bank of Dallas, or the FHLB. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by a decrease in the level of our business activity as a result of a downturn in Texas or by one or more adverse regulatory actions against us.
Liquidating investment securities with unrealized losses would negatively impact the results from operations due to the recognition of a loss in that period and reduction in the Company's future earnings potential on those securities, unless they are reinvested in higher yielding assets. Furthermore, recognizing a loss on the sale of those investment securities may also have an impact on the Company's overall financial performance and investor perception, potentially damaging investor confidence and causing a decline in stock price.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have an adverse effect on our business, financial condition and results of operations.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital, in the form of additional debt or equity, in the future to have sufficient capital resources and liquidity to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limitat a time when our access to certain customary sources of capital,liquidity, including interbank borrowings, repurchase agreements and borrowings from the FHLB and the discount window of the Federal Reserve System.System, is also limited. We may not be able to obtain capital on acceptable terms — or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our bank or counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition or results of operations.
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We have a concentration of deposit accounts with state and local municipalities that is a material source of our funding, and the loss of these deposits or significant fluctuations in balances held by these public bodies could force us to fund our business through more expensive and less stable sources.
As of December 31, 2017, $287.62023, $229.0 million, or approximately 17.2%8.7%, of our total deposits consisted of deposit accounts of public bodies, such as state or local municipalities, or public funds. These types of deposits are often secured and typically fluctuate on a seasonal basis due to timing differences between tax collection and expenditures. Withdrawals of deposits or significant fluctuation in a material portion of our largest public fund depositors could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have an adverse effect on our business, financial condition and results of operations.
We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.
The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic weakness and disorder and instability in domestic and foreign financial markets. As of December 31, 2017,2023, approximately 46.87%52.2% of our interest-earning assets and approximately 57.39%38.9% of our interest-bearing liabilities had a variable rate. Our interest rate sensitivity profile was asset sensitive as of December 31, 2017,2023, meaning that we estimate our net interest income would increase more from rising interest rates than from falling interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. In addition, in a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have an adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. If short-term interest rates continue to remain at their historically low levels for a prolonged period and assumingor if longer-term interest rates fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have an adverse effect on our net interest income and could have an adverse effect on our business, financial condition and results of operations.
Our business is concentrated in, and largely dependent upon, the continued growth and welfare of our primary markets, and adverse economic conditions in these markets could negatively impact our operations and customers.
Our business, financial condition and results of operations are affected by changes in the economic conditions of our primary markets of East Texas, Central Texas, Houston MSA and the Dallas/Fort Worth metroplex.MSA. Our success depends to a significant extent upon the business activity, population, income levels, employment trends, deposits and real estate activity in our primary markets. Economic conditions within our primary markets, and the state of Texas in general, are influenced by the energy sector generally and the price of oil and gas specifically. Although our customers’ business and
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financial interests may extend well beyond our primary markets, adverse conditions that affect our primary markets, including future declines in oil prices, could reduce our growth rate, affect the ability of our customers to repay their loans, affect the value of collateral underlying our loans, affect our ability to attract deposits and generally affect our business, financial condition, results of operations and future prospects. Due to our geographic concentration within our primary markets, we may be less able than other larger regional or national financial institutions to diversify our credit risks across multiple markets.
We face strong competition from financial services companies and other companies that offer banking services.
We operate in the highly competitive financial services industry and face significant competition for customers from financial institutions located both within and beyond our principal markets. We compete with commercial banks, savings banks, credit unions, nonbank financial services companies and other financial institutions operating within
Many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than we may be able to accommodate. Our inability to compete successfully in the markets in which we operate could have an adverse effect on our business, financial condition or results of operations.
Our trust and wealth management division derives its revenue from noninterest income and is subject to operational, compliance, reputational, fiduciary and strategic risks that could adversely affect our business, financial condition and results of operations.
Our trust and wealth management division subjects us to a number of different risks from our commercial activities, any of which could adversely affect our business, financial condition and results of operations. Operational or compliance risk entails inadequate or failed internal processes, people and systems or changes driven by external events. Success in the trust and wealth management business is highly dependent on reputation. Damage to our reputation from negative opinion in the marketplace could adversely impact both revenue and net income. Such results could also be affected by errors in judgment by management or the board, the improper implementation of business decisions or by unexpected external events. Our success in this division is also dependent upon our continuing ability to generate investment results that satisfy our clients and attract prospective clients, which may be adversely impacted by factors that are outside of our control. In addition, our trust and wealth management division is subject to fiduciary risks and risks associated with adverse decisions regarding the scope of fiduciary liabilities. If any claims or legal actions regarding our fiduciary role are not resolved in a manner favorable to us, we may be exposed to significant financial liability and our reputation could be damaged. Either of these results may adversely impact demand for our products and services, including those unrelated to our trust and wealth management division, or otherwise have an adverse effect on our business, financial condition or results of operation.
Additional risks resulting from our mortgage warehouse lending business could have an adverse effect on our business, financial condition and results of operations.
A portion of our lending involves the origination of mortgage warehouse lines of credit. Risks associated with our mortgage warehouse loans include credit risks relating to the mortgage bankers that borrow from us, including the risk of intentional misrepresentation or fraud; changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse; and originations of mortgage loans that are unsalable or impaired, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to ultimately purchase the loan from the mortgage banker. Any one or a combination of these events may adversely affect our loan portfolio and may result
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in increased delinquencies, loan losses and increased future provision levels, which, in turn, could adversely affect our business, financial condition and results of operations.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we implement new lines of business, or offer new products and product enhancements as well as new services within our existing lines of business and we will continue to do so in the future. For example, in 2017, we established our Small Business Association lending division. We also have plans to enhance our trust and wealth management division. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In implementing, developing or marketing new lines of business,
Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.
As a community bank, our reputation within the communities we serve is critical to our success. We believe we have set ourselves apart from our competitors by building strong personal and professional relationships with our customers and by being active members of the communities we serve. As such, we strive to enhance our reputation by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve and delivering superior service to our customers. If our reputation is negatively affected by the actions of our employees or otherwise, we may be less successful in attracting new talent and customers or may lose existing customers, and our business, financial condition and results of operations could be adversely affected. Further, negative public opinion can expose us to litigation and regulatory action and delay and impede our efforts to implement our expansion strategy, which could further adversely affect our business, financial condition and results of operations.
We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
While we attempt to invest a significant majority of our total assets in loans (our loan to asset ratio was 69.27%72.9% as of December 31, 2017)2023), we invest a percentage of our total assets (20.74%(18.9% as of December 31, 2017)2023) in investment securities with the primary objectives of providing a source of liquidity, providing an appropriate return on funds invested, managing interest rate risk, meeting pledging requirements and meeting regulatory capital requirements. As of December 31, 2017,2023, the fair value of our available for sale investment securities portfolio was $232.4$196.2 million, which included a net unrealized loss of $3.5$19.2 million. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio. For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise. The Federal Open Market Committee increased the target federal funds rate significantly in 2022 and 2023, which resulted in the net unrealized losses of $19.2 million in our available for sale portfolio and $29.7 million in our held to maturity portfolio at December 31, 2023. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.
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The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in the section captioned “
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our needing to revise or restate prior period financial statements,There could be material changes to our financial statements and disclosures if there are changes in accounting standards or regulatory interpretations of existing standards
From time to time the Financial Accounting Standards Board or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how new or existing standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently and retrospectively, in each case resulting in our needing to revise or restate prior period financial statements, which could materially change our financial statements and related disclosures, cause damage to our reputation and the price of our common stock, and adversely affect our business, financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We outsource some of our operational activities and accordingly depend on a number of relationships with third-party service providers. Specifically, we rely on third parties for certain services, including, but not limited to, core systems support, informational website hosting, internet services, online account opening and other processing services. Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, a cyber security breach involving any of our third-party service providers, or the termination or change in terms of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. Replacing vendors or addressing other issues with our third-party service providers could entail significant delay, expense and disruption of service.
As a result, if these third-party service providers experience difficulties, are subject to cyber security breaches, or terminate their services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
In addition, the Bank’s primary federal regulator, the Office of the Comptroller of the Currency, or OCC, has recently issued guidance outlining the expectations for third-party service provider oversight and monitoring by financial institutions. The federal banking agencies, including the OCC, have recently issued enforcement actions against financial institutions for failure in oversight of third-party providers and violations of federal banking law by such providers when performing services for financial institutions. Accordingly, our operations could be interrupted if any of our third-party service providers experience difficulty, are subject to cyber security breaches, terminate their services or fail to comply with banking regulations, which could adversely affect our business, financial condition and results of operations. In addition, our failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against the Bank, which could adversely affect our business, financial condition and results of operations.
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System failure or cyber security breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.
Our computer systems and network infrastructure could be vulnerable to hardware and cyber security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal sources. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect our computer systems and network infrastructure, including our digital, mobile and internet banking activities, against damage from physical break-ins, cyber security breaches and
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology or technology needed to compete effectively with larger institutions may not be available to us on a cost effective basis.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, at least in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We may experience operational challenges as we implement these new technology enhancements or products, which could impair our ability to realize the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for our technology needs may not be able to develop on a cost effective basis systems that will enable us to keep pace with such developments. As a result, they may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. Accordingly, the ability to keep pace with technological change is important and the failure to do so could adversely affect our business, financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.
Employee errors and employee or customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls to mitigate operational risks, including data processing system failures and errors and customer or employee fraud, as well as insurance coverage designed to protect us from material losses associated with these risks, including losses resulting from any associated business interruption. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could adversely affect our business, financial condition and results of operations.
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In addition, we rely heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended. Whether a misrepresentation is made by the applicant or another third party, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover
Our primary markets are susceptible to natural disasters and other catastrophes that could negatively impact the economies of our markets, our operations or our customers, any of which could have an adverse effect on us.
A significant portion of our business is generated from our primary markets of East Texas, Central Texas, and the Dallas/Fort Worth metroplex,MSA and the Houston MSA, which are susceptible to damage by tornadoes, floods, droughts, hurricanes and other natural disasters and adverse weather. In addition to natural disasters, man-made events, such as acts of terror and governmental response to acts of terror, malfunction of the electronic grid and other infrastructure breakdowns, could adversely affect economic conditions in our primary markets. These catastrophic events can disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate. If the economies in our primary markets experience an overall decline as a result of a catastrophic event, demand for loans and our other products and services could be reduced. In addition, the rates of delinquencies, foreclosures, bankruptcies and losses on loan portfolios may increase substantially, as uninsured property losses or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans. Moreover, the value of real estate or other collateral that secures the loans could be materially and adversely affected by a catastrophic event. A natural disaster or other catastrophic event could, therefore, result in decreased revenue and loan losses that have an adverse effect on our business, financial condition and results of operations.
We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.
In the course of our business, we may purchase real estate in connection with our acquisition and expansion efforts, or we may foreclose on and take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those properties, we may not have adequate remedies against the prior owners or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability. Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property and, as a result, we may suffer a loss upon collection of the loan. Any significant environmental liabilities could have an adverse effect on our business, financial condition and results of operations.
We are subject to claims and litigation pertaining to intellectual property.
Banking and other financial services companies, such as our company, rely on technology companies to provide information technology products and services necessary to support their day-to-day operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, may from time to time claim to hold intellectual property sold to us by our
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vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted litigation. Such litigation is often expensive, time-consuming, disruptive to our operations and distracting to management. If we are found to infringe one or more
If the goodwill that we have recorded or may record in connection with a business acquisition becomes impaired, it could require charges to earnings.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired.
Our goodwill impairment test involves a two-step process. Under the first step, the estimation of fair value of the reporting unit is compared to its carrying value including goodwill. If step one indicates a potential impairment, the second step is performed to measure the amount of impairment, if any. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2017,2023, our goodwill totaled $18.7$32.2 million. While we have not recorded any impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of our existing goodwill or goodwill we may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect our business, financial condition and results of operations.
We may be adversely affected by recent changes in U.S. tax laws.
The enactmenttax laws applicable to our business activities may change over time. Legislative initiatives, including initiatives currently under discussion, may impact our results of the Tax Cuts and Jobs Act, or TCJA, on December 22, 2017 made significant changes to the Internal Revenue Code, many of which are highly complex and may require interpretations and implementing regulations. As a result of the TCJA’s reduction ofoperations by increasing the corporate income tax rate from 35%applicable to 21%, we recorded a one-time, non-cash charge to income tax provision of $1.7 million during the fourth quarter of 2017 to reduce the value of our net deferred tax assets. See “
Risks Related to the Regulation of Our Industry
The ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, could adversely affect our business, financial condition, and results of operations.
On July 21, 2010, the Dodd-Frank Act was signed into law, and the process of implementation is ongoing. The Dodd-Frank Act imposes significant regulatory and compliance changes on many industries, including ours. On May 24, 2018, the EGRRCPA became law. Among other things, the EGRRCPA changes certain of the regulatory requirements of the Dodd-Frank Act and includes provisions intended to relieve the regulatory burden on community banks. There remains significant uncertainty surrounding the manner in which the provisions of the Dodd-Frank Act and the EGRRCPA will ultimately be implemented by the various regulatory agencies and the full extent of the impact of the requirements on our operations is unclear, especially in light of the Trump administration’s executive order calling for a full review of the Dodd-Frank Act and the regulations promulgated under it.unclear. The changes resulting from the Dodd-Frank Actthis legislation may impact the profitability of our business activities, require changes to certain of our business practices, require the development of new compliance infrastructure, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements or with any future changes in laws or regulations could adversely affect our business, financial condition and results of operations.
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could adversely affect us.
Banking is highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. These laws and regulations are not intended to
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protect our shareholders. Rather, these laws and regulations are intended to protect customers, depositors, the Deposit Insurance Fund and the overall financial stability of the United States. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions that the Bank can pay to us, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP would require. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional operating costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, enforcement actions and fines and other penalties, any of which could adversely affect our results of operations, regulatory capital levels and the price of our securities. Further, any new laws, rules and regulations, such as the Dodd-Frank Act, could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition and results of operations.
Recent volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Company and the Bank to increased government regulation and supervision.
The regional bank crisis that occurred in Spring 2023 led to interventions by the FDIC, the Federal Reserve, and the U.S. Treasury Secretary in order to safeguard the depositors of these establishments. In light of these events, Congress and federal banking authorities have initiated assessments to pinpoint the causes of these failures, proposing various explanations such as insufficient regulation and oversight, as well as the institutions' inability to effectively manage interest rate and liquidity risks. Ongoing analysis of these developments might result in government-driven measures aimed at averting similar bank failures in the future, which could include changes to risk-based capital regulations. Federal banking authorities may also reconsider relevant liquidity risk management standards.
While it is impossible to definitively predict which measures lawmakers and regulatory bodies might adopt, or the specifics and extent of any such measures, any of the aforementioned potential changes could, among other consequences, impose additional costs on us, restrict the range of financial services and products the Bank is able to offer, and curtail the future expansion of both the Company and the Bank. These factors could substantially and negatively impact the Company's business, operational results, or financial standing.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
As part of the bank regulatory process, the OCC and the Board of Governors of the Federal Reserve System, or Federal Reserve, periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, one of these federal banking agencies were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity, risk management or other aspects of any of our operations have become unsatisfactory, or that our Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against us, the Bank or their respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance. If we become subject to such regulatory actions, our business, financial condition, results of operations and reputation could be adversely affected.
We recently becameare subject to more stringent capital requirements, which may result in lower returns on equity, require the raising of additional capital, limit our ability to repurchase shares or pay dividends and discretionary bonuses, or result in regulatory action.
As a bank, we are subject to establish stricterstrict risk-based capital requirements and leverage limits, to apply to banks and bank and savings and loan holding companies. In July 2013, the federal banking agencies published new capital rules, referred to herein as the Basel III capital rules, which revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets. The Basel III capital rules apply to all bank holding companies with $1.0 billion or more in consolidated assets and all banks regardless of size. The Basel III capital rules became effective as applied to us on January 1, 2015, with a phase-in period for the new capital conservation buffer that generally extends from January 1, 2015 through January 1, 2019.rules. See the section in Item 1 of this Annual Report on Form 10-K captioned “
As a result of the enactment of the Basel III capital rules, we became subject to increased required capital levels. Our inability to comply with these more stringent capital requirements, or with future capital requirements, could, among other things, result in lower returns on equity; require the raising of additional capital; limit our ability to repurchase shares
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or pay dividends and discretionary bonuses; or result in regulatory actions, any of which could adversely affect our business, financial condition and results of operation.
Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of financial institutions and other complementary businesses. Generally, we must receive federal regulatory approval before we can acquire an FDIC-insured depository institution or related business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act, or the CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. We may also be required to sell banking locations as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.
In addition to the acquisition of existing financial institutions, as opportunities arise, we plan to continue
de novo branching as a part of our expansion strategy. De novo branching and acquisitions carry with them numerous risks, including the inability to obtain all required regulatory approvals. The failure to obtain these regulatory approvals for potential future strategic acquisitions and de novo banking locations could impact our business plans and restrict our growth.Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the U.S. Department of the Treasury, or the Treasury Department, to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and the Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the Treasury Department’s Office of Foreign Assets Control.
In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our anti-money laundering program. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, or CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The ongoing broad rulemaking powers of the CFPB have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services. The CFPB has indicated that it may propose new rules on overdrafts and other consumer financial products or services, which could have an adverse effect on our business, financial condition and results of operations if any such rules limit our ability to provide such financial products or services.
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A successful regulatory challenge to an institution’s performance under the CRA, fair lending or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, financial condition and results of operations.
Increases in FDIC insurance premiums could adversely affect our earnings and results of operations.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. As a result of economic conditions and the enactment of the Dodd-Frank Act, the FDIC has in recent years increased deposit insurance assessment rates, which in turn raised deposit premiums for many insured depository institutions. In 2010, the FDIC increased the Deposit Insurance Fund’s target reserve ratio to 2.0% of insured deposits following the Dodd-Frank Act’s elimination of the 1.5% cap on the insurance fund’s reserve ratio, and the FDIC as put in place a restoration plan to restore the Deposit Insurance Fund to its 1.35% minimum reserve ratio managed by the Dodd-Frank Act by September 30, 2020. If recent increases in premiums are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. Further, if there are additional financial institution failures that affect the Deposit Insurance Fund, we may be required to pay higher FDIC premiums. Our FDIC insurance related costs were $671,000 for the year ended December 31, 2017, compared to $1.2$1.5 million for the year ended December 31, 2016, and $743,0002023, compared to $1.1 million for the year ended December 31, 2015.2022. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could adversely affect our earnings and results of operations.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Under the “source of strength” doctrine that was codified by the Dodd-Frank Act, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank at times when the bank holding company may not be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.
A capital injection may be required at a time when our resources are limited, and we may be required to borrow the funds or raise capital to make the required capital injection. Any loan by a bank holding company to its subsidiary bank is subordinate in right with payment to deposits and certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover,
We could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the U.S. money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of securities by the Federal Reserve, adjustments of both the discount rate and the federal funds rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall
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economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Although we cannot determine the effects of such policies on us at this time, such policies could adversely affect our business, financial condition and results of operations.
We are subject to commercial real estate lending guidance issued by the federal banking regulators that impacts our operations and capital requirements.
The federal banking regulators have issued guidance regarding concentrations in commercial real estate lending directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios. This guidance suggests that institutions whose commercial real estate loans exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. Based on our commercial real estate concentration as of December 31, 2017,2023, we believe that we are operating within the guidelines. However, increases in our commercial real estate lending, particularly as we expand into metropolitansmetropolitan markets and make more of these loans, could subject us to additional supervisory analysis. We cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management has implemented controls to monitor our commercial real estate lending concentrations, but we cannot predict the extent to which this guidance will impact our operations or capital requirements.
Risks Related to an Investment in Our Common Stock
The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired.
The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may affect the market price and trading volume of our common stock, including, without limitation:
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The stock market and, in particular, the market for financial institution stocks have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired. The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of our common stock in the future. We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments and pursuant to compensation and incentive plans. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition or under a compensation or incentive plan), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through future sales of our securities. Securities analysts may not initiate or continue coverage on us. The trading market for our common stock depends, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts, and they may not cover us. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline. If we are covered by securities analysts and are the subject of an unfavorable report, the price of our common stock may decline. Our management and board of directors have significant control over our business. As of December 31, As a result of their significant control over our business, our management and board of directors may be able to significantly affect the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets and other extraordinary corporate matters. The interests of these insiders could conflict with the interests of our other shareholders, including you. The holders of our existing debt obligations, as well as debt obligations that may be outstanding in the future, will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest. In the event of any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of debt holders against us. As of December 31, 37 preferred securities) for up to five years, during which time no dividends may be paid to holders of our common stock. To the extent that we issue additional debt obligations or junior subordinated debentures, the additional debt obligations or additional junior subordinated debentures will be We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock. Our amended and restated certificate of formation authorizes us to issue up to 15,000,000 shares of one or more series of preferred stock. Our board of directors has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock. We are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted. Our primary Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions. We anticipate that dividends will be declared and paid in the month following the end of each calendar quarter, and we anticipate paying a quarterly dividend on our common stock in an amount equal to approximately 25.0% to 30.0% of our net income for the immediately preceding quarter. However, holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on common stock will depend upon the ability of the Bank to make cash distributions to the Company, our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by our board of directors. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely affect the amount of dividends, if any, paid to our common shareholders. The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital. The guidance provides that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure, including interest on the junior subordinated debentures underlying our trust preferred securities and our other debt obligations. If required payments on our outstanding junior subordinated debentures, held by our unconsolidated subsidiary trusts, or our other debt obligations, are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock. Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management. Our certificate of formation and our bylaws (each as amended and restated) may have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control or a replacement of our board of directors or management. Our governing documents include provisions that: 38 In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control. Furthermore, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or its holding company. These laws include the Bank Holding Company Act of 1956, as amended, or the BHC Act, and the Change in Bank Control Act, or the CBCA. These laws could delay or prevent an acquisition. Furthermore, our amended and restated certificate of formation provides that the state courts located in Titus County, Texas, the county in which our legacy headquarters in Mount Pleasant lie, will be the exclusive forum for: (a) any actual or purported derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of fiduciary duty by any of our directors or officers, (c) any action asserting a claim against us or our directors or officers arising pursuant to the TBOC, our certificate of formation, or our bylaws; or (d) any action asserting a claim against us or our officers or directors that is governed by the internal affairs doctrine. By becoming a shareholder of our Company, you will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of formation related to choice of forum. The choice of forum provision in our amended and restated certificate of formation may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of formation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, operating results, and financial condition. An investment in our common stock is not an insured deposit and is subject to risk of loss. Any shares of our common stock you purchase will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment. ITEM 1B. UNRESOLVED STAFF None. ITEM 1C. CYBERSECURITY. Cybersecurity Risk Management and Strategy Our enterprise risk management program is designed to identify, assess, and mitigate risks across various aspects of the Company, including financial, operational, regulatory, reputational, and legal. Given the increasing reliance on technology and potential cyber threats, information security (and by entailment cybersecurity) is a critical component of this 39 program. Our Chief Information Security Officer (“CISO”) is primarily responsible for this cybersecurity component and is a key member of the enterprise risk management organization, which is overseen by our Chief Risk Officer. As discussed below, our CISO reports periodically throughout the year on cybersecurity related risks, threats, and our responses, to the Technology Committee and our board of directors. Cybersecurity risks are constantly evolving and becoming increasingly pervasive across all industries. To mitigate these risks and protect sensitive customer data, financial transactions, and our information systems, Guaranty has implemented comprehensive cybersecurity practices. Key components of the cybersecurity program include the following: The Bank leverages in-house resources and third-party service providers to implement and maintain processes and controls to manage identified risks. Our Vendor Management program is designed to ensure that our vendors meet our cybersecurity requirements. This includes conducting periodic risk assessments of vendors, requiring vendors to maintain appropriate cybersecurity controls and monitoring vendor compliance with our cybersecurity requirements. The Bank’s risk management program and strategy are designed to ensure confidential information and information systems are appropriately protected from a variety of threats, both natural and man-made. Periodic risk assessments are performed to validate control requirements and ensure that the Bank’s information is protected at a level commensurate with its sensitivity, value, and criticality. Preventative and detective security controls are employed on all media where information is stored, the systems that process it, and infrastructure components that facilitate its transmission to ensure the confidentiality, integrity, and availability of Bank and customer information. Minimally, these controls include identity and access management, data encryption, data loss prevention, incident response, security monitoring and alerting, third party risk management, and vulnerability management. The Bank’s risk management program and strategy are regularly reviewed and updated to ensure that they are aligned with the Bank's business objectives. Risks from Cyber Threats Like many businesses, the Bank faces numerous cybersecurity risks in connection with providing services to our customers. Guaranty does not currently believe that any current or pervious cybersecurity threats have materially affected, or are reasonably likely to materially affect the Bank, including its business strategy, results of operations, or financial condition. Unfortunately, the sophistication of cyber threats continues to increase, and the Bank’s cybersecurity risk management and strategy may be insufficient or may not be successful in protecting against all cyber incidents. No cybersecurity program will be able to anticipate all cyber threats and breach attempts, and there may exist limitations to the ability to effectively implement preventive measures against such breaches in a timely manner. For more information on how cybersecurity risk may materially affect the Bank’s business strategy, results of operations or financial condition, please refer to Item 1A Risk Factors. 40 Governance Board of Directors Oversight The Board of Directors is charged with overseeing the establishment and execution of the Bank’s risk management framework and monitoring adherence to related policies required by applicable regulations and statutes. Consistent with this responsibility, the Board may delegate some responsibilities to the Audit Committee. The CISO holds the primary day-to-day responsibility for the strategic, operational, and risk management components of cybersecurity. The Audit Committee, and the board through summary reports, receives updates on cybersecurity risks and incidents and the cybersecurity program through direct communication with the CISO. Additionally, awareness and training on cybersecurity topics is provided to the Board at least annually. Management's Role The Information Security department is responsible for implementing and maintaining the Banks’s Information Security program, which addresses cybersecurity risk management and cyber threats. The Information Security department consists of cybersecurity and information risk professionals who assess, identify, and manage cybersecurity risks. Information Security is led by the CISO, who reports directly to the Chief Financial Officer and with dotted-line reporting to the Audit Committee. Additionally, the CISO is a key member of the Technology Committee, which is charged with Bank’s managerial oversight and steering organization for all information technology areas (including cybersecurity). The Bank’s CISO has over 20 years of experience in cybersecurity across various verticals. Our CISO brings a wealth of expertise to his role. His background includes extensive experience and certifications in all facets of information technology and information security. His in-depth knowledge and experience are instrumental in developing and executing our cybersecurity strategies. The Bank’s CISO remains informed about the latest developments in cybersecurity, including potential threats and innovative risk management techniques. This ongoing knowledge acquisition is crucial for the effective prevention, detection, mitigation, and remediation of cybersecurity incidents. To assist the Information Security team in such knowledge acquisition, we subscribe to services that provide Bank personnel with alerts on security incidents and threats. Our CISO oversees the implementation and processes for regular monitoring of our information systems. This includes the deployment of advanced security measures and regular internal/external assessments to identify potential vulnerabilities. In a cybersecurity incident, the information security incident response plan is enacted. This plan includes immediate actions to mitigate the impact of and remediate the incident. ITEM 2. As of December 31, 2023 the Bank As of December 31, ITEM 3. LEGAL The Company is from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. The Company intends to defend itself vigorously against any pending or future claims and litigation. 41 At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the Company combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the ITEM 4. MINE SAFETY Not applicable. 42 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY Market Information for Common Stock Beginning on March 7, 2023, shares of our common stock are traded on the As of March Dividend Policy See " Unregistered Sales of Equity Securities None. Equity Compensation Plan Information See “ Stock Performance Graph The following table and graph compares the cumulative total shareholder return on our common stock to the cumulative total return of the 43 The historical stock price performance for our common stock shown on the graph below is not necessarily indicative of future stock performance. December 31, December 31, December 31, December 31, December 31, December 31, Guaranty Bancshares, Inc. $ 100.00 $ 112.84 $ 105.96 $ 149.63 $ 141.40 $ 141.66 S&P 500 Index 100.00 131.49 155.68 200.37 164.08 207.21 S&P U.S. SmallCap Banks Index 100.00 125.46 113.94 158.62 139.85 140.55 Source: S&P Global Market Intelligence Stock Repurchases On April 21, 2022, the Company announced the adoption of There were 434,798 shares of Company common stock ITEM 6. [RESERVED]. Not applicable. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 44 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following: The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Annual Report on Form 10-K. If one or more events related to these or other risks or uncertainties 45 materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. General We were incorporated in 1990 to serve as the holding company for Guaranty Bank & As of December 31, 2023, we operate 33 banking locations in the East Texas, Dallas/Fort Worth, Central Texas and As a bank holding company that operates through one segment, we generate most of our revenue from interest on loans and investments, customer service and loan fees, fees related to the sale of mortgage loans, and trust and wealth management services. We incur interest expense on deposits and other borrowed funds, as well as noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the Critical Accounting Policies Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates, and the potential sensitivity of our consolidated financial statements to those judgments and assumptions, Loans and Allowance for 46 Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. A loan may continue to accrue interest, even if it is more than 90 days past due, if the loan is both well collateralized and it is in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be The allowance for Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We use the weighted-average remaining maturity method (WARM method) as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans The allowance for In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial and industrial, construction, and commercial real estate loans. Internal risk ratings are a key factor Loans with unique risk characteristics are 47 For off-balance sheet credit exposures, we estimate expected credit losses over the contractual period in which we are From time to time, we modify our loan We have certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography. Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees. Real estate loans are also subject to underwriting standards and processes similar to commercial and industrial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real We utilize methodical credit standards and analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated as well as the underlying collateral, if secured, which must be perfected. The relatively small individual dollar amounts of consumer loans that are spread over numerous individual borrowers also Marketable Securities Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive (loss) income. Management determines the appropriate classification of securities at the time of purchase. Interest income includes amortization and accretion of purchase premiums and discounts. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. From time to time, we have reclassified certain securities from available for sale to held to maturity. Such transfers are made at fair value at the date of transfer. The Management evaluates securities for an allowance for credit losses based on whether they are classified as held to 48 basis by major security type and credit rating. The estimate of expected credit losses considers historical credit loss information that is then adjusted for current conditions and reasonable and supportable forecasts. For available for sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically relate to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive (loss) income. Changes in the allowance for credit losses are recorded as provision for (or reversal of provision for) credit losses expense. Losses are charged against the allowance when management believes the uncollectibility of an Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and Discussion and Analysis of A discussion regarding our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found under “Item 7. Management's Discussion and Analysis of Financial Condition and Result of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 10, 2023, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at investors.gnty.com. Net Interest Income Our operating results depend primarily on our net interest income. Fluctuations in market interest rates impact the yield and rates paid on interest-earning assets and interest-bearing liabilities, respectively. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact our net interest income. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. Net interest income, before the provision for credit losses, was $97.0 million for the year ended December 31, The 49 The $33.3 million increase in For the Average Balance Sheet Amounts, Interest Earned and The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for Year Ended December 31, 2023 2022 (dollars in thousands) Average Interest Average Average Interest Average ASSETS Interest-earning assets: Total loans(1) $ 2,352,154 $ 136,086 5.79 % $ 2,126,810 $ 104,503 4.91 % Securities available for sale 182,277 5,159 2.83 287,764 5,808 2.02 Securities held to maturity 449,097 11,210 2.50 518,213 10,789 2.08 Nonmarketable equity securities 27,371 1,288 4.71 18,791 1,246 6.63 Interest-bearing deposits in other banks 51,507 2,749 5.34 121,609 863 0.71 Total interest-earning assets 3,062,406 156,492 5.11 3,073,187 123,209 4.01 Allowance for credit losses (31,601 ) (29,415 ) Noninterest-earning assets 220,230 216,812 Total assets $ 3,251,035 $ 3,260,584 LIABILITIES AND EQUITY Interest-bearing liabilities: Interest-bearing deposits $ 1,698,758 $ 44,981 2.65 % $ 1,670,287 $ 9,753 0.58 % Advances from FHLB and fed funds purchased 226,214 11,626 5.14 132,764 3,855 2.90 Line of credit 4,168 363 8.71 — 34 — Subordinated debt 47,873 2,143 4.48 46,977 1,722 3.67 Securities sold under agreements to repurchase 20,635 399 1.93 8,596 16 0.19 Total interest-bearing liabilities 1,997,648 59,512 2.98 1,858,624 15,380 0.83 Noninterest-bearing liabilities: Noninterest-bearing deposits 924,945 1,082,513 Accrued interest and other liabilities 30,924 25,537 Total noninterest-bearing liabilities 955,869 1,108,050 Equity 297,518 293,910 Total liabilities and equity $ 3,251,035 $ 3,260,584 Net interest rate spread(2) 2.13 % 3.18 % Net interest income $ 96,980 $ 107,829 Net interest margin(3) 3.17 % 3.51 % Net interest margin, fully taxable equivalent(4) 3.15 % 3.54 % (1) Includes average outstanding balances of loans held for sale of $1.2 million and $2.4 million for the years ended December 31, 2023 and 2022, respectively. (2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (3) Net interest margin is equal to net interest income divided by average interest-earning assets. (4) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, using a marginal tax rate of 21%. 50 The following For the Year Ended December 31, 2023 vs. 2022 Increase (Decrease) Due to Change in Total Increase (in thousands) Volume Rate (Decrease) Interest-earning assets: Total loans $ 11,064 $ 20,519 $ 31,583 Securities available for sale (2,131 ) 1,482 (649 ) Securities held to maturity (1,438 ) 1,859 421 Nonmarketable equity securities 569 (527 ) 42 Interest-earning deposits in other banks (498 ) 2,384 1,886 Total increase in interest income $ 7,566 $ 25,717 $ 33,283 Interest-bearing liabilities: Interest-bearing deposits $ 165 $ 35,063 $ 35,228 Advances from FHLB 2,710 5,061 7,771 Line of credit 329 — 329 Subordinated debt 33 388 421 Securities sold under agreements to repurchase 23 360 383 Total increase in interest expense 3,260 40,872 44,132 Increase (decrease) in net interest income $ 4,306 $ (15,155 ) $ (10,849 ) For the Year Ended December 31, 2022 vs. 2021 Increase (Decrease) Due to Change in Total Increase (in thousands) Volume Rate (Decrease) Interest-earning assets: Total loans $ 10,419 $ 1,587 $ 12,006 Securities available for sale (1,315 ) 284 (1,031 ) Securities held to maturity 9,022 (374 ) 8,648 Nonmarketable equity securities 645 (139 ) 506 Interest-earning deposits in other banks (222 ) 752 530 Total increase (decrease) in interest income $ 18,549 $ 2,110 $ 20,659 Interest-bearing liabilities: Interest-bearing deposits $ 241 $ 3,861 $ 4,102 Advances from FHLB and fed funds purchased 703 2,739 3,442 Line of credit (216 ) 34 (182 ) Subordinated debentures 959 63 1,022 Securities sold under agreements to repurchase (5 ) 9 4 Total increase in interest expense 1,682 6,706 8,388 Increase in net interest income $ 16,867 $ (4,596 ) $ 12,271 Provision for The provision for During the year ended December 31, 51 million. As the economic, health and other impacts of the virus became more clear and cases began to decline, we reduced the COVID-specific qualitative factors during 2021 and fully unwound these specific factors during the first quarter of 2022, which resulted in a $1.25 million reverse provision during the first quarter of 2022, no provision in the second quarter of 2022 and a $650,000 reverse provision in the third quarter of 2022. During the fourth quarter of 2022, we recorded a $2.8 million provision to incorporate economic forecasts for an economic downturn and possible borrower stressors into our current expected credit loss model ("CECL") model. The factors that were adjusted in the As of December 31, Net charge-offs for the year ended December 31, The following table shows the ratio of Year Ended December 31, 2023 2022 2021 Commercial and industrial 0.15 % 0.04 % 0.10 % Real estate: Commercial real estate 0.03 % — 0.13 % 1-4 family residential — (0.01 %) — Consumer 0.12 % 0.48 % 0.23 % Agricultural 0.01 % — (0.05 %) Overdrafts 64.52 % 55.85 % 49.85 % Net charge-offs to total loans 0.04 % 0.03 % 0.08 % Noninterest Income Our primary sources of recurring noninterest income are service charges on deposit accounts, merchant and debit card fees, fiduciary income, gains on the sale of both mortgage and SBA loans, and income from bank-owned life The following table presents components of noninterest income for the years ended December 31, 2023 and 2022 and the period-over-period variations in the categories of noninterest income: Year Ended December 31, Increase (in thousands) 2023 2022 2023 vs. 2022 Noninterest income: Service charges $ 4,387 $ 4,288 $ 99 Net realized (loss) gain on securities transactions (229 ) 172 (401 ) Gain on sale of loans 1,201 2,435 (1,234 ) Fiduciary and custodial income 2,529 2,498 31 Bank-owned life insurance income 941 842 99 Merchant and debit card fees 7,307 7,121 186 Loan processing fee income 520 761 (241 ) Mortgage fee income 194 389 (195 ) Other noninterest income 5,663 4,979 684 Total noninterest income $ 22,513 $ 23,485 $ (972 ) 52 Total noninterest income decreased $972,000, or 4.1%, for the year ended December 31, Service Charges on Deposit Accounts. We earn fees from our customers for deposit related services, and these fees typically constitute a significant and generally predictable component of Net Realized (Loss) Gain on Securities Transactions. We sell securities from time-to-time, which results in gains or losses being recognized in the income statement as noninterest income. During the years ended December 31, 2023 and 2022 we sold securities for a net loss of $229,000 and a net gain of $172,000, respectively. Gain on Sale of Loans. We originate long-term fixed-rate mortgage loans and Small Business Administration (SBA) loans for resale into the secondary market. We sold 162 mortgage loans for $42.3 million during the year ended December 31, Fiduciary and Bank-Owned Life Insurance Merchant and Debit Card Fees. We earn interchange income related to the activity of our customers’ merchant debit card usage. Debit card interchange income was $7.3 million for the year ended December 31, 2023, compared to $7.1 million for 2022, an increase of $186,000, or 2.6%. The increase was primarily due to Loan Processing Fee Mortgage Fee Income. Mortgage fee income consists of lender processing fees such as underwriting fees, administrative fees and funding fees that are collected from mortgage loans that the Bank intends to sell on the secondary Other. This category includes a variety of other income producing activities, including 53 to the Noninterest Expense Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, professional and regulatory fees, including FDIC assessments, data processing expenses, and advertising and promotion expenses. For the year ended December 31, Year Ended December 31, Increase (in thousands) 2023 2022 2023 vs. 2022 Employee compensation and benefits $ 48,862 $ 47,477 $ 1,385 Non-staff expenses: Occupancy expenses 11,301 11,129 172 Legal and professional fees 3,424 2,825 599 Software and technology 6,157 5,482 675 Amortization 602 724 (122 ) Director and committee fees 778 836 (58 ) Advertising and promotions 1,176 1,593 (417 ) ATM and debit card expense 2,904 2,715 189 Telecommunication expense 707 750 (43 ) FDIC insurance assessment fees 1,507 1,101 406 Other noninterest expense 4,936 5,275 (339 ) Total noninterest expense $ 82,354 $ 79,907 $ 2,447 Material changes in the components of noninterest expense are discussed below. Employee Compensation and Benefits Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments other than FDIC insurance assessment fees, were Software and Technology. Software and technology expenses Amortization. Advertising and 54 ATM and Debit Card Expense. FDIC Insurance Assessment Fees. Income Tax Expense The amount of income tax expense we incur is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For the Discussion and Analysis of Financial Condition Assets Our total assets Loan Portfolio Our primary source of income is derived through interest earned on loans to small- to medium-sized businesses, commercial companies, professionals and individuals located in our primary market areas. A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base. As of December 31, Total loans, excluding 55 The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of December 31, 2023 2022 2021 (dollars in thousands) Amount Percent Amount Percent Amount Percent Commercial and industrial $ 287,565 12.38 % $ 314,067 13.21 % $ 324,289 17.00 % Real estate: Construction and development 296,639 12.77 % 377,135 15.86 % 307,797 16.13 % Commercial real estate 923,195 39.74 % 887,587 37.32 % 622,842 32.64 % Farmland 186,295 8.02 % 185,817 7.81 % 145,501 7.63 % 1-4 family residential 514,603 22.16 % 493,061 20.73 % 410,673 21.52 % Multi-family residential 44,292 1.91 % 45,147 1.90 % 30,971 1.62 % Consumer and overdrafts 57,302 2.47 % 61,676 2.59 % 51,328 2.69 % Agricultural 12,685 0.55 % 13,686 0.58 % 14,639 0.77 % Total loans held for investment $ 2,322,576 100.00 % $ 2,378,176 100.00 % $ 1,908,040 100.00 % Total loans held for sale $ 976 $ 3,156 $ 4,129 Commercial and Industrial Construction and Development Commercial Real Estate Farmland. Farmland loans are comprised of loans used for agricultural purposes, and include land with a 1-4 Family Residential. Our 1-4 family residential loan portfolio is comprised of loans secured by 1-4 family homes, which are both owner occupied and investor owned. Our 1-4 family residential loans have a relatively small average balance spread across many individual borrowers compared to our other loan categories. Our 1-4 family residential loans increased $21.5 million, or 4.4%, to $514.6 million as of December 31, 2023 from $493.1 million as of December 31, 2022. This increase is due to normal fluctuations in Other Loan Categories 56 Contractual Loan As of December 31, 2023 (in thousands) One Year After One After Five After Total Commercial and industrial $ 107,393 $ 116,695 $ 60,930 $ 2,547 $ 287,565 Real estate: Construction and development 152,657 50,860 57,850 35,272 296,639 Commercial real estate 57,896 225,121 332,543 307,635 923,195 Farmland 32,022 66,939 43,561 43,773 186,295 1-4 family residential 31,795 34,016 186,632 262,160 514,603 Multi-family residential 1,399 20,846 16,967 5,080 44,292 Consumer 13,861 39,418 1,896 2,127 57,302 Agricultural 8,220 4,029 436 — 12,685 Total loans $ 405,243 $ 557,924 $ 700,815 $ 658,594 $ 2,322,576 Amounts with fixed rates $ 251,010 $ 423,484 $ 42,093 $ 35,395 $ 751,982 Amounts with adjustable rates $ 154,233 $ 134,440 $ 658,722 $ 623,199 $ 1,570,594 Nonperforming Assets Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured. We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions. Nonperforming assets as a percentage of total loans were 0.25% at December 31, 2023, compared to 0.46% at December 31, 2022. The Bank’s nonperforming assets consist primarily of nonaccrual loans. The decrease in nonperforming assets 57 The following table presents information regarding nonperforming assets As of December 31, (dollars in thousands) 2023 2022 2021 Nonaccrual loans $ 5,592 $ 10,848 $ 2,831 Accruing loans 90 or more days past due — — — Total nonperforming loans 5,592 10,848 2,831 Other real estate owned: Residential real estate — 38 — Total other real estate owned — 38 — Repossessed assets owned 234 — 14 Total other assets owned 234 38 14 Total nonperforming assets $ 5,826 $ 10,886 $ 2,845 Ratio of nonaccrual loans to total loans(1) 0.24 % 0.46 % 0.15 % Ratio of allowance for credit losses to nonaccrual loans 552.93 % 294.75 % 1074.99 % Ratio of nonperforming assets to total assets 0.18 % 0.32 % 0.09 % (1) Excludes loans held for sale of $976,000, $3.2 million and $4.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. The following table presents information regarding nonaccrual loans by category as of the dates indicated: As of December 31, (dollars in thousands) 2023 2022 2021 Nonaccrual loans by category: Commercial and industrial $ 1,777 $ 115 $ 148 Real estate: Construction and development 117 1,435 — Commercial real estate 132 7,271 642 Farmland 164 109 298 1-4 family residential 2,793 1,691 1,535 Multi-family residential — — — Consumer 250 170 160 Agricultural 359 57 48 Total $ 5,592 $ 10,848 $ 2,831 Potential Problem Loans From a credit risk standpoint, we classify loans in one of five Credits rated special mention show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating. Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Credits rated as doubtful have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. 58 Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss. The following December 31, 2023 (in thousands) Pass Special Mention Substandard Doubtful Loss Nonaccrual Total Commercial and industrial $ 283,202 $ 1,503 $ 1,083 $ — $ — $ 1,777 $ 287,565 Real estate: Construction and development 296,266 — 256 — — 117 296,639 Commercial real estate 892,563 7,333 23,167 — — 132 923,195 Farmland 186,051 — 80 — — 164 186,295 1-4 family residential 510,947 863 — — — 2,793 514,603 Multi-family residential 44,292 — — — — — 44,292 Consumer and overdrafts 57,015 37 — — — 250 57,302 Agricultural 12,301 — 25 — — 359 12,685 Total $ 2,282,637 $ 9,736 $ 24,611 $ — $ — $ 5,592 $ 2,322,576 December 31, 2022 (in thousands) Pass Special Mention Substandard Doubtful Loss Nonaccrual Total Commercial and industrial $ 311,685 $ 1,369 $ 898 $ — $ — $ 115 $ 314,067 Real estate: Construction and development 374,795 905 — — — 1,435 377,135 Commercial real estate 867,426 7,321 5,569 — — 7,271 887,587 Farmland 185,615 — 93 — — 109 185,817 1-4 family residential 491,171 199 — — — 1,691 493,061 Multi-family residential 45,147 — — — — — 45,147 Consumer and overdrafts 61,456 50 — — — 170 61,676 Agricultural 13,594 3 32 — — 57 13,686 Total $ 2,350,889 $ 9,847 $ 6,592 $ — $ — $ 10,848 $ 2,378,176 Allowance for We maintain an allowance for For available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, including changes in interest rates. Any impairment that is not credit related is recognized in other comprehensive (loss) income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings through provision for credit loss expense. As of December 31, 2023, the Company determined that all available for sale securities that experienced a decline in fair value below the amortized costs basis were due to noncredit-related factors, therefore no related ACL was recorded and there was no related provision expense recognized during the year ended December 31, 2023. For held to maturity debt securities, the Company evaluates expected credit losses on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage backed securities issued by the U.S. governments, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to municipal securities, management considers 1) issuer bond ratings, 2) whether issuers 59 continue to make timely principal and interest payments under the contractual terms of the securities, 3) internal forecasts and 4) whether or not such securities are guaranteed by the Texas Permanent School Fund or pre-refunded by the issuers. As of December 31, 2023, the Company determined there were no credit related concerns that warrant an ACL for the held to maturity portfolio. In determining the In connection with the review of our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include: As of December 31, 60 The following table presents, as of and for the periods indicated, an analysis of the allowance for As of and for the Years Ended December 31, (dollars in thousands) 2023 2022 2021 Average loans outstanding(1) $ 2,352,154 $ 2,126,810 $ 1,911,540 Gross loans outstanding at end of period(2) $ 2,322,576 $ 2,378,176 $ 1,908,040 Allowance for credit losses at beginning of the period 31,974 30,433 33,619 Impact of adopting ASC 326 — — — Provision for credit losses — 2,150 (1,700 ) Charge offs: Commercial and industrial 473 192 411 Real Estate: Commercial real estate 277 — 816 1-4 family residential — — — Consumer 139 322 151 Agriculture 3 — — Overdrafts 312 335 263 Total charge-offs 1,204 849 1,641 Recoveries: Commercial and industrial 19 72 21 Real Estate: Construction and development — — 1 Commercial real estate — 1 30 1-4 family residential — 30 — Consumer 68 55 35 Agriculture 2 — 8 Overdrafts 61 82 60 Total recoveries 150 240 155 Net charge-offs 1,054 609 1,486 Allowance for credit losses at end of period $ 30,920 $ 31,974 $ 30,433 Ratio of allowance to end of period loans(2) 1.33 % 1.34 % 1.59 % Ratio of net charge-offs to average loans(1) 0.04 % 0.03 % 0.08 % (1) Includes average outstanding balances of loans held for sale of $1.2 million, $2.4 million and $3.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. (2) Excludes loans held for sale of $976,000, $3.2 million and $4.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. We believe the successful execution of our expansion strategy through organic growth and strategic acquisitions is generally demonstrated by the upward trend in average loan balances from December 31, Although we believe that we have established our allowance for The following table shows the allocation of the allowance for 61 occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category. As of December 31, 2023 2022 2021 (dollars in thousands) Amount Percent Amount Percent Amount Percent Commercial and industrial $ 3,719 12.03 % $ 4,382 13.70 % $ 3,600 11.83 % Real estate: Construction and development 3,623 11.72 % 4,889 15.29 % 4,221 13.87 % Commercial real estate 12,257 39.64 % 12,658 39.59 % 13,765 45.23 % Farmland 2,231 7.22 % 2,008 6.28 % 1,698 5.58 % 1-4 family residential 7,470 24.16 % 6,617 20.69 % 5,818 19.12 % Multi-family residential 521 1.68 % 490 1.53 % 396 1.30 % Total real estate 26,102 84.42 % 26,662 83.38 % 25,898 85.10 % Consumer and overdrafts 947 3.06 % 781 2.44 % 766 2.51 % Agricultural 152 0.49 % 149 0.48 % 169 0.56 % Total allowance for credit losses $ 30,920 100.00 % $ 31,974 100.00 % $ 30,433 100.00 % Securities We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of December 31, As of December 31, The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive (loss) income in shareholders’ equity. As of December 31, 2023, the Company determined that all available for sale securities that experienced a decline in fair value below their amortized cost basis were impacted by noncredit-related factors and that securities held to maturity have not experienced credit deterioration; therefore the Company carried no ACL with respect to our securities portfolio at December 31, 2023. From time to time, we have reclassified certain securities from available for sale to held to maturity. Such transfers are made at fair value at the date of transfer. The unrealized holding gains and losses at the date of transfer are retained in other comprehensive loss and in the carrying value of the held to maturity securities and are amortized or accreted over the remaining life of the security. These unamortized unrealized losses and unaccreted unrealized gains on our transferred securities are included in accumulated other comprehensive loss on our balance sheet and netted to an unrealized loss of $7.0 million at December 31, 2023. This amount will be amortized and accreted out of accumulated other comprehensive loss over the remaining life of the underlying securities as an adjustment of the yield on those securities. The following As of December 31, 2023 (in thousands) Amortized Cost Gross Gross Fair Value U.S. government agencies $ 9,292 $ — $ 1,066 $ 8,226 Treasury securities 69,432 — 1,038 68,394 Corporate bonds 29,882 — 3,077 26,805 Municipal securities 170,497 1,105 6,123 165,479 Mortgage-backed securities 284,291 1,014 30,726 254,579 Collateralized mortgage obligations 56,194 19 8,978 47,235 Total $ 619,588 $ 2,138 $ 51,008 $ 570,718 62 As of December 31, 2022 (in thousands) Amortized Cost Gross Gross Fair Value U.S. government agencies $ 9,141 $ — $ 1,259 $ 7,882 Treasury securities 133,735 — 2,921 130,814 Corporate bonds 29,964 — 2,177 27,787 Municipal securities 202,004 984 8,293 194,695 Mortgage-backed securities 278,589 1 30,264 248,326 Collateralized mortgage obligations 63,740 3 9,252 54,491 Total $ 717,173 $ 988 $ 54,166 $ 663,995 We do not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, structured investment vehicles or second lien elements in our investment portfolio. As of December 31, The following As of December 31, 2023 Within One Year After One Year but After Five Years but After Ten Years Total (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total Yield U.S. government agencies $ — — $ 9,292 1.35% $ — — $ — — $ 9,292 1.35% Treasury securities 39,969 2.21% 29,463 2.92% — — — — 69,432 2.51% Corporate bonds 1,980 3.31% 7,228 3.40% 17,597 4.00% — — 26,805 3.80% Municipal securities 8,568 3.63% 43,517 2.90% 68,044 3.06% 50,550 3.17% 170,679 3.08% Mortgage-backed securities — — 46,823 1.80% 187,027 2.87% 35,834 3.42% 269,684 2.76% Collateralized mortgage obligations 1,577 2.89% 17,623 2.77% 30,595 1.48% 4,716 2.81% 54,511 2.10% Total $ 52,094 2.51% $ 153,946 2.46% $ 303,263 2.84% $ 91,100 3.25% $ 600,403 2.78% As of December 31, 2022 Within One Year After One Year but After Five Years but After Ten Years Total (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total Yield U.S. government agencies $ — — $ — — $ 9,141 1.35% $ — — $ 9,141 1.35% Treasury securities 64,798 1.46% 68,937 2.51% — — — — 133,735 2.00% Corporate bonds — — 9,690 3.41% 18,097 4.00% — — 27,787 3.80% Municipal securities 19,151 3.48% 46,087 3.18% 56,844 3.21% 80,240 3.44% 202,322 3.32% Mortgage-backed securities 3,042 2.43% 80,292 1.91% 170,487 2.51% 9,213 1.93% 263,034 2.31% Collateralized mortgage obligations 626 3.82% 25,772 2.79% 32,107 1.47% 3,411 1.09% 61,916 1.98% Total $ 87,617 1.95% $ 230,778 2.49% $ 286,676 2.57% $ 92,864 3.15% $ 697,935 2.54% The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools 63 of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities As of December 31, The average yield of our securities portfolio was 2.78% as of December 31, 2023, up from 2.54% as of December 31, 2022. The growth in average yield resulted primarily from increases in yields on mortgage-backed securities and treasury securities of 2.31% and 2.00% at December 31, 2022, respectively, to 2.76% and 2.51% at December 31, 2023, respectively. As of December 31, 2023, the fair value of available for sale and amortized cost of held to maturity mortgage-backed securities and municipal securities comprised 44.9% and 28.4% of the portfolio, respectively. As of December 31, 2022, mortgage-backed securities and municipal securities comprised 37.7% and 29.0% of the portfolio, respectively. Deposits We offer a variety of deposit products, which have a wide range of interest rates and terms, including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits. Average total deposits for the year ended December 31, The following table presents the average balances and average rates paid on deposits for the periods indicated: For the Years Ended December 31, 2023 2022 (dollars in thousands) Average Average Average Average NOW and interest-bearing demand accounts $ 260,297 1.05% $ 364,941 0.47% Savings accounts 134,409 0.75% 141,484 0.31% Money market accounts 707,840 2.80% 831,833 0.61% Certificates and other time deposits 596,212 3.59% 332,029 0.77% Total interest-bearing deposits 1,698,758 2.65% 1,670,287 0.58% Noninterest-bearing demand accounts 924,945 — 1,082,513 — Total deposits $ 2,623,703 1.71% $ 2,752,800 0.35% The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, Total deposits as of December 31, Noninterest-bearing deposits as of December 31, Total interest-bearing deposits as of December 31, The aggregate amount of certificates and 64 The following table sets forth the amount of uninsured certificates of deposit greater than (dollars in thousands) December 31, 2023 Under 3 months $ 50,188 3 to 6 months 56,026 6 to 12 months 106,478 Over 12 months 9,988 Total $ 222,680 Total deposits in denominations greater than $250,000 as of December 31, 2023, 2022 and 2021 were $1.29 billion, $1.49 billion, and $1.51 billion, respectively. Our estimated uninsured deposits, excluding public funds and bank-owned accounts, were $580.1 million, or 22.0% of total deposits, as of December 31, 2023. Factors affecting the cost of funding interest-bearing assets include the volume of noninterest- and interest-bearing deposits, changes in market interest rates and economic conditions in our primary market areas and their impact on interest paid on deposits, as well as the ongoing execution of our balance sheet management strategy. Cost of Borrowings We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below. Federal Home Loan Bank (FHLB) Advances (dollars in thousands) FHLB Advances December 31, 2023 Amount outstanding at year-end $ 140,000 Weighted average interest rate at year-end 5.36 % Maximum month-end balance during the year $ 340,000 Average balance outstanding during the year $ 226,123 Weighted average interest rate during the year 5.14 % December 31, 2022 Amount outstanding at year-end $ 290,000 Weighted average interest rate at year-end 4.74 % Maximum month-end balance during the year $ 290,000 Average balance outstanding during the year $ 132,764 Weighted average interest rate during the year 2.89 % The following table presents our FHLB borrowings by maturity and weighted average rate as of December 31, 2023: (dollars in thousands) Balance Weighted Average Less than 90 days $ 130,000 5.43 % 90 days to less than one year 10,000 4.38 % Total $ 140,000 5.36 % Federal Reserve Bank of Dallas 65 available under this arrangement. As of December 31, Other Borrowings. Liquidity and Capital Resources Liquidity Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected The following table illustrates, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated. Average assets were Year Ended Year Ended Sources of Funds: Deposits: Noninterest-bearing 28.45 % 33.20 % Interest-bearing 52.25 % 51.23 % Advances from FHLB 6.96 % 4.07 % Line of credit 0.13 % 0.00 % Subordinated debt 1.47 % 1.44 % Securities sold under agreements to repurchase 0.63 % 0.26 % Accrued interest and other liabilities 0.96 % 0.79 % Equity 9.15 % 9.01 % Total 100.00 % 100.00 % Uses of Funds: Loans 71.38 % 64.33 % Securities available for sale 5.61 % 8.83 % Securities held to maturity 13.81 % 15.89 % Nonmarketable equity securities 0.84 % 0.58 % Federal funds sold 1.41 % 3.26 % Interest-bearing deposits in other banks 0.18 % 0.47 % Other noninterest-earning assets 6.77 % 6.64 % Total 100.00 % 100.00 % Average noninterest-bearing deposits to average deposits 35.25 % 39.32 % Average loans to average deposits 89.65 % 77.26 % Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans, including average loans held for sale, 66 increased As of December 31, As of December 31, Capital Resources Total shareholders’ equity Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. See " The following table presents the regulatory capital ratios for our Company and the Bank as of the dates December 31, 2023 December 31, 2022 (dollars in thousands) Amount Ratio Amount Ratio Guaranty Bancshares, Inc. (consolidated) Total capital (to risk-weighted assets) $ 367,526 15.22 % $ 358,702 14.37 % Tier 1 capital (to risk-weighted assets) 302,757 12.53 % 292,966 11.74 % Tier 1 capital (to average assets) 302,757 9.47 % 292,966 8.77 % Common equity tier 1 capital (to risk-weighted assets) 295,540 12.24 % 285,749 11.45 % Guaranty Bank & Trust, N.A. Total capital (to risk weighted assets) $ 373,778 15.49 % $ 361,125 14.48 % Tier 1 capital (to risk weighted assets) 343,607 14.24 % 329,933 13.23 % Tier 1 capital (to average assets) 343,607 10.78 % 329,933 9.89 % Common equity tier 1 capital (to risk-weighted assets) 343,607 14.24 % 329,933 13.23 % Contractual Obligations We have issued subordinated debentures relating to the issuance of trust preferred securities. In October 2002, we formed Guaranty (TX) Capital Trust II, which issued $3.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $93,000. The trust invested the total proceeds from the sale 67 of the trust preferred securities and the common securities in $3.1 million of the Company’s junior subordinated debentures. These debentures In July 2006, we formed Guaranty (TX) Capital Trust III, which issued $2.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $62,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $2.1 million of the Company’s junior subordinated debentures, which will mature on October 1, 2036. In March 2015, we acquired DCB With certain exceptions, the amount of the principal and any accrued and unpaid interest on the debentures are subordinated in right of payment to the prior payment in full of all of our senior Both the DCB On March 4, 2022, the Company On May 1, 2020, the Company issued The following table summarizes contractual obligations and other commitments to make future payments as of December 31, As of December 31, 2023 (in thousands) 1 year More than 1 3 years or 5 years Total Time deposits $ 646,978 $ 53,825 $ 4,380 $ — $ 705,183 Advances from FHLB 140,000 — — — 140,000 Subordinated debt 4,000 — — 42,217 46,217 Operating leases 2,303 4,031 3,423 3,856 13,613 Total $ 793,281 $ 57,856 $ 7,803 $ 46,073 $ 905,013 68 Off-Balance Sheet Items In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of As of December 31, 2023 (in thousands) 1 year More than 3 years or 5 years Total Standby and commercial letters of credit $ 2,852 $ 3,793 $ 27 $ 864 $ 7,536 Commitments to extend credit 219,272 56,669 13,058 47,037 336,036 Total $ 222,124 $ 60,462 $ 13,085 $ 47,901 $ 343,572 Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management believes the credit risk of these off balance sheet items is minimal and we recorded no ACL with respect to these loan agreements as of December 31, 2023. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are summarized and discussed in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this report. Impact of Inflation Our consolidated financial statements and related notes included elsewhere in Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates 69 may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation. Non-GAAP Financial Measures Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this The non-GAAP financial measures that we discuss in this Tangible Book Value Per Common Share We believe that the tangible book value per common share measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value. The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and presents tangible book value per common share compared to book value per common share: As of December 31, (dollars in thousands, except per share data) 2023 2022 2021 Tangible Common Equity Total shareholders’ equity attributable to Guaranty Bancshares, Inc. $ 303,300 $ 294,984 $ 302,214 Adjustments: Goodwill (32,160 ) (32,160 ) (32,160 ) Core deposit intangible, net (1,418 ) (1,859 ) (2,313 ) Total tangible common equity attributable to Guaranty Bancshares, Inc. $ 269,722 $ 260,965 $ 267,741 Common shares outstanding(1) 11,540,644 11,941,672 12,122,717 Book value per common share $ 26.28 $ 24.70 $ 24.93 Tangible book value per common share $ 23.37 $ 21.85 $ 22.09 (1) Excludes the dilutive effect, if any, of 44,844, 112,638 and 146,576 shares of common stock issuable upon exercise of outstanding stock options as of December 31, 2023, 2022 and 2021, respectively. Tangible Common Equity to Tangible Assets 70 We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets. The following table reconciles, as of the dates set forth below, total As of December 31, (dollars in thousands) 2023 2022 2021 Tangible Common Equity Total shareholders’ equity attributable to Guaranty Bancshares, Inc. $ 303,300 $ 294,984 $ 302,214 Adjustments: Goodwill (32,160 ) (32,160 ) (32,160 ) Core deposit intangible, net (1,418 ) (1,859 ) (2,313 ) Total tangible common equity attributable to Guaranty Bancshares, Inc. $ 269,722 $ 260,965 $ 267,741 Tangible Assets Total assets $ 3,184,791 $ 3,351,495 $ 3,086,070 Adjustments: Goodwill (32,160 ) (32,160 ) (32,160 ) Core deposit intangible, net (1,418 ) (1,859 ) (2,313 ) Total tangible assets $ 3,151,213 $ 3,317,476 $ 3,051,597 Tangible Common Equity to Tangible Assets 8.56 % 7.87 % 8.77 % Core Earnings. The following table reconciles, as of and for the dates set forth below, net earnings, a GAAP measure, and net core earnings, a non-GAAP measure that excludes provisions for credit losses and income tax and net PPP income. Net Core Earnings and Net Core Earnings per Common Share (dollars in thousands, except per share data) 2023 2022 2021 2020 2019 Net earnings attributable to Guaranty Bancshares, Inc. $ 30,037 $ 40,447 $ 39,806 $ 27,402 $ 26,279 Adjustments: Provision for (reversal of provision for) credit losses — 2,150 (1,700 ) 13,200 1,250 Income tax provision 7,130 8,834 8,750 5,895 5,778 PPP loans, including fees (21 ) (1,277 ) (7,822 ) (6,270 ) — Net interest expense on PPP-related borrowings — — — 34 — Net core earnings attributable to Guaranty Bancshares, Inc. $ 37,146 $ 50,154 $ 39,034 $ 40,261 $ 33,307 Weighted-average common shares outstanding, basic* 11,693,761 11,980,209 12,065,182 12,219,420 12,802,787 Earnings per common share, basic* $ 2.57 $ 3.38 $ 3.30 $ 2.25 $ 2.05 Net core earnings attributable to Guaranty Bancshares, Inc. per common share, basic* 3.18 4.19 3.24 3.29 2.60 * Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET Interest Rate Sensitivity and Market Risk As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. 71 The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets. Our exposure to interest rate risk is managed by the asset-liability committee of Guaranty Bank & Trust, in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model. We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies. On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a twelve-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 15.0% for a 100 basis point shift, 20.0% for a 200 basis point shift and 30.0% for a 300 basis point shift. The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated: December 31, 2023 December 31, 2022 Change in Interest Rates Percent Change Percent Change Percent Change Percent Change +300 (2.31 %) (19.90 %) 0.43 % (18.35 %) +200 (1.64 %) (12.07 %) 0.17 % (10.87 %) +100 (1.13 %) (5.77 %) (0.21 %) (5.17 %) Base — — — — -100 (0.57 %) 2.67 % 0.34 % 1.48 % -200 0.07 % 3.13 % 4.16 % (0.70 %) The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies. 72 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY The financial statements, the reports thereon, the notes thereto and supplementary data commence on page F-1 of this Annual Report on Form 10-K. See “ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT AND FINANCIAL None. ITEM 9A. CONTROLS AND Evaluation of disclosure controls and procedures Changes in internal control over financial reporting Report on Management’s Assessment of Internal Control Over Financial Reporting As of December 31, Whitley Penn LLP 73 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Guaranty Bancshares, Inc. Opinion on We have audited Guaranty Bancshares, Inc.’s (the “Company”) internal control over financial reporting We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company of December 31, 2023 and 2022, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 14, 2024 expressed an Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the entity’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Whitley Penn LLP Plano, Texas March 14, 2024 74 ITEM 9B. OTHER (a) Not applicable. (b) During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in item 408(a) of Regulation S-K. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information called for by this item is incorporated herein by reference from our Definitive Proxy Statement for our Annual Meeting of Shareholders being held on May ITEM 11. EXECUTIVE COMPENSATION. The information called for by this item is incorporated herein by reference from our Definitive Proxy Statement for our Annual Meeting of Shareholders being held on May ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information called for by this item related to security ownership of certain beneficial owners and management is incorporated herein by reference from our Definitive Proxy Statement for our Annual Meeting of Shareholders being held on May 15, 2024, a copy of which will be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2023. The information called for by this item is incorporated herein by reference from our Definitive Proxy Statement for our Annual Meeting of Shareholders being held on May ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information concerning principal accounting fees and services is incorporated herein by reference from our Definitive Proxy Statement for our Annual Meeting of Shareholders being held on May PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT The following documents are filed as part of this Annual Report on Form 10-K: 75 Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted below: Exhibit No. Description 3.1 3.2 4.1 The other instruments defining the rights of the long-term debt securities of Guaranty Bancshares, Inc. and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Guaranty Bancshares, Inc. hereby agrees to furnish copies of these instruments to the SEC upon request. 4.2 10.1† 10.2† 10.3† 10.4† 10.5† 10.6† 10.7† 10.8† 10.9† 10.10† 76 10.11† 10.12† 10.13† 10.14† 10.15† 10.16 10.17 10.18 10.19 10.20† 10.21† 10.22† 10.23† 21.1 23.1 31.1 31.2 32.1 32.2 97.1 Guaranty Bancshares, Inc. Clawback Policy adopted October 2, 2023.* 101.INS XBRL Instance Document* 101.SCH XBRL Taxonomy Extension Schema Document* 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document* 101.DEF XBRL Taxonomy Extension Definition Linkbase Document* 101.LAB XBRL Taxonomy Extension Label Linkbase Document* 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document* * Filed with this Annual Report on Form ** Furnished with this Annual Report on Form 10-K. † Represents a management contract or a compensatory plan or arrangement. 77 78 ITEM 16. FORM 10-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of Date: March GUARANTY BANCSHARES, INC. By: /s/ Tyson T. Abston Name: Tyson T. Abston Title: Chairman of the Board & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/ Tyson T. Abston Chairman and Chief Executive Officer 3/ Tyson T. Abston (Principal Executive Officer) /s/ Executive Vice President and Chief Financial Officer 3/ Shalene A. (Principal Financial and Accounting Officer) /s/ Kirk L. Lee President 3/ Kirk L. Lee /s/ Richard W. Baker Director 3/ Richard W. Baker /s/ Jeffrey W. Brown Director 3/14/2024 Jeffrey W. Brown /s/ James S. Bunch Director 3/ James S. Bunch /s/ Director 3/ Sondra Cunningham /s/ Bradley K. Drake Director 3/ Bradley K. Drake /s/ Christopher B. Elliott Director 3/ Christopher B. Elliott /s/ Carl Johnson, Jr. Director 3/ Carl Johnson, Jr. /s/ Director 3/ James M. Nolan, Jr. 79 INDEX TO FINANCIAL STATEMENTS Audited Consolidated Financial Statements of Guaranty Bancshares, Inc. as of December 31, F-2 F-4 Consolidated Statements of Earnings for the Years Ended December 31, F-5 Consolidated Statements of F-6 Consolidated Statements of F-7 Consolidated Statements of F-8 F-10 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Guaranty Bancshares, Inc. We have audited the accompanying consolidated balance sheets of Guaranty Bancshares, Inc. (the “Company”) We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2024 expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses for Loans – Qualitative Factors Description of the Matter As described in Notes 1 and 3 to the consolidated financial statements, the Company accounts for credit losses under Accounting Standards Codification ("ASC") 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. As of December 31, 2023, the balance of the allowance for credit losses on loans was approximately $31 million. The Company’s allowance for credit losses represents management’s best estimate of expected losses in the loan portfolio. Estimates of expected credit losses for loans are based on reasonable and supportable forecasts of future economic conditions, historical loss experience and qualitative factors. F-2 Management estimates the allowance for credit losses balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. Our determination that auditing the qualitative adjustments of the allowance for credit losses for loans is a critical audit matter is a result of the high degree of subjectivity involved in management’s assessment of the risk of loss associated with the qualitative adjustments and the determination of the adjustment amounts to historical loss rates for current conditions, and reasonable and supportable forecasts. How We Addressed the Matter in Our Audit The primary procedures performed to address this critical audit matter included: /s/ We have served as the Plano, Texas March F-3 GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, (Dollars in thousands, except per share amounts) 2023 2022 ASSETS Cash and due from banks $ 47,744 $ 52,390 Federal funds sold 36,575 47,275 Interest-bearing deposits 5,205 6,802 Total cash and cash equivalents 89,524 106,467 Securities available for sale 196,195 188,927 Securities held to maturity 404,208 509,008 Loans held for sale 976 3,156 Loans, net of allowance for credit losses of $30,920 and $31,974, respectively 2,290,881 2,344,245 Accrued interest receivable 13,143 11,555 Premises and equipment, net 57,018 54,291 Other real estate owned — 38 Cash surrender value of life insurance 42,348 38,404 Core deposit intangible, net 1,418 1,859 Goodwill 32,160 32,160 Other assets 56,920 61,385 Total assets $ 3,184,791 $ 3,351,495 LIABILITIES AND EQUITY Liabilities Deposits Noninterest-bearing $ 852,957 $ 1,052,144 Interest-bearing 1,780,289 1,629,010 Total deposits 2,633,246 2,681,154 Securities sold under agreements to repurchase 25,172 7,221 Accrued interest and other liabilities 32,242 28,409 Line of credit 4,500 — Federal Home Loan Bank advances 140,000 290,000 Subordinated debt, net 45,785 49,153 Total liabilities 2,880,945 3,055,937 Commitments and contingencies (see Note 15) Equity Preferred stock, $5.00 par value, 15,000,000 shares authorized, no shares issued — — Common stock, $1.00 par value, 50,000,000 shares authorized, 14,242,328 and 14,208,558 shares issued, and 11,540,644 and 11,941,672 shares outstanding, respectively 14,242 14,209 Additional paid-in capital 228,986 227,727 Retained earnings 156,878 137,565 Treasury stock, 2,701,684 and 2,266,886 shares, respectively, at cost (71,484 ) (60,257 ) Accumulated other comprehensive loss (25,322 ) (24,260 ) Equity attributable to Guaranty Bancshares, Inc. 303,300 294,984 Noncontrolling interest 546 574 Total equity 303,846 295,558 Total liabilities and equity $ 3,184,791 $ 3,351,495 See accompanying notes to consolidated financial F-4 GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF EARNINGS For the Years (Dollars in thousands, except per share data) 2023 2022 2021 Interest income Loans, including fees $ 136,086 $ 104,503 $ 92,497 Securities Taxable 11,580 11,466 4,762 Nontaxable 4,789 5,131 4,218 Nonmarketable equity securities 1,288 1,246 740 Federal funds sold and interest-bearing deposits 2,749 863 333 Total interest income 156,492 123,209 102,550 Interest expense Deposits 44,981 9,753 5,651 FHLB advances and federal funds purchased 11,626 3,855 413 Subordinated debt 2,143 1,722 700 Other borrowed money 762 50 228 Total interest expense 59,512 15,380 6,992 Net interest income 96,980 107,829 95,558 Provision for (reversal of provision for) credit losses — 2,150 (1,700 ) Net interest income after reversal of provision for credit losses 96,980 105,679 97,258 Noninterest income Service charges 4,387 4,288 3,772 Net realized (loss) gain on sales of securities available for sale (229 ) 172 — Net realized gain on sale of loans 1,201 2,435 5,528 Merchant and debit card fees 7,307 7,121 6,717 Other income 9,847 9,469 8,559 Total noninterest income 22,513 23,485 24,576 Noninterest expense Employee compensation and benefits 48,862 47,477 42,345 Occupancy expenses 11,301 11,129 10,944 Other expenses 22,191 21,301 19,989 Total noninterest expense 82,354 79,907 73,278 Income before income taxes 37,139 49,257 48,556 Income tax provision 7,130 8,834 8,750 Net earnings $ 30,009 $ 40,423 $ 39,806 Net loss attributable to noncontrolling interest 28 24 — Net earnings attributable to Guaranty Bancshares, Inc. $ 30,037 $ 40,447 $ 39,806 Basic earnings per share $ 2.57 $ 3.38 $ 3.30 Diluted earnings per share $ 2.56 $ 3.34 $ 3.26 See accompanying notes to consolidated financial statements. F-5 GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years (Dollars in thousands) 2023 2022 2021 Net earnings $ 30,009 $ 40,423 $ 39,806 Other comprehensive loss: Unrealized losses on securities: Unrealized holding losses arising during the period, net of tax (139 ) (12,750 ) (15,673 ) Reclassification adjustment for net losses (gains) included in net earnings, net of tax 181 (136 ) — Unrealized losses on available for sale securities transferred to held to maturity, net of tax and amortization (1,104 ) (17,491 ) 11,010 Unrealized losses on securities, net of tax (1,062 ) (30,377 ) (4,663 ) Unrealized (losses) gains on interest rate swaps: Unrealized holding gains arising during the period — 497 873 Reclassification of realized (gains) losses on interest rate swap termination from accumulated other comprehensive loss — (685 ) 466 Unrealized (losses) gains on interest rate swaps — (188 ) 1,339 Total other comprehensive loss (1,062 ) (30,565 ) (3,324 ) Comprehensive income 28,947 9,858 36,482 Less comprehensive loss attributable to noncontrolling interest 28 24 — Comprehensive income attributable to Guaranty Bancshares, Inc. $ 28,975 $ 9,882 $ 36,482 See accompanying notes to consolidated financial statements. F-6 GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years (Dollars in Attributable to Guaranty Bancshares, Inc. Preferred Common Additional Retained Treasury Accumulated Noncontrolling Interest Total Balance at December 31, 2020 $ — $ 12,952 $ 188,032 $ 113,449 $ (51,419 ) $ 9,629 $ — $ 272,643 Net earnings — — — 39,806 — — — 39,806 Other comprehensive income — — — — — (3,324 ) — (3,324 ) 10% stock dividend — 1,094 34,853 (35,947 ) — — — — Exercise of stock options — 90 1,929 — — — — 2,019 Restricted stock grants — 3 (3 ) — — — — — Stock based compensation — — 733 — — — — 733 Cash dividends: Common - $0.80 per share — — — (9,663 ) — — — (9,663 ) Balance at December 31, 2021 — 14,139 225,544 107,645 (51,419 ) 6,305 — 302,214 Net earnings — — — 40,447 — — (24 ) 40,423 Other comprehensive loss — — — — — (30,565 ) — (30,565 ) Contributions from noncontrolling interest — — — — — — 598 598 Exercise of stock options — 70 1,495 — — — — 1,565 Purchase of treasury stock — — — — (8,838 ) — — (8,838 ) Stock based compensation — — 688 — — — — 688 Cash dividends: Common - $0.88 per share — — — (10,527 ) — — — (10,527 ) Balance at December 31, 2022 — 14,209 227,727 137,565 (60,257 ) (24,260 ) 574 295,558 Net earnings — — — 30,037 — — (28 ) 30,009 Other comprehensive loss — — — — — (1,062 ) — (1,062 ) Exercise of stock options — 29 669 — — — — 698 Purchase of treasury stock — — — — (11,227 ) — — (11,227 ) Restricted stock grants — 4 (4 ) — — — — — Stock based compensation — — 594 — — — — 594 Cash dividends: Common - $0.92 per share — — — (10,724 ) — — — (10,724 ) Balance at December 31, 2023 $ — $ 14,242 $ 228,986 $ 156,878 $ (71,484 ) $ (25,322 ) $ 546 $ 303,846 See accompanying notes to consolidated financial statements. F-7 GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2023, 2022 and 2021 (Dollars in thousands) 2023 2022 2021 Cash flows from operating activities Net earnings $ 30,009 $ 40,423 $ 39,806 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 4,042 4,211 4,358 Amortization 734 724 1,154 Deferred taxes 346 (1,157 ) (143 ) Premium amortization, net of discount accretion 2,070 4,919 4,368 Net realized loss (gain) on sales of securities available for sale 229 (172 ) — Gain on sale of loans (1,201 ) (2,435 ) (5,528 ) Provision for (reversal of) credit losses — 2,150 (1,700 ) Origination of loans held for sale (39,066 ) (73,292 ) (118,500 ) Proceeds from loans held for sale 42,447 76,700 125,441 Write-down of other real estate and repossessed assets — 19 6 Net gain on sale of premises, equipment, other real estate owned and other assets (2,943 ) (925 ) (23 ) Stock based compensation 594 688 733 Gain on BOLI death benefits — — (277 ) Net change in accrued interest receivable and other assets (1,860 ) (14,446 ) (8,565 ) Net change in accrued interest payable and other liabilities 3,806 1,439 2,414 Net cash provided by operating activities $ 39,207 $ 38,846 $ 43,544 Cash flows from investing activities Securities available for sale: Purchases $ (1,671,050 ) $ (641,739 ) $ (1,223,595 ) Proceeds from sales 21,268 26,130 — Proceeds from maturities and principal repayments 1,641,283 628,160 1,079,462 Securities held to maturity: Purchases — (457,452 ) (15,057 ) Proceeds from maturities and principal repayments 102,681 234,150 890 Net repayments (originations) of loans 53,072 (470,389 ) (43,148 ) Purchases of premises and equipment (6,779 ) (5,684 ) (2,896 ) Proceeds from BOLI death benefit — — 464 Proceeds from sale of premises, equipment, other real estate owned and other assets 3,558 1,860 1,202 Net cash provided by (used in) investing activities $ 144,033 $ (684,964 ) $ (202,678 ) See accompanying notes to consolidated financial statements. F-8 GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2023, 2022 and 2021 (Dollars in thousands) 2023 2022 2021 Cash flows from financing activities Net change in deposits $ (47,908 ) $ 10,664 $ 384,437 Net change in securities sold under agreements to repurchase 17,951 (6,930 ) (1,480 ) Proceeds from FHLB advances 3,275,000 1,135,000 160,000 Repayment of FHLB advances (3,425,000 ) (892,500 ) (221,601 ) Proceeds from line of credit 17,500 1,000 10,000 Repayment of line of credit (13,000 ) (6,000 ) (17,000 ) Proceeds from issuance of subordinated debt — 34,436 — Repayments of debentures (3,500 ) (5,093 ) — Purchase of treasury stock (11,227 ) (8,838 ) — Exercise of stock options 698 1,565 2,019 Cash dividends paid (10,697 ) (10,324 ) (9,427 ) Net cash (used in) provided by financing activities $ (200,183 ) $ 252,980 $ 306,948 Net change in cash and cash equivalents (16,943 ) (393,138 ) 147,814 Cash and cash equivalents at beginning of period 106,467 499,605 351,791 Cash and cash equivalents at end of period $ 89,524 $ 106,467 $ 499,605 Supplemental disclosures of cash flow information Interest paid $ 56,588 $ 13,513 $ 7,315 Income taxes paid 7,580 9,940 9,650 Supplemental schedule of noncash investing and financing activities Cash dividends accrued $ 2,654 $ 2,627 $ 2,424 Lease right of use assets obtained in exchange for lease liabilities 1,695 337 1,085 Available for sale securities transferred to held to maturity, net of unrealized loss of $13,186 for 2022 and net of unrealized gain of $10,235 for 2021. — 106,157 172,292 Transfer of loans to other real estate owned and repossessed assets 292 70 509 Contributions from noncontrolling interest — 574 — Stock dividend — — 35,947 See accompanying notes to consolidated financial statements. F-9 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. The policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Principles of Consolidation Basis of Presentation: All The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Nature of Operations Use of Estimates Cash and Cash Equivalents Marketable Securities Management evaluates securities that are in an unrealized loss position for F-10 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, Nonmarketable Securities Loans Held for Sale Loans Nonaccrual Loans COVID-19: Due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 16, 2020, the Federal Open Market Committee ("FOMC") reduced the target federal funds rate range to 0.00% to 0.25%, at which it remained until March 2022, when the FOMC began to rapidly increase market interest rates in response to high levels of inflation that arose in the U.S. economy. From March 2022 through July 31, 2023, the FOMC increased market rates from 0.00% to a target range of 5.25% to 5.50%. These rapid increases in interest rates, the impact of future rate increases or decreases, high levels of inflation and other lingering effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations, as well as business and consumer confidence. Economic uncertainties remain which can negatively impact net interest income and F-11 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) noninterest income. Allowance for Credit Losses: Held to Maturity Debt Securities The allowance for credit losses on held to maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held to maturity securities to present management's best estimate of the net amount expected to be collected. Held to maturity securities are charged-off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses. Management measures expected credit losses on held to maturity securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. As of December 31, 2023 and 2022, our held to maturity securities consisted of U.S. government agencies, treasury securities, municipal securities, collateralized mortgage obligations and mortgage-backed securities issued by the U.S. government and its agencies. With regard to the treasuries, collateralized mortgage obligations and mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. For municipal securities, management reviewed key risk indicators, including ratings by credit agencies when available, and determined that there is no current expectation of credit loss as of December 31, 2023 and 2022. Management has made the accounting policy election to exclude accrued interest receivable on held to maturity securities from the estimate of credit losses. Available for Sale Debt Securities For available for sale debt securities in an unrealized loss position, the Company Changes in the allowance for credit losses are recorded as provisions for or Loans The allowance for Management estimates the allowance balance F-12 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. The allowance for credit losses is measured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan Below is a summary of the segments and certain of the inherent risks in the Company’s loan portfolio: Commercial and industrial: This portfolio segment includes general secured and unsecured commercial loans which are not secured by real Construction and development: This portfolio segment includes all loans for the purpose of construction, including both business and residential structures; and real estate development loans, including Commercial real estate: The commercial real estate portfolio segment includes all commercial loans that are secured by real estate, other than those included in the construction and development, farmland, multi-family, and 1-4 family residential segments. Risks inherent in this portfolio segment include fluctuations in property values and changes in the local and national economy impacting the sale or lease of the finished structures. Farmland: The farmland portfolio includes loans that are secured by real estate that is used or usable for agricultural purposes, including land used for crops, livestock production, grazing & Consumer: This portfolio segment consists of non-real estate loans to consumers. This includes secured and unsecured loans such as auto and personal loans. The risks inherent in this portfolio segment include those factors that would impact the consumer’s ability to meet their obligations under the loan. These include increases in the local unemployment rate and fluctuations in consumer and business sales. 1-4 family residential: This portfolio segment includes loans to both commercial and consumer borrowers secured by real estate for housing units of up to four families. Risks inherent in this portfolio segment include increases in the local unemployment rate, changes in the local economy and factors that would impact the value of the underlying collateral, such as changes in property values. F-13 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Multi-family residential: This portfolio segment includes loans secured by structures containing five or more residential housing units. Risks inherent in this portfolio segment include increases to the local unemployment rate, changes in the local economy, and factors that would impact property values. Agricultural: The agricultural portfolio segment includes loans to individuals and companies in the dairy and cattle industries and farmers. Loans in the segment are secured by collateral including cattle, crops and equipment. Risks inherent in this portfolio segment include adverse changes in climate and fluctuations in feed and cattle prices. The following groups of loans are considered to carry specific similar inherent risk characteristics, which the Bank considers separately during its calculation of the allowance for credit losses. These groups of loans are reported within the segments identified in the previous table. Mortgage Warehouse: The mortgage warehouse portfolio, which was discontinued as a product line in May 2023, includes loans in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30-days, typically 5-10 days before they are sold to an approved investor. These loans are consistently underwritten based on standards established by the approved investor. Risks inherent in this portfolio include borrower or mortgage originator fraud. SBA – Acquired Loans The SBA – acquired loans segment consists of partially SBA guaranteed loans that were acquired from Westbound Bank in June 2018. These loans are commercial real estate and commercial and industrial in nature and were underwritten with guidelines that are less conservative than our Company. Risks inherent in this portfolio include increases in interest rates, as most are variable rate loans, generally lower levels of borrower equity, less conservative underwriting guidelines, fluctuations in real estate values and changes in the local and national economy. SBA – Originated Loans The SBA – originated loans segment consists of loans that are partially guaranteed by the SBA and were originated and underwritten by Guaranty Bank & Trust loan officers. Risks inherent in this portfolio include increases in interest rates due to variable rate structures, generally lower levels of borrower equity or net worth, fluctuations in real estate values and changes in the local and national economy. In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our portfolio is impacted by delinquency status and debt service coverage generated by our borrowers’ businesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for credit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for credit losses, which would adversely affect our results of operations and financial condition. Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial and industrial, construction, and commercial real estate loans. Internal risk ratings are a key factor that impact management’s estimates of loss factors used in determining the amount of the allowance for credit losses. Internal risk ratings are updated on a continuous basis. F-14 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Credit Quality Indicators - The Company monitors the credit quality of the loans in the various segments by identifying and evaluating credit quality indicators specific to each segment class. This information is incorporated into management’s analysis of the adequacy of the allowance for The following is a discussion of the primary credit quality indicators most closely monitored for the Commercial and industrial: In assessing risk associated with commercial loans, management considers the business’s cash flow and the value of the underlying collateral to be the primary credit quality indicators. Construction and development: In assessing the credit quality of construction loans, management considers the ability of the borrower to Commercial real estate: Management considers the strength of the borrower’s cash flows, changes in property values and occupancy status to be key credit quality indicators of commercial real estate loans. Farmland: In assessing risk associated with farmland loans, management considers the borrower’s cash flows and underlying property values to be key credit quality indicators. Consumer: Management considers delinquency status to be the primary credit quality indicator of consumer loans. Others include the debt to income ratio of the borrower, the borrower’s credit history, the availability of other credit to the borrower, the borrower’s past-due history, and, if applicable, the value of the underlying collateral to be primary credit quality indicators. 1-4 family residential: Management considers delinquency status to be the primary credit quality indicator of 1-4 family residential loans. Others include changes in the local economy, changes in property values, and changes in local unemployment rates to be key credit quality indicators of the loans in the 1-4 family residential loan segment. Multi-family residential: Management considers changes in the local economy, changes in property values, vacancy rates and changes in local unemployment rates to be key credit quality indicators of the loans in the multifamily loan segment. Agricultural: In assessing risk associated with agricultural loans, management considers the borrower’s cash flows, the value of the underlying collateral and sources of secondary repayment to be primary credit quality indicators. From time to time, we modify the terms of loans for borrowers experiencing financial difficulties. These modifications may include adjustments such as a lower interest rate, a reduction of principal, or a longer term to maturity. Such modifications are evaluated under FASB's ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the recognition and measurement guidance for troubled debt restructurings ("TDRs") by creditors in ASC 310-40. We assess each loan experiencing financial difficulties on a case-by-case basis to determine the appropriate method for allocating an allowance for credit losses. This determination considers factors such F-15 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) as the loan's specific situation, its collateral, and the borrower's prospects for recovery. In some cases, the loan may be grouped with similar loans for allowance consideration, while in others, an individual assessment may be necessary. The allowance for credit loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral. Reserve for Unfunded Commitments The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Company. The allowance for credit losses on off balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Premises and Equipment Bank Buildings Up to 40 years Equipment to 10 years Furniture and Fixtures to 7 years Software to 5 years Automobiles to 4 years Other Real Estate Owned Transfers of Financial Assets Goodwill and Other Intangible Assets Impairment is tested for annually or when a triggering event occurs, and exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At the measurement date, the Company had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying Core deposit intangibles represent premiums paid on acquired deposits based on the estimated fair value of the deposits at the time of purchase. These premiums are amortized over a ten year period. Impairment is tested for annually, and exists when there is significant runoff of these deposits. Management has concluded that there is no impairment to the Company's core deposit intangibles. F-16 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Bank Owned Life Insurance Income Taxes A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Fair Values of Financial Instruments Loss Contingencies Derivative Financial Instruments Prior to entering a hedge transaction, the Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in operations. Dividend Restriction Restrictions on Cash Stock Compensation F-17 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Nonvested restricted stock awards and options are forfeited upon termination, and vested options are subject to a 90-day grace period prior to forfeiture. Earnings Per Share Comprehensive Income Operating Segments Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Revenue Recognition: ASU 2014-09, Revenue from Contracts with Customers (Topic 606), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Company's revenue-generating transactions are not subject to Topic 606, including revenue generated from financial instruments, such as loans, letters of credit, loan processing fees and investment securities, as well as revenue related to mortgage banking activities, and BOLI, as these activities are subject to other accounting guidance. Descriptions of revenue-generating activities that are within the scope of Topic 606, and are presented in the accompanying consolidated statements of earnings as components of noninterest income, are as follows: F-18 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Reclassification Recent Accounting In NOTE 2 - The following December 31, 2023 Amortized Gross Gross Estimated Available for sale: Corporate bonds $ 29,882 $ — $ 3,077 $ 26,805 Municipal securities 2,322 182 — 2,504 Mortgage-backed securities 164,419 1,014 15,621 149,812 Collateralized mortgage obligations 18,757 19 1,702 17,074 Total available for sale $ 215,380 $ 1,215 $ 20,400 $ 196,195 Held to maturity: U.S. government agencies $ 9,292 $ — $ 1,066 $ 8,226 Treasury securities 69,432 — 1,038 68,394 Municipal securities 168,175 923 6,123 162,975 Mortgage-backed securities 119,872 — 15,105 104,767 Collateralized mortgage obligations 37,437 — 7,276 30,161 Total held to maturity $ 404,208 $ 923 $ 30,608 $ 374,523 December 31, 2022 Amortized Gross Gross Estimated Available for sale: Corporate bonds $ 29,964 $ — $ 2,177 $ 27,787 Municipal securities 10,324 326 8 10,642 Mortgage-backed securities 145,896 1 15,556 130,341 Collateralized mortgage obligations 21,981 3 1,827 20,157 Total available for sale $ 208,165 $ 330 $ 19,568 $ 188,927 Held to maturity: U.S. government agencies $ 9,141 $ — $ 1,259 $ 7,882 Treasury securities 133,735 — 2,921 130,814 Municipal securities 191,680 658 8,285 184,053 Mortgage-backed securities 132,693 — 14,708 117,985 Collateralized mortgage obligations 41,759 — 7,425 34,334 Total held to maturity $ 509,008 $ 658 $ 34,598 $ 475,068 From time to time, we have reclassified certain securities from available for sale to held to maturity. Such transfers are made at fair value at the date of transfer. The unrealized holding gains and losses at the date of transfer are retained in accumulated other comprehensive loss and in the carrying value of the held to maturity securities and are amortized or F-19 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) accreted over the remaining life of the security. During the second quarter of 2022, we transferred $106,157 of securities from available for sale to held to maturity, which included a net unrealized loss on the date of transfer of $13,186. During the third quarter of 2021, we transferred $172,292 of securities from available for sale to held to maturity, which included a net unrealized gain on the date of transfer of $10,235. These unamortized unrealized losses and unaccreted unrealized gains on our transferred securities are included in accumulated other comprehensive loss on our balance sheet and they netted to an unrealized loss of $6,964 at December 31, There is no allowance for credit losses recorded for our available for sale or held to maturity debt securities as of December 31, 2023 or 2022. Information pertaining to available for sale securities with gross unrealized losses as of December 31, 2023 and 2022, for which no allowance for credit losses has been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is detailed in the following tables: Less Than 12 Months 12 Months or Longer Total December 31, 2023 Gross Estimated Gross Estimated Gross Estimated Available for sale: Corporate bonds $ — $ — $ (3,077 ) $ 26,805 $ (3,077 ) $ 26,805 Mortgage-backed securities (742 ) 13,308 (14,879 ) 101,889 (15,621 ) 115,197 Collateralized mortgage obligations — — (1,702 ) 13,976 (1,702 ) 13,976 Total available for sale $ (742 ) $ 13,308 $ (19,658 ) $ 142,670 $ (20,400 ) $ 155,978 Less Than 12 Months 12 Months or Longer Total December 31, 2022 Gross Estimated Gross Estimated Gross Estimated Available for sale: Corporate bonds $ (1,518 ) $ 20,323 $ (659 ) $ 7,464 $ (2,177 ) $ 27,787 Municipal securities (8 ) 1,659 — — (8 ) 1,659 Mortgage-backed securities (6,150 ) 74,146 (9,406 ) 55,826 (15,556 ) 129,972 Collateralized mortgage obligations (908 ) 16,575 (919 ) 3,411 (1,827 ) 19,986 Total available for sale $ (8,584 ) $ 112,703 $ (10,984 ) $ 66,701 $ (19,568 ) $ 179,404 There were 233 investments in an unrealized loss position at December 31, 2023, of which 74 were available for sale debt securities in an unrealized loss position with no recorded allowance for credit losses as of December 31, 2023. The available for sale securities in a loss position were composed of corporate bonds, collateralized mortgage obligations and mortgage-backed securities as of December 31, 2023, along with municipal securities as of December 31, 2022.Management evaluates available for sale debt securities in an unrealized loss position to determine whether the impairment is due to credit-related factors or noncredit-related factors. With respect to the collateralized mortgage obligations and mortgage-backed securities issued by the U.S. government and its agencies, the Company has determined that a F-20 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Management As of December 31, There were no held to maturity securities past due on interest or principal payments, and none that were on nonaccrual as of December 31, 2023. Securities with fair values of approximately Proceeds from the sales of available for sale securities and the associated gains and losses for the years ended December 31, 2023 and 2022 are listed 2023 2022 2021 Proceeds from sales $ 21,268 $ 26,130 $ — Gross gains 184 234 — Gross losses (413 ) (62 ) — There were no held to maturity The contractual maturities at December 31, Available for Sale Held to Maturity December 31, 2023 Amortized Estimated Amortized Estimated Due within one year $ 2,003 $ 1,979 $ 47,009 $ 46,674 Due after one year through five years 7,540 7,229 68,564 66,189 Due after five years through ten years 22,661 20,101 79,950 77,878 Due after ten years — — 51,376 48,854 Mortgage-backed securities 164,419 149,812 119,872 104,767 Collateralized mortgage obligations 18,757 17,074 37,437 30,161 Total securities $ 215,380 $ 196,195 $ 404,208 $ 374,523 F-21 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) NOTE The following table summarizes 2023 2022 Commercial and industrial $ 287,565 $ 314,067 Real estate: Construction and development 296,639 377,135 Commercial real estate 923,195 887,587 Farmland 186,295 185,817 1-4 family residential 514,603 493,061 Multi-family residential 44,292 45,147 Consumer 57,059 61,394 Agricultural 12,685 13,686 Overdrafts 243 282 Total loans 2,322,576 2,378,176 Net of: Deferred loan fees, net (775 ) (1,957 ) Allowance for credit losses (30,920 ) (31,974 ) Total net loans(1) $ 2,290,881 $ 2,344,245 (1) Excludes accrued interest receivable on loans of $9.5 million and $7.6 million as of December 31, 2023 and 2022, respectively, which is presented separately on the consolidated balance sheets. The Company has entered into transactions, at prevailing market rates and terms, with certain directors, executive officers, significant shareholders and their affiliates. Loans to such related parties at December 31, Loans to principal officers, directors, and their affiliates during the year ended December 31, December 31, 2023 Beginning balance $ 72,539 New loans 42,661 Effect of changes in composition of related parties (492 ) Repayments (51,157 ) Ending balance $ 63,551 F-22 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Allowance for Credit Losses The Company’s estimate of the allowance for credit losses (“ACL”) reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected modification for borrower experiencing financial difficulty.The following For the Year Ended Commercial Construction Commercial Farmland 1-4 family Multi-family Consumer Agricultural Overdrafts Total Allowance for credit losses: Beginning balance $ 4,382 $ 4,889 $ 12,658 $ 2,008 $ 6,617 $ 490 $ 778 $ 149 $ 3 $ 31,974 (Reversal of) provision for credit losses (209 ) (1,266 ) (124 ) 223 853 31 238 4 250 — Loans charged-off (473 ) — (277 ) — — — (139 ) (3 ) (312 ) (1,204 ) Recoveries 19 — — — — — 68 2 61 150 Ending balance $ 3,719 $ 3,623 $ 12,257 $ 2,231 $ 7,470 $ 521 $ 945 $ 152 $ 2 $ 30,920 For the Year Ended Commercial Construction Commercial Farmland 1-4 family Multi-family Consumer Agricultural Overdrafts Total Allowance for credit losses: Beginning balance $ 3,600 $ 4,221 $ 13,765 $ 1,698 $ 5,818 $ 396 $ 762 $ 169 $ 4 $ 30,433 Provision for (reversal of) credit losses 902 668 (1,108 ) 310 769 94 283 (20 ) 252 2,150 Loans charged-off (192 ) — — — — — (322 ) — (335 ) (849 ) Recoveries 72 — 1 — 30 — 55 — 82 240 Ending balance $ 4,382 $ 4,889 $ 12,658 $ 2,008 $ 6,617 $ 490 $ 778 $ 149 $ 3 $ 31,974 For the Year Ended Commercial Construction Commercial Farmland 1-4 family Multi-family Consumer Agricultural Overdrafts Total Allowance for credit losses: Beginning balance $ 4,033 $ 4,735 $ 15,780 $ 1,220 $ 6,313 $ 363 $ 929 $ 239 $ 7 33,619 Provision for (reversal of) credit losses (43 ) (515 ) (1,229 ) 478 (495 ) 33 (51 ) (78 ) 200 (1,700 ) Loans charged-off (411 ) — (816 ) — — — (151 ) — (263 ) (1,641 ) Recoveries 21 1 30 — — — 35 8 60 155 Ending balance $ 3,600 $ 4,221 $ 13,765 $ 1,698 $ 5,818 $ 396 $ 762 $ 169 $ 4 $ 30,433 F-23 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) During 2021, a reverse provision of $1,700 was recorded as a result of improvements that occurred to Credit Quality Assets are graded “pass” when the relationship exhibits acceptable credit risk and indicates repayment ability, tolerable collateral coverage and reasonable performance history. Lending relationships exhibiting potentially significant credit risk and marginal repayment ability and/or asset protection are graded “special mention.” Assets classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. Substandard graded loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets graded “doubtful” are substandard graded loans that have added characteristics that make collection or liquidation in full improbable. Loans that are on nonaccrual status are generally classified as substandard. In general, the loans in our portfolio have low historical credit losses. The Company F-24 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of December 31, 2023: December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Total Commercial and industrial: Pass $ 42,646 $ 72,376 $ 38,328 $ 12,864 $ 8,249 $ 12,524 $ 96,215 $ 283,202 Special mention — 16 132 958 147 — 250 1,503 Substandard — 190 — 370 370 153 — 1,083 Nonaccrual — 129 1,528 7 — 79 34 1,777 Total commercial and industrial loans $ 42,646 $ 72,711 $ 39,988 $ 14,199 $ 8,766 $ 12,756 $ 96,499 $ 287,565 Charge-offs $ (79 ) $ — $ (25 ) $ (41 ) $ (31 ) $ (4 ) $ (293 ) $ (473 ) Recoveries — — — — — 4 15 19 Current period net $ (79 ) $ — $ (25 ) $ (41 ) $ (31 ) $ — $ (278 ) $ (454 ) Construction and development: Pass $ 86,641 $ 112,347 $ 62,548 $ 7,074 $ 5,915 $ 12,504 $ 9,237 $ 296,266 Special mention — — — — — — — — Substandard — 189 — — — 67 — 256 Nonaccrual — 73 — — — 44 — 117 Total construction and development loans $ 86,641 $ 112,609 $ 62,548 $ 7,074 $ 5,915 $ 12,615 $ 9,237 $ 296,639 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Pass $ 46,655 $ 368,933 $ 149,536 $ 81,765 $ 54,100 $ 176,509 $ 15,065 $ 892,563 Special mention — 7,000 — — — 333 — 7,333 Substandard — 15,831 6,950 — 49 337 — 23,167 Nonaccrual — — — — 32 100 — 132 Total commercial real estate loans $ 46,655 $ 391,764 $ 156,486 $ 81,765 $ 54,181 $ 177,279 $ 15,065 $ 923,195 Charge-offs $ (190 ) $ — $ — $ — $ — $ (87 ) $ — $ (277 ) Recoveries — — — — — — — — Current period net $ (190 ) $ — $ — $ — $ — $ (87 ) $ — $ (277 ) F-25 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Total Farmland: Pass $ 25,009 $ 77,371 $ 46,817 $ 8,556 $ 5,599 $ 15,850 $ 6,849 $ 186,051 Special mention — — — — — — — — Substandard — — — — 27 53 — 80 Nonaccrual — — — — — 164 — 164 Total farmland loans $ 25,009 $ 77,371 $ 46,817 $ 8,556 $ 5,626 $ 16,067 $ 6,849 $ 186,295 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family residential: Pass $ 57,348 $ 143,992 $ 120,964 $ 42,535 $ 28,764 $ 95,198 $ 22,146 $ 510,947 Special mention — — — — — 863 — 863 Substandard — — — — — — — — Nonaccrual — — 1,249 53 175 1,316 — 2,793 Total 1-4 family residential loans $ 57,348 $ 143,992 $ 122,213 $ 42,588 $ 28,939 $ 97,377 $ 22,146 $ 514,603 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — Multi-family residential: Pass $ 1,984 $ 18,041 $ 16,496 $ 2,363 $ 3,862 $ 1,492 $ 54 $ 44,292 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total multi-family residential loans $ 1,984 $ 18,041 $ 16,496 $ 2,363 $ 3,862 $ 1,492 $ 54 $ 44,292 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — F-26 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Total Consumer and overdrafts: Pass $ 26,161 $ 15,181 $ 5,840 $ 2,449 $ 589 $ 2,307 $ 4,488 $ 57,015 Special mention 6 26 5 — — — — 37 Substandard — — — — — — — — Nonaccrual 19 52 75 25 42 37 — 250 Total consumer loans and overdrafts $ 26,186 $ 15,259 $ 5,920 $ 2,474 $ 631 $ 2,344 $ 4,488 $ 57,302 Charge-offs $ (346 ) $ (38 ) $ (51 ) $ (11 ) $ (5 ) $ — $ — $ (451 ) Recoveries 61 — 4 1 — 23 40 129 Current period net $ (285 ) $ (38 ) $ (47 ) $ (10 ) $ (5 ) $ 23 $ 40 $ (322 ) Agricultural: Pass $ 1,857 $ 1,962 $ 1,078 $ 685 $ 236 $ 604 $ 5,879 $ 12,301 Special mention — — — — — — — — Substandard — — — — — 25 — 25 Nonaccrual — — 256 — 74 29 — 359 Total agricultural loans $ 1,857 $ 1,962 $ 1,334 $ 685 $ 310 $ 658 $ 5,879 $ 12,685 Charge-offs $ — $ — $ — $ — $ — $ (3 ) $ — $ (3 ) Recoveries — — — — — 2 — 2 Current period net $ — $ — $ — $ — $ — $ (1 ) $ — $ (1 ) Total loans: Pass $ 288,301 $ 810,203 $ 441,607 $ 158,291 $ 107,314 $ 316,988 $ 159,933 $ 2,282,637 Special mention 6 7,042 137 958 147 1,196 250 9,736 Substandard — 16,210 6,950 370 446 635 — 24,611 Nonaccrual 19 254 3,108 85 323 1,769 34 5,592 Total loans $ 288,326 $ 833,709 $ 451,802 $ 159,704 $ 108,230 $ 320,588 $ 160,217 $ 2,322,576 Charge-offs $ (615 ) $ (38 ) $ (76 ) $ (52 ) $ (36 ) $ (94 ) $ (293 ) $ (1,204 ) Recoveries 61 — 4 1 — 29 55 150 Total current period net (charge-offs) recoveries $ (554 ) $ (38 ) $ (72 ) $ (51 ) $ (36 ) $ (65 ) $ (238 ) $ (1,054 ) F-27 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of December 31, 2022: December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Total Commercial and industrial: Pass $ 99,750 $ 57,854 $ 19,577 $ 11,797 $ 4,172 $ 12,907 $ 105,628 $ 311,685 Special mention — 131 — 333 — — 905 1,369 Substandard 14 — 246 423 192 23 — 898 Nonaccrual 72 33 10 — — — — 115 Total commercial and industrial loans $ 99,836 $ 58,018 $ 19,833 $ 12,553 $ 4,364 $ 12,930 $ 106,533 $ 314,067 Charge-offs $ — $ — $ (67 ) $ — $ — $ — $ (125 ) $ (192 ) Recoveries — — — — — 32 40 72 Current period net $ — $ — $ (67 ) $ — $ — $ 32 $ (85 ) $ (120 ) Construction and development: Pass $ 179,501 $ 138,388 $ 17,361 $ 8,697 $ 3,443 $ 10,535 $ 16,870 $ 374,795 Special mention 905 — — — — — — 905 Substandard — — — — — — — — Nonaccrual — — — — 1,435 — — 1,435 Total construction and development loans $ 180,406 $ 138,388 $ 17,361 $ 8,697 $ 4,878 $ 10,535 $ 16,870 $ 377,135 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Pass $ 347,162 $ 147,986 $ 86,897 $ 63,988 $ 51,002 $ 158,384 $ 12,007 $ 867,426 Special mention — — 1,300 — 2,594 3,427 — 7,321 Substandard 1,336 — — — 26 4,207 — 5,569 Nonaccrual — — 251 96 — 6,924 — 7,271 Total commercial real estate loans $ 348,498 $ 147,986 $ 88,448 $ 64,084 $ 53,622 $ 172,942 $ 12,007 $ 887,587 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — 1 — — 1 Current period net $ — $ — $ — $ — $ 1 $ — $ — $ 1 F-28 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Total Farmland: Pass $ 93,128 $ 51,912 $ 10,284 $ 6,646 $ 5,956 $ 11,741 $ 5,948 $ 185,615 Special mention — — — — — — — — Substandard — — — 31 — 62 — 93 Nonaccrual — — — — — 109 — 109 Total farmland loans $ 93,128 $ 51,912 $ 10,284 $ 6,677 $ 5,956 $ 11,912 $ 5,948 $ 185,817 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family residential: Pass $ 143,268 $ 128,957 $ 50,140 $ 30,068 $ 27,104 $ 89,678 $ 21,956 $ 491,171 Special mention — — 43 — — 156 — 199 Substandard — — — — — — — — Nonaccrual — 148 — 116 118 1,309 — 1,691 Total 1-4 family residential loans $ 143,268 $ 129,105 $ 50,183 $ 30,184 $ 27,222 $ 91,143 $ 21,956 $ 493,061 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — 30 — 30 Current period net $ — $ — $ — $ — $ — $ 30 $ — $ 30 Multi-family residential: Pass $ 18,183 $ 18,331 $ 2,463 $ 4,216 $ 878 $ 985 $ 91 $ 45,147 Special mention — — — — — — — — Substandard — — — — — — — — Nonaccrual — — — — — — — — Total multi-family residential loans $ 18,183 $ 18,331 $ 2,463 $ 4,216 $ 878 $ 985 $ 91 $ 45,147 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — F-29 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Total Consumer and overdrafts: Pass $ 32,817 $ 11,789 $ 5,455 $ 1,835 $ 3,079 $ 473 $ 6,008 $ 61,456 Special mention 14 4 — 28 4 — — 50 Substandard — — — — — — — — Nonaccrual 17 93 21 12 23 4 — 170 Total consumer loans and overdrafts $ 32,848 $ 11,886 $ 5,476 $ 1,875 $ 3,106 $ 477 $ 6,008 $ 61,676 Charge-offs $ (335 ) $ (26 ) $ (25 ) $ (21 ) $ — $ — $ (250 ) $ (657 ) Recoveries 83 3 6 11 1 33 — 137 Current period net $ (252 ) $ (23 ) $ (19 ) $ (10 ) $ 1 $ 33 $ (250 ) $ (520 ) Agricultural: Pass $ 3,148 $ 1,914 $ 984 $ 491 $ 392 $ 422 $ 6,243 $ 13,594 Special mention — — — — — 3 — 3 Substandard — — — — — 32 — 32 Nonaccrual — — — — 4 53 — 57 Total agricultural loans $ 3,148 $ 1,914 $ 984 $ 491 $ 396 $ 510 $ 6,243 $ 13,686 Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Recoveries — — — — — — — — Current period net $ — $ — $ — $ — $ — $ — $ — $ — Total loans: Pass $ 916,957 $ 557,131 $ 193,161 $ 127,738 $ 96,026 $ 285,125 $ 174,751 $ 2,350,889 Special mention 919 135 1,343 361 2,598 3,586 905 9,847 Substandard 1,350 — 246 454 218 4,324 — 6,592 Nonaccrual 89 274 282 224 1,580 8,399 — 10,848 Total loans $ 919,315 $ 557,540 $ 195,032 $ 128,777 $ 100,422 $ 301,434 $ 175,656 $ 2,378,176 Charge-offs $ (335 ) $ (26 ) $ (92 ) $ (21 ) $ — $ — $ (375 ) $ (849 ) Recoveries 83 3 6 11 2 95 40 240 Total current period net charge-offs $ (252 ) $ (23 ) $ (86 ) $ (10 ) $ 2 $ 95 $ (335 ) $ (609 ) There were no loans classified in the “doubtful” or “loss” risk rating categories as of December 31, 2023 and 2022. The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of December 31, 2023: December 31, 2023 Real Estate Non-RE Total Allowance for Credit Losses Allocation Commercial and industrial $ — $ 217 $ 217 $ 217 Real estate: Commercial real estate 14,527 — 14,527 — Total $ 14,527 $ 217 $ 14,744 $ 217 F-30 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) There were no individually evaluated collateral-dependent loans within the ACL model as of December 31, 2022. The following tables summarize the payment status of loans in the Company’s total loan portfolio, including an aging of delinquent loans and loans 90 days or more past due continuing to accrue interest December 31, 2023 30 to 59 Days 60 to 89 Days 90 Days Total Current Total Recorded Commercial and industrial $ 621 $ 30 $ 1,656 $ 2,307 $ 285,258 $ 287,565 $ — Real estate: Construction and 315 288 117 720 295,919 296,639 — Commercial real 356 — 132 488 922,707 923,195 — Farmland 226 84 — 310 185,985 186,295 — 1-4 family residential 2,827 1,110 1,612 5,549 509,054 514,603 — Multi-family residential — — — — 44,292 44,292 — Consumer 169 77 162 408 56,651 57,059 — Agricultural 16 — — 16 12,669 12,685 — Overdrafts — — — — 243 243 — Total $ 4,530 $ 1,589 $ 3,679 $ 9,798 $ 2,312,778 $ 2,322,576 $ — December 31, 2022 30 to 59 Days 60 to 89 Days 90 Days Total Current Total Recorded Commercial and industrial $ 440 $ 44 $ 105 $ 589 $ 313,478 $ 314,067 $ — Real estate: Construction and 258 73 1,435 1,766 375,369 377,135 — Commercial real 882 354 6,708 7,944 879,643 887,587 — Farmland 129 79 — 208 185,609 185,817 — 1-4 family residential 2,101 547 572 3,220 489,841 493,061 — Multi-family residential — — — — 45,147 45,147 — Consumer 164 118 70 352 61,042 61,394 — Agricultural 37 10 — 47 13,639 13,686 — Overdrafts — — — — 282 282 — Total $ 4,011 $ 1,225 $ 8,890 $ 14,126 $ 2,364,050 $ 2,378,176 $ — The following table presents 2023 2022 Commercial and industrial $ 1,777 $ 115 Real estate: Construction and development 117 1,435 Commercial real estate 132 7,271 Farmland 164 109 1-4 family residential 2,793 1,691 Consumer and overdrafts 250 170 Agricultural 359 57 Total $ 5,592 $ 10,848 If interest on nonaccrual loans had been accrued, such income would have been approximately F-31 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Modifications to Borrowers Experiencing Financial Difficulty The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings The following For the Year Ended Term Total Class of Financing Receivable Commercial and industrial $ 900 0.00 % 1-4 family residential 57 0.01 % Consumer 12 0.02 % Total loans $ 969 0.03 % The Term Extension Loan Type Financial Effect Commercial and industrial Amortization period was extended by a weighted-average period of 0.25 years. 1-4 family residential Amortization period was extended by a weighted-average period of 5.00 years. Consumer Amortization period was extended by a weighted-average period of 0.26 years. The following table provides an age analysis of loans made to borrowers experiencing financial difficult that were modified on or after our ASU 2022-02 adoption date of January 1, 2023: Current 30 to 89 Days 90 Days Commercial and industrial $ 900 $ — $ — 1-4 family residential — 57 — Consumer 12 — — Total loans $ 912 $ 57 $ — As of December 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2023 that subsequently defaulted. There were no commitments to lend additional funds to borrowers experiencing financial difficulty as of December 31, 2023. There were no loans restructured during the year ended December 31, 2022. NOTE 4 - PREMISES AND EQUIPMENT Premises and equipment balances, by type, were as follows: December 31, December 31, Land $ 11,135 $ 11,135 Building and improvements 59,955 59,448 Construction in progress 9,027 4,153 Furniture, fixtures and equipment 20,983 19,708 Automobiles 365 370 101,465 94,814 Less: accumulated depreciation 44,447 40,523 $ 57,018 $ 54,291 F-32 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) NOTE 5 - There were no changes in the carrying amount of goodwill as presented in the accompanying consolidated balance sheets as of December 31, NOTE Changes in the carrying amount of core deposit intangibles in the accompanying consolidated balance sheets as of December 31 are summarized as follows: 2023 2022 Beginning of year $ 1,859 $ 2,313 Amortization (441 ) (454 ) End of year $ 1,418 $ 1,859 Accumulated amortization was Year Ended December 31, Amount 2024 $ 424 2025 316 2026 272 2027 270 2028 136 $ 1,418 NOTE Interest-bearing deposits, by type of account, were as follows as of: December 31, 2023 December 31, 2022 NOW accounts $ 150,548 $ 225,859 Savings and money market accounts 924,558 1,048,612 Time deposits $250,000 or less 426,145 224,550 Time deposits greater than $250,000 279,038 129,989 $ 1,780,289 $ 1,629,010 Year-end maturities of time deposits, as of December 31, Year Ended December 31, Amount 2024 $ 646,978 2025 49,642 2026 4,183 2027 2,238 2028 2,142 Thereafter — $ 705,183 Deposits of executive officers, directors and significant shareholders at December 31, NOTE Advances from the Federal Home Loan Bank (FHLB) F-33 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) floating liens on certain securities and loans. FHLB advances bear interest based on a fixed rate, payable monthly, with Year Current Principal Due Fixed rate advances 2024 5.36 % 140,000 Total FHLB advances $ 140,000 The outstanding FHLB advances above will be repaid with The Company NOTE Subordinated December 31, 2023 December 31, 2022 Trust III Debentures $ 2,062 $ 2,062 DCB Trust I Debentures 5,155 5,155 Subordinated note 34,568 34,436 Other debentures 4,000 7,500 $ 45,785 $ 49,153 As of December 31, 2023, the Company has Trust III DCB Trust I Formation date July 25, 2006 March 29, 2007 Capital trust pass-through securities Number of shares 2,000 5,000 Original liquidation value $ 2,000 $ 5,000 Common securities liquidation value 62 155 The securities held by the Trusts F-34 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) With certain exceptions, the amount of the principal and any accrued and unpaid interest on the Debentures are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company. Interest on the Debentures Trust III Debentures DCB Trust I Original amount $ 2,062 $ 5,155 Maturity date October 1, 2036 June 15, 2037 Interest due Quarterly Quarterly In accordance with ASC 810, Trust II Debentures In May 2022, the Company redeemed the $3.1 million in junior subordinated debentures issued to Guaranty (TX) Capital Trust II relating to such trust's issuance of trust preferred securities to a third party. Prior to repayment, interest was payable at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 3.35%. Trust III Debentures Interest is payable at a variable rate per annum, reset quarterly, equal to On any interest payment date on or after October 1, 2016 and prior to maturity date, the debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days’ notice, in whole or in part, at a redemption price DCB Trust I Debentures Interest is payable at a variable rate per annum, reset quarterly, equal to On any interest payment date on or after June 15, 2012 and prior to maturity date, the debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days’ notice, in whole or in part, at a redemption price equal to Subordinated Note In March 2022, the Company completed a private placement of $35,000 aggregate principal amount of its fixed-to-floating rate subordinated note due April 1, 2032. The subordinated note initially bears a fixed interest rate of 3.625% per year, due semi-annually in arrears on April 1 and October 1. Commencing on April 1, 2027, the interest rate on the subordinated note will reset each quarter at a floating interest rate equal to the then-current three-month SOFR plus 192 basis points. The Company may at its option redeem in whole or in part the subordinated note on or after March 4, 2027 without a premium. The subordinated note is treated as Tier 2 capital for regulatory purposes (subject to reductions in the amount includable as Tier 2 capital in the final five years prior to maturity), and is presented net of related unamortized issuance costs on the consolidated balance sheets. Other Debentures In F-35 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The scheduled principal payments and weighted average rates of the Debentures, the subordinated note and other debentures are as follows: Year Current Principal Due 2024 3.74 % $ 4,000 2025 - 2028 — — Thereafter 4.23 % 42,217 Total scheduled principal payments 46,217 Unamortized debt issuance costs (432 ) $ 45,785 NOTE The Company’s 2015 Equity Incentive Plan (the “Plan”) The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer group averages. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable. The dividend yield is the total dividends per share paid during the period divided by the average of the Company's stock price on each date a grant was issued. The risk-free interest rate for the expected term of the option is based on U.S. Treasury yield The fair value of options granted was determined using the following weighted-average assumptions as of grant date, for the years ended December 31: 2023 2022 2021 Risk-free interest rate 4.08 % 2.90 % 0.98 % Expected term (in years) 6.50 6.50 6.50 Expected stock price volatility 23.53 % 21.70 % 23.98 % Dividend yield 3.23 % 2.47 % 2.35 % A summary of stock option activity in the Plan during the years ended December 31, 2023 and 2022 follows: 2023 Number of Weighted- Weighted- Aggregate Outstanding at beginning of year 497,820 $ 28.07 5.87 $ 3,402 Granted 52,500 28.72 Exercised (29,790 ) 23.46 Forfeited (54,850 ) 30.80 Balance, December 31, 2023 465,680 $ 28.12 5.46 $ 2,782 Exercisable at end of period 283,110 $ 26.03 3.87 $ 2,202 F-36 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 2022 Number of Weighted- Weighted- Aggregate Outstanding at beginning of year 502,780 $ 25.77 5.59 $ 5,936 Granted 102,500 35.58 Exercised (69,580 ) 22.49 Forfeited (37,880 ) 28.16 Balance, December 31, 2022 497,820 $ 28.07 5.87 $ 3,402 Exercisable at end of period 281,340 $ 25.25 4.32 $ 2,648 A summary of nonvested stock option activity in the Plan during the years ended December 31, 2023 and 2022 follows: 2023 Number of Weighted-Average Outstanding at beginning of year 216,480 $ 5.95 Granted 52,500 6.04 Vested (65,690 ) 5.63 Forfeited (20,720 ) 14.39 Balance, December 31, 2023 182,570 $ 6.10 2022 Number of Weighted-Average Outstanding at beginning of year 207,084 $ 5.23 Granted 102,500 6.98 Vested (71,944 ) 5.50 Forfeited (21,160 ) 8.86 Balance, December 31, 2022 216,480 $ 5.95 Information related to stock options in the Plan is as follows for the 2023 2022 2021 Intrinsic value of options exercised $ 303 $ 846 $ 1,273 Cash received from options exercised 698 1,565 2,019 Weighted average fair value of options granted 6.04 6.98 5.92 Restricted Stock Awards and Units A summary of restricted stock activity in the Plan during the years ended December 2023 Number of Weighted-Average Outstanding at beginning of year 18,930 $ 27.51 Granted 5,056 31.96 Vested (7,520 ) 27.52 Forfeited (1,076 ) 28.93 Balance, December 31, 2023 15,390 $ 28.87 2022 Number of Weighted-Average Outstanding at beginning of year 30,190 $ 27.52 Vested (11,260 ) 27.52 Balance, December 31, 2022 18,930 $ 27.51 F-37 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Restricted stock granted to employees typically vests over five years, but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date. As of December 31, The Company granted options and restricted stock under the NOTE KSOP The Company maintains an Employee Stock Ownership Plan containing Section 401(k) provisions covering substantially all employees (“KSOP”). The plan provides for a matching contribution of up to Upon separation from service or other distributable event, a participant’s account under the KSOP As of December 31, Executive Incentive Retirement Plan The Company established a non-qualified, non-contributory executive incentive retirement plan covering a selected group of key personnel to provide benefits equal to amounts computed under an “award criteria” at various targeted salary levels as adjusted for annual earnings performance of the Company. The plan is non-funded. In connection with Expense related to these plans totaled Bonus Plan The Company has a F-38 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) $2,190, respectively. The expense is included in employee compensation and benefits on the NOTE 12 – LEASES The Company has operating leases for bank locations, ATMs, corporate offices, and certain other arrangements, which have remaining lease terms of 1 year to 12 years. Some of the Company’s operating leases include options to extend the leases for up to 10 years. Operating leases in which we are the lessee must be recorded as right-of-use assets with corresponding lease liabilities. The right-of-use asset represents our right to utilize the underlying asset during the lease term, while the lease liability represents the present value of the obligation of the Company to make periodic lease payments over the life of the lease. The associated operating lease costs are comprised of the amortization of the right-of-use asset and the implicit interest accreted on the lease liability, which is recognized on a straight-line basis over the life of the lease. As of December 31, 2023, operating lease right-of-use assets were $12,485 and liabilities were $13,128, and as of December 31, 2022, lease assets and liabilities were $12,896 and $13,520, respectively, and were included within the accompanying consolidated balance sheets as components of other assets and accrued interest and other liabilities, respectively. Operating lease expense for operating leases accounted for under ASC 842 for the years ended December 31, 2023, 2022 and 2021 was approximately $2,292, $2,236 and $2,278, respectively, and were included as a component of occupancy expenses within the accompanying consolidated statements of earnings. The table below summarizes other information related to our operating leases as of: December 31, 2023 December 31, 2022 Operating leases Operating lease right-of-use assets $ 12,485 $ 12,896 Operating lease liabilities 13,128 13,520 Weighted average remaining lease term Operating leases 7 years 8 years Weighted average discount rate Operating leases 2.28 % 2.00 % The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2028 and thereafter. Minimum future lease payments under these non-cancelable operating leases as of December 31, 2023, are as follows: NOTE Management of the Company considers the likelihood of changes by taxing authorities in its filed income tax returns and discloses potential significant changes that management believes are more likely than not to occur upon examination by F-39 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) tax authorities. Management has not identified any uncertain tax positions in previously filed income tax returns that require disclosure in the accompanying consolidated financial statements. The Company is subject to U.S. federal income taxes. The consolidated provision for income taxes 2023 2022 2021 Current federal tax expense $ 6,784 $ 9,991 $ 8,893 Deferred federal tax expense (benefit) 346 (1,157 ) (143 ) Total $ 7,130 $ 8,834 $ 8,750 The provision for federal income taxes differs from that computed by applying federal statutory rates to income before federal income tax expense, as indicated in the following analysis as of December 31: 2023 2022 2021 Federal statutory income tax at 21% $ 7,799 $ 10,344 $ 10,197 Tax exempt interest income (944 ) (1,076 ) (1,043 ) Earnings of bank owned life insurance (198 ) (177 ) (235 ) Nondeductible expenses 669 277 180 Other (196 ) (534 ) (349 ) Total $ 7,130 $ 8,834 $ 8,750 The following table summarizes the 2023 2022 Deferred tax assets: Allowance for credit losses $ 6,493 $ 6,714 Deferred compensation 1,271 1,132 Unrealized loss on available for sale securities 4,029 4,040 Bonus accrual 385 526 Deferred loan fees, net 163 330 Accretion of acquisition allowance 37 54 Other 297 360 Total deferred tax assets 12,675 13,156 Deferred tax liabilities: Premises and equipment (1,187 ) (1,494 ) Prepaid expenses (375 ) (281 ) Intangibles (196 ) (230 ) Other (178 ) (55 ) Total deferred tax liabilities (1,936 ) (2,060 ) Net deferred tax asset $ 10,739 $ 11,096 The Company is no longer subject to U.S. federal income tax examinations for years before 2020. NOTE The Company utilizes certain derivative financial instruments. Stand-alone derivative financial instruments such as interest rate swaps, are used to economically hedge interest rate risk related to the Company’s liabilities. These derivative instruments involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected on the Company’s consolidated balance The Company is exposed to credit related losses in the event of nonperformance by the counterparties to those agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to perform their respective obligations. F-40 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The Company entered into interest rate swaps to receive payments at a fixed rate in exchange for paying a floating rate on the debentures discussed in Note In the first quarter of 2022, the Company also terminated interest rate swaps that were originally designed to receive payments at a floating rate in exchange for paying a fixed rate, the objective of which was to reduce the overall cost of short-term 3-month FHLB advances that were renewed consistent with the reset terms on the interest rate swaps. The swaps were canceled at a net gain of $685, which is included in other non-interest income in the consolidated statements of earnings. The interest rate swaps, with notional amounts totaling $40,000 as of December 31, The changes in There were no Interest expense recorded on these swap transactions totaled, NOTE In the normal course of business, the Company enters into various transactions, which, in accordance with The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount F-41 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) shown in the table below. If the commitment were funded, the Company would be entitled to seek recovery from the customer. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers. As of December 31, Commitments and letters of credit outstanding were as follows as Contract or Notional Amount 2023 2022 Commitments to extend credit $ 336,036 $ 474,745 Letters of credit 7,536 8,289 Litigation The Company is involved in certain claims and lawsuits occurring in the normal course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions, if determined adversely, would have a material impact on the consolidated financial statements of the Company. FHLB Letters of Credit At December 31, NOTE The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015, with certain transition provisions The Basel III Capital Rules, among other things, As of December 31, The Federal Reserve’s guidelines regarding the capital treatment of trust preferred securities limits restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred F-42 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) securities is less than the limit of 25% of Tier A comparison of the Company’s and Bank’s actual capital amounts and ratios to required capital amounts and ratios Actual Minimum Required Minimum Required To Be Well Amount Ratio Amount Ratio Amount Ratio Amount Ratio December 31, 2023 Total capital to risk-weighted assets: Consolidated $ 367,526 15.22% $ 193,232 8.00% $ 253,617 10.50% $ 241,540 10.00% Bank 373,778 15.49% 193,035 8.00% 253,359 10.50% 241,294 10.00% Tier 1 capital to risk-weighted assets: Consolidated 302,757 12.53% 144,924 6.00% 205,309 8.50% 144,924 6.00% Bank 343,607 14.24% 144,777 6.00% 205,100 8.50% 193,035 8.00% Tier 1 capital to average assets:(1) Consolidated 302,757 9.47% 127,878 4.00% 127,878 4.00% n/a Bank 343,607 10.78% 127,531 4.00% 127,531 4.00% 159,414 5.00% Common equity tier 1 capital to risk-weighted assets: Consolidated 295,540 12.24% 108,693 4.50% 169,078 7.00% n/a Bank 343,607 14.24% 108,582 4.50% 168,906 7.00% 156,841 6.50% (1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum. Actual Minimum Required Minimum Required To Be Well Amount Ratio Amount Ratio Amount Ratio Amount Ratio December 31, 2022 Total capital to risk-weighted assets: Consolidated $ 358,702 14.37% $ 199,687 8.00% $ 262,089 10.50% $ 249,608 10.00% Bank 361,125 14.48% 199,570 8.00% 261,936 10.50% 249,463 10.00% Tier 1 capital to risk-weighted assets: Consolidated 292,966 11.74% 149,765 6.00% 212,167 8.50% 149,765 6.00% Bank 329,933 13.23% 149,678 6.00% 212,044 8.50% 199,570 8.00% Tier 1 capital to average assets:(1) Consolidated 292,966 8.77% 133,614 4.00% 133,614 4.00% n/a Bank 329,933 9.89% 133,375 4.00% 133,375 4.00% 166,718 5.00% Common equity tier 1 capital to risk-weighted assets: Consolidated 285,749 11.45% 112,324 4.50% 174,726 7.00% n/a Bank 329,933 13.23% 112,258 4.50% 174,624 7.00% 162,151 6.50% (1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum. Dividends paid by F-43 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) net income less dividends declared during the period. As of December 31, NOTE Most of the Company’s business activity is with customers located within the state of Texas. Investments in state and municipal securities involve governmental entities within the Company’s market area. The Company also maintains deposits with other financial institutions in amounts that exceed FDIC insurance coverage. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. NOTE Securities sold under agreements to repurchase Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase is summarized as follows as of December 31: 2023 2022 $ 20,635 $ 8,596 1.27 % 0.42 % $ 31,644 $ 12,118 2.12 % 0.44 % NOTE As more fully described in Note NOTE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 Level 2 Level 3 The Company used the following methods and significant assumptions to estimate fair value: Marketable Securities F-44 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Loans Held For Other Real Estate Owned: Individually Evaluated Collateral Dependent Loans The following December 31, 2023 Fair Value Quoted Significant Significant Assets at fair value on a recurring basis: Available for sale securities: Mortgage-backed securities $ 149,812 $ — $ 149,812 $ — Collateralized mortgage obligations 17,074 — 17,074 — Municipal securities 2,504 — 2,504 — Corporate bonds 26,805 — 26,805 — Loans held for sale 976 — — 976 Cash surrender value of life insurance 42,348 — 42,348 — SBA servicing assets 691 — — 691 Assets at fair value on a nonrecurring basis: Individually evaluated collateral dependent loans 14,527 — — 14,527 F-45 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) December 31, 2022 Fair Value Quoted Significant Significant Assets at fair value on a recurring basis: Available for sale securities: Mortgage-backed securities $ 130,341 $ — $ 130,341 $ — Collateralized mortgage obligations 20,157 — 20,157 — Municipal securities 10,642 — 10,642 — Corporate bonds 27,787 — 27,787 — Loans held for sale 3,156 — — 3,156 Cash surrender value of life insurance 38,404 — 38,404 — SBA servicing assets 874 — — 874 Assets at fair value on a nonrecurring basis: Individually evaluated collateral dependent loans — — — — There were no transfers between Level 2 and Level 3 during the Nonfinancial Assets and Nonfinancial Liabilities Nonfinancial assets measured at fair value on a nonrecurring basis As of December 31, 2023 and 2022, there were no foreclosed assets that were remeasured and recorded at fair The following table presents quantitative information about nonrecurring Level 3 fair value measurements December 31, 2022 Fair Value Valuation Unobservable Input(s) Range Other real estate owned $ 38 Appraisal value of collateral Selling costs or other normal adjustments 49 % The following table presents information on individually evaluated collateral dependent loans included in the ACL model as of December 31, 2023. There were no individually evaluated collateral dependent loans included in the ACL model as of December 31, 2022: Fair Value Measurements Using December 31, 2023 Level 1 Level 2 Level 3 Total Fair Value Commercial and industrial $ — $ — $ — $ — Real estate: Commercial real estate — — 14,527 14,527 Total $ — $ — $ 14,527 $ 14,527 F-46 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, Fair value measurements as of Carrying Level 1 Level 2 Level 3 Total Financial assets: Cash, due from banks, federal funds sold and interest-bearing deposits $ 89,524 $ 89,524 $ — $ — $ 89,524 Marketable securities held to maturity 404,208 — 374,523 — 374,523 Loans, net 2,290,881 — — 2,187,669 2,187,669 Accrued interest receivable 13,143 — 13,143 — 13,143 Nonmarketable equity securities 24,128 — 24,128 — 24,128 Financial liabilities: Deposits $ 2,633,246 $ 1,928,063 $ 706,074 $ — $ 2,634,137 Securities sold under repurchase agreements 25,172 — 25,172 — 25,172 Accrued interest payable 5,272 — 5,272 — 5,272 Federal Home Loan Bank advances 140,000 — 139,963 — 139,963 Subordinated debt 45,785 — 46,433 — 46,433 Fair value measurements as of Carrying Level 1 Level 2 Level 3 Total Financial assets: Cash, due from banks, federal funds sold and interest-bearing deposits $ 106,467 $ 106,467 $ — $ — $ 106,467 Marketable securities held to maturity 509,008 — 475,068 — 475,068 Loans, net 2,344,245 — — 2,217,606 2,217,606 Accrued interest receivable 11,555 — 11,555 — 11,555 Nonmarketable equity securities 25,585 — 25,585 — 25,585 Financial liabilities: Deposits $ 2,681,154 $ 2,326,615 $ 351,981 $ — $ 2,678,596 Securities sold under repurchase agreements 7,221 — 7,221 — 7,221 Accrued interest payable 2,348 — 2,348 — 2,348 Federal Home Loan Bank advances 290,000 — 289,926 — 289,926 Subordinated debt 49,153 — 50,025 — 50,025 The methods and assumptions, not previously presented, used to estimate fair values are described as follows: Cash and Cash Equivalents Marketable Securities Held to Maturity: The fair values for marketable securities held to maturity are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). Loans, net Nonmarketable Equity Securities Deposits and Securities Sold Under Repurchase Agreements F-47 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Other Borrowings Accrued Interest Receivable/Payable Off-balance Sheet Instruments NOTE The following are changes in accumulated other comprehensive loss by component, net of tax, for the year ending December 31, Cash Flow Hedges Available for Sale Securities Held to Maturity Securities Total Beginning balance $ — $ (18,400 ) $ (5,860 ) $ (24,260 ) Unrealized gains (losses) arising during the period — 282 (1,104 ) (822 ) Tax effect — (59 ) — (59 ) Amounts reclassified from accumulated other comprehensive loss — (181 ) — (181 ) Net current period other comprehensive income (loss) — 42 (1,104 ) (1,062 ) Ending balance $ — $ (18,358 ) $ (6,964 ) $ (25,322 ) The following are Details about Accumulated Other Comprehensive Loss Components Amount Reclassified From Affected Line Item in the Unrealized loss on available for sale securities $ 229 Net realized loss on sale of securities available for sale Tax effect (48 ) Tax expense Net of tax $ 181 The following are changes in accumulated other comprehensive loss by component, net of tax, for the year Cash Flow Hedges Available for Sale Securities Held to Maturity Securities Total Beginning balance $ 188 $ (2,744 ) $ 8,861 $ 6,305 Transfer from AFS to HTM — 13,186 (13,186 ) — Unrealized gains (losses) arising during the period 497 (33,175 ) (1,535 ) (34,213 ) Tax effect — 4,197 — 4,197 Amounts reclassified from accumulated other comprehensive loss (685 ) 136 — (549 ) Net current period other comprehensive loss (188 ) (15,656 ) (14,721 ) (30,565 ) Ending balance $ — $ (18,400 ) $ (5,860 ) $ (24,260 ) F-48 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The following are Details about Accumulated Other Comprehensive Loss Components Amount Reclassified From Affected Line Item in the Statement Where Net Unrealized gain on available for sale securities $ (172 ) Net realized gain on sale of securities available for sale Tax effect 36 Tax expense Net of tax $ (136 ) Gains on cash flow hedges 867 Other income Tax effect (182 ) Tax expense Net of tax $ 685 Total amounts reclassified out of accumulated other comprehensive loss $ 549 The following are changes in accumulated other comprehensive Cash Flow Hedges Available for Sale Securities Held to Maturity Securities Total Beginning balance $ (1,151 ) $ 10,780 $ — $ 9,629 Transfer from AFS to HTM (10,235 ) 10,235 — Unrealized gains (losses) arising during the period 873 (6,884 ) (1,374 ) (7,385 ) Tax effect — 3,595 — 3,595 Amounts reclassified from accumulated other comprehensive loss 466 — — 466 Net current period other comprehensive income (loss) 1,339 (13,524 ) 8,861 (3,324 ) Ending balance $ 188 $ (2,744 ) $ 8,861 $ 6,305 The following are Details about Accumulated Other Comprehensive Loss Components Amount Reclassified From Affected Line Item in the Unrealized loss on interest rate termination $ 590 Other expenses Tax effect (124 ) Tax expense Net of tax $ 466 NOTE Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average common shares outstanding for the period. Net losses attributable to the noncontrolling interest during the years ended December 31, 2023 and 2022 were $28 and $24, respectively, and are excluded from this calculation. Diluted earnings per share reflects the maximum potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and would then share in the net earnings of the Company. Dilutive share equivalents include stock-based awards issued to employees. Stock options granted by the Company are treated as potential shares in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money awards which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not F-49 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The computations of basic and diluted earnings per share for the Company were as follows (in thousands except per share amounts) as of December 31: 2023 2022 2021 Numerator: Net earnings attributable to Guaranty Bancshares, Inc. $ 30,037 $ 40,447 $ 39,806 Denominator: Weighted-average shares outstanding (basic) 11,693,761 11,980,209 12,065,182 Effect of dilutive securities: Common stock equivalent shares from stock options 44,844 112,638 146,576 Weighted-average shares outstanding (diluted) 11,738,605 12,092,847 12,211,758 Net earnings attributable to Guaranty Bancshares, Inc. per share Basic $ 2.57 $ 3.38 $ 3.30 Diluted $ 2.56 $ 3.34 $ 3.26 NOTE Condensed financial information of Guaranty Bancshares, Inc. follows: December 31, 2023 2022 ASSETS Cash and cash equivalents $ 2,987 $ 6,848 Investment in banking subsidiary 351,367 339,168 Other assets 2,428 1,351 Total assets $ 356,782 $ 347,367 LIABILITIES AND EQUITY Line of credit $ 4,500 $ — Subordinated debt, net 45,785 49,153 Accrued expenses and other liabilities 3,197 3,230 Shareholders’ equity 303,300 294,984 Total liabilities and shareholders’ equity $ 356,782 $ 347,367 For the Years Ended December 31, 2023 2022 2021 Interest income $ 15 $ 8 $ 7 Dividends from Guaranty Bank & Trust 20,000 — 18,000 20,015 8 18,007 Expenses Interest expense 2,506 1,755 916 Other expenses 1,645 1,974 2,520 4,151 3,729 3,436 Income (loss) before income tax and equity in undistributed income of subsidiary 15,864 (3,721 ) 14,571 Income tax benefit 912 924 718 Income (loss) before equity in undistributed earnings of subsidiary 16,776 (2,797 ) 15,289 Equity in undistributed earnings of subsidiary 13,261 43,244 24,517 Net earnings $ 30,037 $ 40,447 $ 39,806 Comprehensive income $ 28,975 $ 9,882 $ 36,482 F-50 GUARANTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) For the Years Ended December 31, 2023 2022 2021 Cash flows from operating activities Net earnings $ 30,037 $ 40,447 $ 39,806 Adjustments: Equity in undistributed subsidiary earnings (13,261 ) (43,244 ) (24,517 ) Stock based compensation 594 688 733 Change in other assets (945 ) (724 ) (176 ) Change in other liabilities (60 ) 226 44 Net cash provided by (used in) operating activities 16,365 (2,607 ) 15,890 Cash flows from investing activities Net cash provided by investing activities — — — Cash flows from financing activities Proceeds from line of credit 17,500 35,436 10,000 Repayments of borrowings (16,500 ) (11,093 ) (17,000 ) Purchase of treasury stock (11,227 ) (8,838 ) — Exercise of stock options 698 1,565 2,019 Cash dividends paid (10,697 ) (10,324 ) (9,427 ) Net cash (used in) provided by financing activities (20,226 ) 6,746 (14,408 ) Net change in cash and cash equivalents (3,861 ) 4,139 1,482 Beginning cash and cash equivalents 6,848 2,709 1,227 Ending cash and cash equivalents $ 2,987 $ 6,848 $ 2,709 F-512017,2023, our CompanyCompany-only directors Bank directors and named executive officers beneficially owned an aggregate of 3,068,7632,447,788 shares, or approximately 27.8%21.0%, of our issued and outstanding shares of common stock, including 316,432231,221 shares that are held by our KSOP and allocated to the accounts of our named executive officers. As of December 31, 2017,2023, our KSOP owned an aggregate of 1,314,2771,021,462 shares, or approximately 11.9%8.9% of our issued and outstanding shares. A committee consisting of four independent directors of the Company, which we refer to herein as the KSOP Committee, currently serves as trustee of the KSOP. Each KSOP participant will have the right to vote the shares allocated to such participant’s account on all matters requiring a vote of our shareholders, but the KSOP committee, as trustee of the KSOP, retains sole voting power over all shares held by the KSOP that are not allocated to participants’ accounts and all shares for which they have received no voting instructions from the2017,2023, there were no shares owned by our KSOP that were unallocated to participants’ accounts.2017,2023, we had a senior, unsecured line of credit with an available balance of $25.0$20.5 million but no amounts advanced, wewith $4.5 million advanced. We also had $3.5$38.6 million of subordinated debt obligations and approximately $10.3$7.2 million of junior subordinated debentures issued to statutory trusts that, in turn, issued $10.0$7.0 million of trust preferred securities. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. Our debt obligations are senior to our shares of common stock. As a result, we must make payments on our debt obligations before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of ourthese existing and any future debt obligations must be satisfied in full before any distributions can be made to the holders of our common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trustof equal rank with, or senior to, our existing debt obligations and senior to our shares of common stock.We are an emerging growth company, and the reduced regulatory and reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company we may to take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The JOBS Act also permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have irrevocably “opted out” of this provision, and we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies.We may take advantage of these provisions for up to five years, unless we earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30, in which case we would no longer be an emerging growth company as of the following December 31. Investors may find our common stock less attractive because we intend to rely on certain of these exemptions, which may result in a less active trading market and increased volatility in our stock price. tangible asset is Guaranty Bank & Trust. As such, we dependthe Company depends upon the Bank for cash distributions (through dividends on the Bank’s common stock) that we usethe Company uses to pay ourits operating expenses, satisfy ourits obligations (including ourits junior subordinated debentures and our other debt obligations) and to pay dividends on ourthe Company’s common stock. Federal statutes, regulations and policies restrict the Bank’s ability to make cash distributions to us.the Company. These statutes and regulations require, among other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, the OCC has the ability to restrict the Bank’s payment of dividends by supervisory action. If the Bank is unable to pay dividends to us,the Company, we will not be able to satisfy our obligations or pay dividends on our common stock.
• our preferred stock, the terms of which, including voting power, are to be set by our board of directors;thean increase by a majority vote of the directors present at a meeting of directors.COMMENTSCOMMENTS.
•None.•
•PROPERTIESThePROPERTIES.currently operates 2833 banking locations, all of which are located in Texas. TheOur principal executive office of the Bank is located at 201 South Jefferson Avenue, Mount Pleasant,16475 Dallas Parkway, Suite 600, Addison, Texas 75455.75001. The Bank currently operates banking locations in the following Texas locations: Atlanta, Austin (two locations), Georgetown (two locations), Bogata, Bryan, College Station (two locations), Commerce, Conroe, Dallas (two locations), Denton (two locations), Fort Worth, Hallsville, Houston (three locations), Longview, Mount Pleasant (two locations), Mount Vernon, New Boston, Paris (two locations), Pittsburg, Rockwall, Royse City, Sulphur Springs, and Texarkana (four(three locations).2017,2023, we owned 21 of our banking locations, had one location in which we owned the building and had a long-term land lease on the real property associated with the branch, locations and leased the remaining seven11 locations. We also own our executive headquarters in Mount Pleasant, and lease two buildings for business operations. The terms of our leases generally range from one to 1512 years and give us the option to renew for subsequent terms of equal duration or otherwise extend the lease term subject to price adjustment based on market conditions at the time of renewal. We believe that the seven13 leases to which we are subject are generally on terms consistent with prevailing market terms, and none of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.PROCEEDINGSDISCLOSURESSECURITIESSharesNASDAQNew York Stock Exchange under the symbol “GNTY”. Prior to that date, our shares were traded on the Nasdaq Global Select Market under the symbol “GNTY.” Our shares have been traded(the "Nasdaq") since our initial public offering ("IPO") on the NASDAQ Global Select Market since May 9, 2017. Prior to that date,our IPO, there was no public trading market for our common stock. The following table presents the range of high and low sales price per share reported on the NASDAQ Global Select Market for the period indicated. 2017 High Low Second Quarter $36.38 $29.00 Third Quarter 33.16 28.27 Fourth Quarter 31.70 28.00 Holders of Record14, 2018,7, 2024, there were 270364 holders of record of our common stock.Item 8.Consolidated Financial Statements and Supplementary Data—Quarterly Results of OperationsStatements—Note 16—Regulatory Matters" for the frequency and amount of cash dividends paid by us. Also, see "Item 1. Business—Regulation and Supervision—Guaranty Bancshares, Inc.—Regulatory Restrictions on Dividends” for restrictions on our present or future ability to pay dividends, particularly those restrictions arising under federal and state banking laws.Russell 3000S&P 500 Index and the SNL BankS&P U.S. SmallCap Banks Index for banks with $1.0 billion to $5.0 billion in total assets for the period beginning on May 9, 2017, the first day of tradingDecember 31, 2018 through December 31, 2023. The following assumes $100 was invested in each of our common stock, on the NASDAQ Global Select Market throughS&P 500 and the S&P U.S. SmallCap Banks Index values on December 31, 2017. The following assumes $100 invested on May 9, 2017 in our common stock at our initial public offering price of $27.00 per share, otherwise reflects our stock and the Russell 3000 and SNL Bank $1.0 to $5.0 Billion Index values as of close of trading,2018, and assumes the reinvestment of dividends, if any.
May 9, 2017 June 30, 2017 September 30, 2017 December 31, 2017 Guaranty Bancshares, Inc. $ 100.00 $ 118.81 $ 119.44 $ 114.98 S&P 500 Index $ 100.00 $ 101.46 $ 106.00 $ 113.05 SNL Bank $1B - $5B Index $ 100.00 $ 100.75 $ 107.52 $ 107.19 
2018
2019
2020
2021
2022
2023No purchasesoura new stock repurchase program that authorized the repurchase of up to 1,000,000 shares of Company common stock. The stock repurchase program will be effective until the earlier of April 21, 2024, or the date all shares authorized for repurchase under the program have been repurchased, unless shortened or extended by the board of directors. The repurchase plan permits shares to be acquired from time to time in the open market or negotiated transactions at prices management considers to be attractive and in the best interest of both the Company and its shareholders, subject to compliance with applicable laws and regulations, general market and economic conditions, the financial and regulatory condition of the Company, liquidity and other factors.were made by or on behalf of us or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Actrepurchased during the year ended December 31, 2017. There is currently no authorization to repurchase2023, at a weighted-average price per share of $25.82. No shares of outstandingCompany common stock.ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATIONThe following tables set forth certain of our summary historical consolidated financial information for each ofstock were repurchased during the periods indicated. The historical information as of and for the yearsquarter ended December 31, 2017 and 2016 has been derived from our audited consolidated financial statements included elsewhere in this Form 10-K, and the selected historical consolidated financial information as2023. As of and for the years ended December 31, 2015, 2014 and 2013 has been derived from our audited consolidated financial statements not appearing in this Form 10-K. The historical results set forth below are not necessarily indicative of our future performance.You should read2023, authority to repurchase 370,814 shares remains available under the following together with the sections entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the related notes included elsewhere in this Form 10-K.(Dollars in Thousands, except Per Share Amounts) As of December 31, 2017 2016 2015 2014 2013 Selected Period End Balance Sheet Data: Total assets $ 1,962,624 $ 1,828,336 $ 1,682,640 $ 1,334,068 $ 1,246,451 Cash and cash equivalents 91,428 127,543 111,379 105,662 81,462 Securities available for sale 232,372 156,925 272,944 227,022 246,395 Securities held to maturity 174,684 189,371 125,031 131,068 140,571 Loans held for sale 1,896 2,563 3,867 3,915 7,118 Loans held for investment 1,359,544 1,243,925 1,067,377 786,519 697,404 Allowance for loan losses 12,859 11,484 9,263 7,721 7,093 Goodwill 18,742 18,742 18,601 6,116 6,436 Core deposit intangibles, net 2,724 3,308 3,846 2,881 3,310 Noninterest-bearing deposits 410,009 358,752 325,556 250,242 213,703 Interest-bearing deposits 1,266,311 1,218,039 1,140,641 826,550 788,110 Total deposits 1,676,320 1,576,791 1,466,197 1,076,792 1,001,813 Federal Home Loan Bank advances 45,153 55,170 21,342 111,539 111,728 Subordinated debentures 13,810 19,310 21,310 9,155 11,155 Other debt — 18,286 18,000 11,000 14,000 KSOP-owned shares — 31,661 35,384 36,300 30,938 207,345 110,253 102,352 75,989 66,157 207,345 141,914 137,736 112,289 97,095 As of and for the Years Ended December 31, 2017 2016 2015 2014 2013 Selected Income Statement Data: Net interest income $ 59,630 $ 53,840 $ 47,759 $ 39,123 $ 35,368 Provision for loan losses 2,850 3,640 2,175 1,322 1,745 Net interest income after provision for loan losses 56,780 50,200 45,584 37,801 33,623 Noninterest income 14,279 13,016 11,483 10,792 11,562 Noninterest expense 48,382 46,380 42,594 34,854 31,400 Net realized gain (loss) on sale of securities 167 82 77 (212 ) 578 Income before income tax 22,677 16,836 14,473 13,739 13,785 8,238 4,715 4,362 4,023 (3,573 ) Net earnings 14,439 12,121 10,111 9,716 17,358 5,562 4,615 4,526 11,863 3,453 As of and for the Years Ended December 31, 2017 2016 2015 2014 2013 Per Share Data: $ 1.41 $ 1.35 $ 1.15 $ 1.25 $ 2.40 1.40 1.35 1.15 1.25 2.40 18.75 16.22 15.47 14.01 13.17 16.81 13.70 12.95 12.89 11.84 10,231,000 8,968,000 8,796,000 7,771,000 7,241,000 10,313,000 8,976,000 8,802,000 7,771,000 7,243,000 As of and for the Years Ended December 31, 2017 2016 2015 2014 2013 (pro forma) Pro Forma Information as if a C Corporation: Income before income taxes $ 22,677 $ 16,836 $ 14,473 $ 13,739 $ 13,785 Income tax provision 8,238 4,715 4,362 4,023 4,009 Pretax pre-provision and pre-securities gain (loss) 25,360 — 20,394 — 16,571 — 15,273 — 14,952 Net earnings 14,439 12,121 10,111 9,716 9,776 1.41 1.35 1.15 1.25 1.35 1.40 1.35 1.15 1.25 1.35 As of December 31, 2017 2016 2015 2014 2013 Summary Performance Ratios: 0.76 % 0.68 % 0.65 % 0.76 % 1.47 % 7.78 8.34 7.44 8.69 17.98 3.38 3.27 3.33 3.33 3.23 65.61 69.46 71.99 69.53 67.74 81.10 78.89 72.80 73.04 69.61 0.75 0.73 0.74 0.85 0.98 2.55 2.61 2.75 2.74 2.67 Summary Credit Quality Ratios: Nonperforming assets to total assets 0.44 % 0.53 % 0.25 % 0.37 % 0.71 % 0.29 0.35 0.23 0.52 1.04 Allowance for loan losses to nonperforming loans 321.15 260.47 381.04 189.38 98.06 0.95 0.92 0.87 0.98 1.02 0.11 0.12 0.06 0.09 0.15 Capital Ratios: Total shareholders’ equity to total assets 10.56 % 7.76 % 8.19 % 8.42 % 7.79 % 9.58 6.64 6.94 7.80 7.06 Common equity tier 1 capital (CET1) to risk-weighted assets 12.61 9.28 10.43 n/a n/a 10.53 7.71 8.33 9.05 8.80 Tier 1 capital to risk-weighted assets 13.29 10.03 11.30 13.65 13.30 Total capital to risk-weighted assets 14.13 10.86 12.08 14.57 14.22 (1)In accordance with provisions of the Internal Revenue Code applicable to private companies, prior to our listing on the NASDAQ Global Select Market, the terms of our KSOP provided that KSOP participants had the right, for a specified period of time, to require us to repurchase shares of our common stock that are distributed to them by the KSOP. As a result, for the periods prior to our listing on the NASDAQ Global Select Market, the shares of common stock held by the KSOP are deducted from shareholders’ equity in our consolidated balance sheet. This repurchase right terminated upon the listing of our common stock on the NASDAQ Global Select Market on May 9, 2017.(2)Effective January 1, 2008, we made an election to be taxed for federal income tax purposes as a Subchapter S corporation under the provisions of Sections 1361 through 1379 of the Internal Revenue Code. We terminated our election to be taxed as a Subchapter S corporation effective December 31, 2013. As a result, for the taxable periods applicable to the years ended December 31, 2008 through December 31, 2013, our net income was not subject to, and we did not pay, U.S. federal income taxes, and no provision or liability for federal or state income tax has been included in our audited consolidated financial statements for the year ended December 31, 2013, except as presented on a pro forma basis in our audited consolidated financial statements for the year ended December 31, 2013. Additionally, distributions made to our shareholders in respect of their federal income tax liability of $10.2 million in 2013 are not considered dividends paid to common shareholders. Despite the termination of our Subchapter S election, we paid dividends of $0.50 per share and a special dividend of $1.00 per share for the year ended December 31, 2014, since all dividends we pay for the first 12 months following the termination of our Subchapter S election were not subject to federal income taxation. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Termination of Subchapter S Corporation Status."(3)Basic and diluted earnings per share for the year ended December 31, 2013 are currently based on income before taxes due to our conversion from an S corporation to a C corporation, effective December 31, 2013. However, unaudited pro forma information is presented as if a C corporation for all periods under the heading “Unaudited Pro Forma Information as if a C Corporation.”(4)Book value per common share and tangible book value per common share calculations reflect the Company’s pro forma total shareholders’ equity.(5)We calculate tangible book value per common share as total shareholders’ equity less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of our common stock at the end of the relevant period. Tangible book value per common share is a financial measure that is not recognized by, or calculated in accordance with, U.S. generally accepted accounting principles, or GAAP, and, as we calculate tangible book value per common share, the most directly comparable GAAP financial measure is total shareholders’ equity per common share. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”(6)Weighted average common shares outstanding as of December 31, 2013 have been adjusted to reflect the 2-for-1 stock split we completed on August 20, 2014.(7)We calculate our average assets and average equity for a period by dividing the period end balances of our total assets or total shareholders’ equity, as the case may be, by the number of months in the period.(8)We have calculated our return on average assets and return on average equity for a period by dividing net earnings for that period by our average assets and average equity, as the case may be, for that period.(9)Net interest margin represents net interest income divided by average interest-earning assets.(10)The efficiency ratio was calculated by dividing total noninterest expenses by net interest income plus noninterest income, excluding securities losses or gains. Taxes are not part of this calculation.(11)Excludes loans held for sale of $1.9 million, $2.6 million, $3.9 million, $3.9 million, and $7.1 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.(12)Includes average outstanding balances of loans held for sale of $1.7 million, $3.0 million, $4.4 million, $4.2 million, and $6.3 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.(13)We calculate tangible common equity as total shareholders’ equity less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization, and we calculate tangible assets as total assets less goodwill and core deposit intangibles and other intangible assets, net of accumulated amortization. Tangible common equity to tangible assets is a financial measure that is not recognized by or calculated in accordance with GAAP, or a non-GAAP financial measure, and, as we calculate tangible common equity to tangible assets, the most directly comparable GAAP financial measure is total shareholders’ equity to total assets. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”OPERATIONSOPERATIONS. “Item 6. Selected Financial Data” and the Company’s audited consolidated financial statements and the accompanying notes included in "Item 8: Financial Statements and Supplementary Data." This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations throughTrust,Trust. Since our founding, we have built a reputation based on financial stability and community leadership. In May 2017, we consummated an initial public offering of our common stock, which began trading on the discussionNasdaq Global Select Market until March 7, 2023, at which time our listing was transferred to the New York Stock Exchange, where our common stock continues to trade.analysis relates to activities primarily conductedGreater Houston regions of the state. Our principal executive office is located at 16475 Dallas Parkway, Suite 600, Addison, Texas, 75001 and our telephone number is (888) 572-9881. Our website address is gnty.com. Information contained on our website does not constitute a part of this Report and is not incorporated by Guaranty Bank & Trust.stateState of Texas.AcquisitionsThe comparability of our consolidated results of operations for the years ending December 31, 2017 and 2016, to the year ended December 31, 2015 is affected by two acquisitions that we completed in 2015. On March 28, 2015, we completed the acquisition of DCB Financial. On April 11, 2015, we completed the acquisition of Texas Leadership Bank. Therefore, the results of the acquired operations of DCB Financial and Texas Leadership Bank were included in our results of operations for a portion of 2015 but were included in our results of operations for all of 2016 and 2017.Termination of Subchapter S Corporation StatusEffective January 1, 2008, we made an election to be taxed for federal income tax purposes as a “Subchapter S corporation” under the provisions of Sections 1361 through 1379 of the Internal Revenue Code. We terminated our election to be taxed as a Subchapter S corporation effective December 31, 2013. During the period we were taxed as a Subchapter S corporation, our net income was not subject to, and we did not pay, U.S. federal income taxes, and we were not required to make any provision or recognize any liability for federal income taxes in our financial statements for the year ended December 31, 2008 through the year ended December 31, 2013. In addition, during these taxable periods that we were a Subchapter S corporation, we paid distributions to our shareholders to assist them in paying the federal income taxes on the pro rata portion of our taxable income that “passed through” to our shareholders. See “Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy.” Effective January 1, 2014, we became subject to federal income taxation as a C corporation under Subchapter C of the Internal Revenue Code, and we established deferred tax assets and liabilities effective December 31, 2013 to reflect the conversion. Accordingly, beginning January 1, 2014, we reflect a provision for federal income taxes on our financial statements. As a result of that change in our status under the federal income tax laws, the net income and earnings per share data presented in our historical financial statements for the year ended December 31, 2013, will not be comparable with our historical financial statements for the years ended December 31, 2014, 2015, 2016 and 2017, or our future net income and earnings per share, which will be calculated by including a provision for federal income taxes. However, we have included pro forma financial information in “Item 6. Selected Financial Data” showing income tax expense and net earnings as if we were a C corporation at the beginning of the earliest period presented for comparison purposes.areis critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate.LoanCredit Losses (ACL)loancredit losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Fees associated with the originatingorigination of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.loancredit losses is an estimateda valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is adequateconfirmed. Recoveries will not exceed the aggregate of loan amounts previously charged-off and expected to absorb inherent losses on existingbe charged-off.that may be uncollectible based upon review and evaluationin a pool or segment of our loan portfolio. Management’s periodic evaluationportfolio at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the allowanceunadjusted historical charge-off rate is based on general economicthen adjusted for current conditions the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experiencefor reasonable and the results of periodic reviews of the portfolio.The allowance for loan losses is comprised of two components. The first component, the general reserve, is determined in accordance with current authoritative accounting guidance that considerssupportable forecast periods. Adjustments to historical loss ratesinformation are made for the last five years adjusteddifferences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for qualitative factors based upon general economic conditions and other qualitative risk factors both internal and external to us. Such qualitative factors include current local economic conditions and trends including unemployment, changes in lending staff, policies and procedures,environmental conditions, such as changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans.unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. For purposes of determining the general reserve, the loan portfolio, less cash secured loans, government guaranteed loans and impaired loans, is multiplied by our adjusted historical loss rate. The second component of the allowance for loan losses, the specific reserve, is determined in accordance with current authoritative accounting guidance based on probable and incurred losses on specific classified loans.loancredit losses is increased by charges to incomemeasured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan portfolio segments include both regulatory call report codes and decreased by charge-offs (net of recoveries). commercial real estate related loan portfolio is impacted by delinquency status and debt service coverage generated by theour borrowers’ businessbusinesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refersrefer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for loancredit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for loancredit losses, which would adversely affect our results of operations and financial condition.in identifying loans that are individually evaluated for impairment and impactimpacts management’s estimates of loss factors used in determining the amount of the allowance for loancredit losses. Internal risk ratings are updated on a continuous basis.considered impaired when, basedevaluated on current information and events, itan individual basis. Loans evaluated individually are excluded from the collective evaluation. When management determines that foreclosure is probable, we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loansexpected credit losses are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairmentscollateral at the reporting date, adjusted for selling costs as appropriate.measured basedexposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by us. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the present valuelikelihood that funding will occur and an estimate of expected future cash flows or the loan’s observable market price. At December 31, 2017 and December 31, 2016, all significant impaired loans have been determinedcredit losses on commitments expected to be collateral dependent and the allowance for loss has been measured utilizing thefunded over its estimated fair value of the collateral.agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower isagreements for borrowers experiencing financial difficulty and (ii) concessions are made by us that would not otherwise be considered for a borrower with similar credit risk characteristics.difficulty. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. Wetroubled debt restructuredsuch modified loan and determine on a case by casecase-by-case basis if the loan is subject to impairment and the needcan be grouped with its like segment for allowance consideration or whether it should be individually evaluated for a specific allowance for loancredit loss allocation. AnIf individually evaluated, an allowance for loancredit loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral.estate.estate collateral. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real estate portfolio are generally diverse in terms of type and geographic location throughout the State of Texas. This diversity helps us reduce the exposure to adverse economic events that affect any single market or industry.minimizesminimize risk.Emerging Growth CompanyJOBS Act permitsunrealized holding gains and losses at the date of transfer are retained in accumulated other comprehensive loss and in the carrying value of the held to maturity securities and are amortized or accreted over the remaining life of the security. These unamortized unrealized losses and unaccreted unrealized gains on our transferred securities are included in accumulated other comprehensive loss on our balance sheet and netted to an “emerging growth company”unrealized loss of $7.0 million at December 31, 2023. This amount will be amortized out of accumulated other comprehensive loss over the remaining lives of the underlying securities as an adjustment of the yield on those securities.take advantagematurity or available for sale. For held to maturity securities, management measures expected credit losses on a collectiveextended transition period to comply with newavailable for sale security is confirmed or revised accounting standards applicable to public companies. However, we have “opted out” of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. Our decision to opt outwhen either of the extended transition period under the JOBS Actcriteria regarding intent or requirement to sell is irrevocable.Performance Summary for the Years Ended December 31, 2017met.2016Net earnings were $14.4 million for the year ended December 31, 2017, as compared to $12.1 million for the year ended December 31, 2016. This performance resulted in basic earnings per shareother assumptions. Fair value estimates involve uncertainties and matters of $1.41 for the year ended December 31, 2017 as compared to $1.35 for the year ended December 31, 2016. The increase in net earnings over this period was primarily the result of the continued maturity of the de novo locations in both the Central Texassignificant judgment regarding interest rates, credit risk, prepayments, and Dallas/Fort Worth metroplex markets. The increase in earnings per share over this period was due to a 19.1% increase in net earnings compared to a 14.1% increaseother factors, especially in the weighted average shares outstanding.Our returnabsence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on averageand off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets was 0.76% for the year ended December 31, 2017, as compared to 0.68% for the year ended December 31, 2016. Our return on average equity was 7.78% for the year ended December 31, 2017, as compared to 8.34% for the year ended December 31, 2016. The increase in our return on average assets was primarily due to an increase in net earningsand liabilities not considered financial instruments.19.1% relative to a smaller increase of 6.9% for total average assets. The decrease in the return on average equity ratio resulted from an increase in average shareholder's equity of 27.6%, primarily due to our initial public offering, relative to a smaller increase in net earnings of 19.1%.Our net interest margin was 3.38% for the year ended December 31, 2017 and 3.27% for the year ended December 31, 2016. Our net interest margin increased as a result of improvements in loan yields due to rising interest rates, compared to smaller increases in the interest rates paid on deposit accounts. Our efficiency ratio was 65.61%for the year ended December 31, 2017, as compared to 69.46% for the year ended December 31, 2016. The improvement in efficiency ratio for 2017 is largely attributable to cost savings realized from new and maturing locations during 2017. Applicable elements of income increased 10.4%, while non-interest expense increased only 8.9%, during 2017.Our total assets increased $134.3 million, or 7.3%, to $1.96 billion for the year ended December 31, 2017, compared to $1.83 billion for the year ended December 31, 2016. The increase in our total assets is primarily the result of our loan growth in 2017, which was entirely organic, with our total loans (excluding loans held for sale) increasing $114.1 million, or 9.3%, to $1.35 billion for the year ended December 31, 2017, compared to $1.23 billion for the year ended December 31, 2016. Total shareholders’ equity increased $97.1 million, or 46.1%, to $207.3 million for the year ended December 31, 2017, compared to $141.9 million for the year ended December 31, 2016. The increase in shareholders' equity was due primarily to the 19.1% increase in net earnings in 2017 and the results of our initial public offering in May 2017.2017, 20162023 and 20152017 vs. 2016.2017 was $59.6 million,2023 compared to $53.8$107.8 million for the same period in 2016, an increase of $5.8 million, or 10.8%. The increase in net interest income was comprised of a $7.1 million, or 10.9%, increase in interest income offset by a $1.3 million, or 11.8%, increase in interest expense. The growth in interest income was primarily attributable to a $103.3 million, or 8.76%, increase in average loans outstanding for the year ended December 31, 2017,2022, a decrease of $10.8 million, or 10.1%. The decrease in net interest income before the provision for credit losses resulted primarily from a $44.1 million, or 286.9%, increase in interest expense compared to the same period in 2016, as well as a four basis point$33.3 million increase in interest income during the yield on total loans. year ended December 31, 2023.increase in average loans outstanding was primarily due to organic growth in all of our markets, continuing maturity of de novo and acquired locations in the Central Texas and Dallas/Fort Worth metroplex markets and opening of new locations during 2017 in both Austin and Fort Worth, Texas. The $1.3$44.1 million increase in interest expense for the year ended December 31, 20172023 was primarily related to an increase in the cost of interest-bearing deposits of 207 basis points together with a $65.6$28.5 million, or 5.6%1.7%, increase in average interest-bearing deposits over the same period in 2016. The majority of this2022. Interest expense was also affected by a 224 basis point increase is duein the rate paid on our average outstanding FHLB advances and fed funds purchased, which increased $93.5 million, or 70.4%, compared to organic growth, primarily in money market accounts, driven in part by favorable rates that were offered in our Central Texas and Dallas/Fort Worth metroplex markets. For the year ended December 31, 2017, net2022. The average interest marginbearing deposit balance increase was primarily the result of depositors transferring funds into money market and netcertificate of deposit accounts to earn higher interest spread were 3.38% and 3.14%, respectively, comparedrates, while the increase in the average balance of FHLB advances was made to 3.27% and 3.08% forsatisfy liquidity metrics during the same periodyear. 2016, which reflects the increases in interest income discussed above relative to the increases in average interest-earning assets and interest expense, respectively.2016 vs. 2015. Net interest income for the year ended December 31, 20162023 was $53.8primarily related to an increase in the yield on loans of 88 basis points, along with a $225.3 million increase in the average balance of loans in 2023 compared to $47.8 million for2022.same period in 2015, an increase of $6.1 million, or 12.7%. The increase inyear ended December 31, 2023, net interest income was comprised of an $8.6 million, or 15.4%margin on a taxable equivalent basis and net interest spread were 3.15% and 2.13%, increase in interest income offset by a $2.5 million, or 30.6%, increase in interest expense. The growth in interest income was primarily attributablerespectively, compared to a $188.0 million, or 19.0%, increase in average loans outstanding3.54% and 3.18% for the year ended December 31, 2016, compared to2022, which reflects a 215 basis point increase in the same period 2015,average rate on interest-bearing liabilities partially offset by an 11a 110 basis point decreaseincrease in the average yield on total loans. The increase in average loans outstanding was primarily due to organic growth in all of our markets and continuing maturity of de novo and acquired locations in the Central Texas and Dallas/Fort Worth metroplex markets. The $2.5 million increase in interest expense for the year ended December 31, 2016 was primarily related to a $210.6 million, or 21.8%, increase in average interest-bearing deposits over the same period in 2015. The increase in average interest-bearing deposits was due to organic growth, primarily in money market accounts, driven in part by favorable rates that were offered in our Central Texas and Dallas/Fort Worth metroplex markets. For the year ended December 31, 2016, net interest margin and net interest spread were 3.27% and 3.08%, respectively, compared to 3.33% and 3.17% for the same period in 2015, which reflects the increases in interest income discussed above relative to the increases in average interest-earning assets from the prior year.interest expense, respectively.eachall major categorycategories of interest-earning assets and interest-bearinginterest-bearing liabilities, the interest earned or paid on such amounts, and the average raterates earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the years ended December 31, 2017, 20162023 and 2015,2022, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.
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Rate For the Years Ended December 31, 2017 2016 2015 (Dollars in thousands) Assets Interest-earnings assets: $ 1,283,253 $ 61,014 4.75 % $ 1,179,938 $ 55,565 4.71 % $ 991,889 $ 47,845 4.82 % Securities available for sale 223,095 5,081 2.28 % 198,372 3,723 1.88 % 233,484 4,393 1.88 % Securities held to maturity. 182,549 4,409 2.42 % 182,870 4,678 2.56 % 126,659 3,453 2.73 % Nonmarketable equity securities 7,134 465 6.52 % 8,547 271 3.17 % 7,450 91 1.22 % Interest-bearing deposits in other banks 70,692 813 1.15 % 78,232 471 0.60 % 72,997 300 0.41 % Total interest-earning assets 1,766,723 $ 71,782 4.06 % 1,647,959 $ 64,708 3.93 % 1,432,479 $ 56,082 3.92 % Allowance for loan losses (12,217 ) (10,826 ) (8,701 ) Noninterest-earnings assets 144,971 139,575 127,470 Total assets $ 1,899,477 $ 1,776,708 $ 1,551,248 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Interest-bearing deposits $ 1,241,115 $ 10,604 0.85 % $ 1,175,520 $ 9,050 0.77 % $ 964,900 $ 6,524 0.68 % Advances from FHLB and fed funds purchased 46,268 472 1.02 % 62,961 299 0.47 % 104,157 674 0.65 % Other debt 6,711 301 4.49 % 13,198 586 4.44 % 10,578 497 4.70 % Subordinated debentures 15,902 724 4.55 % 20,313 882 4.34 % 14,078 603 4.28 % Securities sold under agreements to repurchase 13,306 51 0.38 % 13,011 51 0.39 % 11,223 25 0.22 % Total interest-bearing liabilities 1,323,302 12,152 0.92 % 1,285,003 10,868 0.85 % 1,104,936 8,323 0.75 % Noninterest-bearing liabilities: Noninterest-bearing deposits 384,049 340,240 301,288 Consideration payable — — 3,735 Accrued interest and other liabilities 6,648 6,080 5,335 Total noninterest-bearing liabilities 390,697 346,320 310,358 Shareholders’ equity 185,478 145,385 135,954 Total liabilities and shareholders’ equity $ 1,899,477 $ 1,776,708 $ 1,551,248 3.14 % 3.08 % 3.17 % Net interest income $ 59,630 $ 53,840 $ 47,759 3.38 % 3.27 % 3.33 % (1) Includes average outstanding balancesTable of
loans held for sale of $1.7 million, $3.0 million and $4.4 million for the years ended December 31, 2017, 2016 and 2015 respectively.Contents(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.(3) Net interest margin is equal to net interest income divided by average interest-earning assets.table presents information regardingtables present the dollar amount of changeschange in interest income and interest expense for the periods indicated for eachall major componentcomponents of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. Volume Rate Volume Rate (Dollars in thousands) Interest-earning assets: Total loans $ 4,912 $ 537 $ 5,449 $ 8,856 $ (1,136 ) $ 7,720 Securities available for sale 563 795 1,358 (659 ) (11 ) (670 ) Securities held to maturity (8 ) (261 ) (269 ) 1,438 (213 ) 1,225 Nonmarketable equity securities (92 ) 286 194 35 145 180 Interest-earning deposits in other banks (87 ) 429 342 32 139 171 Total increase (decrease) in interest income $ 5,288 $ 1,786 $ 7,074 $ 9,702 $ (1,076 ) $ 8,626 Interest-bearing liabilities: Interest-bearing deposits $ 560 $ 994 $ 1,554 $ 1,622 $ 904 $ 2,526 Advances from FHLB and Fed funds Purchased (170 ) 343 173 (196 ) (179 ) (375 ) Other debt (291 ) 6 (285 ) 116 (27 ) 89 Subordinated debentures (201 ) 43 (158 ) 271 8 279 Securities sold under agreements to repurchase 1 (1 ) — 7 19 26 Total (decrease) increase in interest expense (101 ) 1,385 1,284 1,820 725 2,545 Increase (decrease) in net interest income $ 5,389 $ 401 $ 5,790 $ 7,882 $ (1,801 ) $ 6,081 LoanCredit Lossesloancredit losses is a charge to income in order to bring our allowance for loancredit losses to a level deemed appropriate by management.management based on factors such as historical loss experience, trends in classified and past due loans, volume and growth in the loan portfolio, current economic conditions in our markets and value of the underlying collateral. Loans are charged off against the allowance for credit losses when determined appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination. For a full description of the factors taken into account by our management in determining the allowance for loancredit losses see “LoanCredit Losses.” The provision for loan losses for2017 was $2.9 million2023, we recorded no provision for credit losses, compared to $3.6a provision of $2.2 million in 2022. At the onset of the COVID pandemic in 2020, we established COVID-specific qualitative factors to estimate the potential impact of the pandemic to our loan portfolio as a whole, which led to a provision during 2020 of $13.2year ended December 31, 2016.fourth quarter of 2022 are still relevant, however certain minor adjustments were made in subsequent quarters to reflect current portfolio credit quality trends. As of December 31, 2017 and December 31, 2016,2023, our allowance for loan and leasecredit losses as a percentage of total loans was $12.9 million and $11.5 million, respectively, which were comprised of general allowance reserves of $12.7 million and $11.2 million, respectively, with specific reserves allocated to cover classified and problem loans of $134,000 and $253,000, respectively. The decrease in provision expense was primarily due to improved credit quality and loan growth at a slower rate during 2017 than during 2016. 1.33%.2017,2023, there was $9.3were $9.8 million in loan balances past due 30 or more days, and $4.0which included $4.2 million in loan balances for nonperforming (nonaccrual) loans, compared to $11.7$14.1 million and $4.49.6 million, respectively, foras of December 31, 2022. The decrease in nonperforming assets during the year ended December 31, 2016.The provision for loan losses for the year ended December 31, 2016 increased $1.5 million to $3.6 million2023 compared to $2.22022 resulted primarily from the resolution of several nonperforming assets during the second quarter of 2023, four of which had outstanding principal balances of $6.7 million forand were Small Business Administration (SBA) 7(a), partially guaranteed (75%) loans, acquired in the year ended December 31, 2015. AsJune 2018 acquisition of Westbound Bank. An additional nonperforming loan with an outstanding balance of $1.4 million was resolved in the second quarter of 2023 and paid off. Each of these nonperforming assets was resolved with minimal incurred losses. Total nonperforming (nonaccrual) loans were $5.6 million and $10.8 million as of December 31, 20162023 and December 31, 2015, our general allowance reserves were $11.2 million and $8.7 million, respectively, with specific reserves allocated to cover classified and problem loans of $253,000 and $527,000,2022, respectively. The increase in provision expense was primarily due to the growth in total loans of $176.5 million, or 16.5%, to $1.25 billion for the year ended December 31, 2016, from $1.07 billion for the year ended December 31, 2015, which resulted in a $2.5 million increase in general allowance reserves. As of December 31, 2016, there was $11.7 million in loan balances past due 30 or more days and $4.4 million in loan balances for nonperforming (nonaccrual) loans, compared to $9.7 million and $2.4 million, respectively, for the year ended December 31, 2015. However, the specific reserves associated with these loans decreased due to improvements in the values of the underlying collateral that secure those loans, leading to a $274,000 decrease in specific reserves for the year ended December 31, 2016 over the year ended December 31, 2015 that partially offset the increase in general reserves driven by our loan growth.20172023 totaled $1.5$1.1 million, or 0.11%, of total loans, compared to net charge-offs of $1.4 million, or 0.11%, and net charge-offs of $633,000, or 0.06%, for the same periods$609,000 in 2016 and 2015, respectively. During 2017, the volume of smaller dollar consumer loan charge-offs increased compared to prior years but there were no individual loan charge-offs that were greater than $500,000.2022. The increase in net charge-offs for the year ended December 31, 2016, from the year ended December 31, 2015,charge-offs was primarily due to one borrowing relationship withslight upward trends in smaller dollar loan and overdraft charge-offs, as well as a $373,000 charge-off amount of $1.2 milliona C&I loan in which the assets were repossessed and somecurrent year.which are currently heldnet charge-offs (recoveries) to average loans outstanding by loan category for sale.insurance. insurance. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
(Decrease)2017,2023 compared to 2022. Material changes in the components of noninterest income totaled $14.3 million, an increaseare discussed below.$1.3 million, or 9.7%, compared to $13.0our non-interest income. Service fee income was $4.4 million for the year ended December 31, 2016. For2023 compared to $4.3 million for the same period in 2022, an increase of $99,000, or 2.3%, resulting from growth in the number of DDAs and debit card usage volume during 2023. The total number of DDAs increased by 1,299 accounts, from 54,867 as of December 31, 2022 to 56,166 as of December 31, 2023.2016, noninterest income increased $1.5 million, or 13.4%, from $11.52023 compared to 271 mortgage loans for $72.8 million for the year ended December 31, 2015. The following table presents, for2022, which is consistent with the periods indicated,industry wide decline in overall mortgage volumes attributable to increased mortgage loan rates during the major categoriesyear. Gain on sale of noninterest income: For the Years Ended December 31, For the Years Ended December 31, 2017 2016 2017 v. 2016 2016 2015 2016 v. 2015 (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 3,746 $ 3,530 $ 216 $ 3,530 $ 3,493 $ 37 Merchant and debit card fees 3,119 2,741 378 2,741 2,737 4 Fiduciary income 1,463 1,405 58 1,405 1,432 (27 ) Gain on sales of loans 1,981 1,718 263 1,718 1,053 665 Bank-owned life insurance income 461 453 8 453 421 32 Gain on sales of investment securities 167 82 85 82 77 5 Loan processing fee income 597 622 (25 ) 622 501 121 Other 2,745 2,465 280 2,465 1,769 696 Total noninterest income $ 14,279 $ 13,016 $ 1,263 $ 13,016 $ 11,483 $ 1,533 Service Charges on Deposit Accounts. We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $3.7loans was $1.2 million for the year ended December 31, 2017, which increased over the same period in 2016 by $216,000,2023, a decrease of $1.2 million, or 6.1%. The increase was due in part to growth in deposit accounts of 6.3% during the period and in part due to our charging services fees to the commercial account analysis deposit accounts that we acquired from DCB Financial and Texas Leadership Bank, which we did not do in 2016 and 2015. Service charges on deposit accounts increased $37,000, or 1.06%50.7%, in 2016 compared to 2015. This increase was relatively small compared to our deposit growth during the same period because the commercial account analysis deposit accounts that we acquired from DCB Financial and Texas Leadership Bank were not charged service fees during 2016 or 2015.Merchant and Debit Card Fees. We earn interchange income related to the activity of our customers’ merchant debit card usage. Debit card interchange income was $3.1$2.4 million and $2.7 million for the years ended December 31, 2017 and 2016, respectively, an increase of $378,000, or 13.8%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during 2017. Debit card income remained flat for the year ended December 31, 2016 compared2022. $1.0 million and $162,000 of the gain in the current year was attributable to the same periodsales of mortgage loans and SBA 7(a) loans, respectively, while the gain during the prior year consisted of $2.0 million in 2015, but related debit card expenses decreased $268,000, or 22.3%, during 2016 due to the conversion from Visa® to Mastercard®mortgage loan sales and the negotiation of better pricing, resulting$392,000 in an overall increase in related net income. See "—Noninterest Expense—ATMSBA 7(a) loan sales.Debit Card Expense."Fiduciary Income. Custodial Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $1.5 million and $1.4$2.5 million for the years ended December 31, 20172023 and 2016, respectively, increasing by $58,000, or 4.13%. Fees increased in part due to2022, which represented an increase of $31,000, or 1.2%. The increase in fee schedules implemented during the year. Additionally,revenue resulted primarily from 44 new accounts that were opened in 2023, which have generated additional income. Furthermore, revenue for our services fluctuates by month with the market value for all publicly-tradedpublicly traded assets, which are primarily held in ourirrevocable trusts and investment management and fiduciary accounts while a flat percentageis charged forthat carry higher fees. Additionally, our custody-only assets based on the bookare carried in a tiered percentage rate fee schedule charged against market value. Revenues increased at a lower rate than the market value of the managed assets primarily because of fluctuations in month-end market values of the investment management accounts. Total managed assets held as of December 31, 2017 were $310.5 million, of which $175.5 million, or 56.5%, were in custody-only services. Total managed assets held as of December 31, 2016 were $265.7 million, of which $149.7 million, or 56.3%, were in custody-only services. Fiduciary income was $1.4 million for the years ended December 31, 2016 and 2015, despite an increase in the total managed assets from $253.1 million as of December 31, 2015 to $265.7 million as of December 31, 2016. Revenue remained flat primarily because of fluctuations in month-end market values of the investment management and fiduciary accounts.Gain on Sales of Loans. We originate long-term fixed-rate mortgage loans for resale into the secondary market. Our mortgage originations sold were $64.8 million for the year ended December 31, 2017, compared to $62.6 million for the year ended December 31, 2016. For the year ended December 31, 2015, our mortgage originations sold were $59.2 million. Gain on sales of loans was $2.0 million for the year ended December 31, 2017, an increase of $263,000, or 15.3%, compared to $1.7 million for the same period in 2016, which reflects an increase in the number of loans sold and the amount of gain per loan sold. Gain on sales of loans increased by $665,000, or 63.15%, from $1.1 million in 2015 to $1.7 million in 2016, which reflects an increase in the number of loans sold and the amount of gain per loan sold.. Income. We invest in bank-owned life insurance due to its attractive nontaxable return and protection against the loss of our key employees. We record income based on the growth of the cash surrender value of these policies as well as the annual yield net of fees and charges, including mortality charges. Income from bank-owned life insurance increased slightly by $8,000,$99,000, or 1.8%11.8%, for the year ended December 31, 20172023, compared to the same period in 2016, primarily due to the purchase of $850,000 of additional bank owned life insurance in the fourth quarter of 2017, which was partially offset by a decrease in tax equivalent yields on these policies from 4.00% in 2016 to 3.84% in 2017. Income for the year ending December 31, 2016 increased $32,000, or 7.6%, from the year ending December 31, 2015.2022. The increase in income is primarily attributable to additional policies purchased on the lives of existing officers of the Company and higher crediting rates due to increases in interest rates.the purchase of $445,000 of additional bank-owned life insurance in 2016, which was partially offset by a decrease in tax equivalent yields on these policies from 4.15% for 2015 compared to 4.00% for 2016.Gain on Sales of Investment Securities. We recorded a gain on sales of securitiesgrowth in the amountsnumber of $167,000, $82,000DDAs and $77,000 for the years endeddebit card usage volume during 2023. The total number of DDAs increased by 1,299 accounts, from 54,867 as of December 31, 2017, 2016 and 2015, respectively. The gains taken in each year relate2022 to securities sold that had higher yields in the current markets, but that management believed also had higher volatility risk in an increasing interest rate environment. Accordingly, we sold these securities and recorded gains on the sales in an effort to decrease our interest rate risk.Income. Income. Revenue earned from collection of loan processing fees decreased $25,000, or 4.02%, to $597,000was $520,000 for the year ended December 31, 2017 from $622,0002023, compared to $761,000 for the year ended December 31, 2016.2022, a decrease of $241,000, or 31.7%. The slight decrease in loan processing fee income is primarily attributable primarily to waiving of certain of these feesa decrease in our newer growth markets to facilitate loan growth during the period. Loan processing fees increased $121,000, or 24.15%, for the year ended December 31, 2016, from $501,000 for the year ended December 31, 2015, which was attributable primarily to an increase in volume of newly originated, renewed or extended loans during the period.Other.
market. The decrease of $195,000, or 50.1%, from December 31, 2022 was primarily due to a lower volume of mortgage purchases and refinances during 2023.mortgage loan origination fees, wire transfer fees, stop payment fees, loan administration fees, and other fee income. Other noninterest income increased $280,000,$684,000, or 11.36%13.7%, in 2017for the year ended December 31, 2023, compared to 20162022, resulting primarily from a one-time gain on the sale of nonmarketable correspondent bank stock of $2.8 million during the year ended December 31, 2023. This was partially offset by one-time net gains in 2022 of $894,000 for the sale of an airplane and $685,000 from the termination of three interest rate swaps, which were not present in 2023. Additionally, there was a decrease in warehouse lending fees of $251,000 due primarily to increases in wire transfer volume and related fees, fees from in-house appraisal reviews that were outsourced in prior years and increased mortgage related income due to increased mortgage origination volume. Other income increased $696,000, or 39.34%, in 2016 compared to 2015 primarily due growthclosure of the business line during 2023, and a $138,000 downward adjustment on the fair value of our SBA servicing assets in our loan portfolio and increased mortgage origination volume causing an increase in fee income generated from loan administration fees and income from mortgage loan origination and processing fees.2017,2023, noninterest expense totaled $48.4$82.4 million, an increase of $2.0$2.4 million, or 4.3%3.1%, compared to $46.4$79.9 million for the same period in 2016. Noninterest expense increased $3.8 million, or 8.9%, for the year ended December 31, 2016, compared to the same period in 2015.2022. The following table presents, for the periods indicated, the major categories of noninterest expense: 2017 2016 2017 v. 2016 2016 2015 2016 v. 2015 (Dollars in thousands) Employee compensation and benefits $ 27,078 $ 25,611 $ 1,467 $ 25,611 $ 22,469 $ 3,142 Non-staff expenses: Occupancy expenses 7,400 6,870 530 6,870 6,468 402 Amortization 1,033 980 53 980 951 29 Software support fees 2,089 1,870 219 1,870 1,840 30 FDIC insurance assessment fees 671 1,200 (529 ) 1,200 743 457 Legal and professional fees 2,061 1,935 126 1,935 2,064 (129 ) Advertising and promotions 1,193 1,015 178 1,015 918 97 Telecommunication expense 526 609 (83 ) 609 572 37 ATM and debit card expense 899 933 (34 ) 933 1,201 (268 ) Director and committee fees 1,064 940 124 940 859 81 Other 4,368 4,417 (49 ) 4,417 4,509 (92 ) Total noninterest expense $ 48,382 $ 46,380 $ 2,002 $ 46,380 $ 42,594 $ 3,786
(Decrease)$27.1$48.9 million for the year ended December 31, 2017,2023, an increase of $1.5$1.4 million, or 5.7%2.9%, compared to $25.6$47.5 million for the same period in 2016. The increase was2022. Employee compensation and benefits expense increased due primarily to an increase in the number of employees from 397 to 407, as well as increased health insurance expenses, benefit plan expenses and payroll taxes. Salarieshigher salaries and employee benefits increased $3.1of $2.5 million, or 14.0%, for the year ended December 31, 2016, aspartially offset by a $1.4 million decrease in bonus expense due to lower net earnings during 2023 compared to $22.5 million for the same period in 2015, primarily due to an increase in the number of employees from 379 to 397.Occupancy Expenses. Occupancy expenses2022.$7.4$3.4 million and $6.9$2.8 million for the years ended December 31, 20172023 and 2016, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $3.2 million for each2022, respectively, an increase of the years ended December 31, 2017 and 2016.$599,000, or 21.2%. The increase of $530,000, or 7.7%, in occupancy expenses for 2017 compared to 2016 was dueresulted primarily tofrom increased lease expense due to new locations in Austinaudit and Fort Worth,legal fees during 2023, as well as additional automated teller machine servicingrecruiting fees paid to acquire new talent.and security updates. Expense associated with occupancy of premises increased $402,000,$675,000, or 6.2%12.3%, from $5.5 million for the year ended December 31, 2016, as compared2022 to $6.5$6.2 million for the same period of 2015, and related depreciation expenses increased $225,000 from $3.0 million, or 7.6%.year ended December 31, 2023. The increase of $402,000 in occupancy expenses for 2016 compared to 2015 was dueis attributable primarily to increased leasenew software investments to enhance automation and rentalefficiencies, digital banking initiatives, cybersecurity monitoring and tools, and other technology capabilities. We also moved to a higher asset tier for billing related to our core processing system, which resulted in higher expense due to new locations in Denton and Rockwall and increased depreciation from additional furniture, fixtures and office equipment, which was partially offset by decreases in automobile expense and utility expense.$1.0 million$602,000 for the year ended December 31, 2017, an increase2023, a decrease of $53,000,$122,000, or 5.4%16.9%, compared to $980,000 for the same period of 2016. Amortization costs for the year ended December 31, 2016 increased $29,000, or 3.0%, compared to $951,000 for the same period of 2015.$724,000 in 2022. The increasesdecrease in amortization costs in 2016 and 2017 were primarilyexpense during 2023 was due to a $110,000 decrease in amortization fromexpense on core deposit intangibles resulting from the acquisitions of DCB Financialassociated with previously acquired deposits being fully amortized and Texas Leadership Bank, as well as additionala $12,000 decrease in software purchases required to support our expansionamortization.to build the infrastructure needed for growth in the volume of our business.Software Support. Software supportPromotions. Advertising and promotion-related expenses were $2.1$1.2 million for the year ended December 31, 2017 and $1.9 million for the same period in 2016. The increase of $219,000, or 11.71%, was primarily attributable to incremental processing fees resulting from growth in volume of our loan and deposit accounts, as well as increased support fees from movement to a higher asset tier for our core processing software and the migration of traditional telecommunicationlines at some locations to a cloud-based method of delivering communication lines, the expense of which is including in software support expenses rather than telecommunications expenses. Software support expenses increased $30,000, or 1.63%, in 2016 from $1.8 million for the year ended December 31, 2015. The increase was primarily attributable to incremental processing fees resulting from the growth in the volume of our loan and deposit accounts.FDIC Assessment Fees. FDIC assessment fees were $671,000 and $1.2$1.6 million for the years ended December 31, 20172023 and 2016, respectively.2022, respectively, a decrease of $417,000, or 26.2%. The decrease of $529,000, or 44.1%, resulted fromwas primarily due to decreased advertising and vendor costs in the effect of an update in our accounting methodology related to accrual of the assessment fees during 2016. FDIC assessment fees increased $457,000, or 61.51%, for the year ended December 31, 2016,current period compared to fees of $743,000 for the same period in 2015, also as a resultthe prior year.Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were $2.1 million and $1.9 million for the years ended December 31, 2017 and 2016, respectively. The increase of $126,000, or 6.5%, was primarily due to increases in legal, audit and professional fees as a result of our public company reporting requirements. The decrease of $129,000, or 6.3%, for the year ended December 31, 2016, compared to $2.1 million for the year ended December 31, 2015, was primarily due to cancellation of services for a third-party investment advisory firm related to our Wealth Management Group during the period, which was partially offset by increases in legal fees and audit fees.Advertising and Promotions. Advertising and promotion related expenses were $1.2 million and $1.0 million for the years ended December 31, 2017 and 2016, respectively. The increase of $178,000, or 17.5%, was primarily due to increases in advertising expense in our growth markets, especially Central Texas and the Dallas/Fort Worth metroplex. The increase of $97,000, or 10.6%, for the year ended December 31, 2016, compared to $918,000 for the year ended December 31, 2015, was primarily due to additional advertising expenses related to our two new locations in Denton, Texas and completion of a direct mail campaign in Bryan/College Station, Texas.Telecommunication Expense. Telecommunications expenses include telephone, internet and television/cable expenses, which were $526,000 and $609,000 for the years ended December 31, 2017 and 2016, respectively. The decrease of $83,000, or 13.6%, was primarily due to the migration of traditional telecommunication lines at some locations to a cloud-based method of delivering communication lines, the cost of which is included with software support expenses. The increase of $37,000, or 6.5%, for the year ended December 31, 2016, compared to $572,000 for the year ended December 31, 2015, was primarily due to an increase in the number of locations utilizing telecommunication services during the period.$899,000 and $933,000 for the years ended December 31, 2017 and 2016, respectively. Our expenses decreased $34,000, or 3.6%, due to triggering of agreed upon contract renewal incentives during the period. ATM and debit card expense decreased $268,000, or 22.3%, for the year ended December 31, 2016, compared to $1.2$2.9 million for the year ended December 31, 2015, due primarily2023, an increase of $189,000, or 7.0%, compared to our conversion from Visa® to Mastercard®$2.7 million for the same period in 2022 as oura result of increased ATM and debit card partner and better negotiated pricing with Mastercard®.Director and Committeeusage by our customers.We payFDIC insurance assessment fees to our board of directors for their attendance at board and committee meetings for both the Company and the Bank. Director and committee fees paid were $1.1$1.5 million and $940,000 for the yearsyear ended December 31, 2017 and 2016.2023, an increase of $406,000, or 36.9%, compared to $1.1 million for the same period in 2022. The expense increased $124,000, or 13.2%,increase was primarily due to an increase in the per meeting fees paid to directors for 2017insurance assessment rate resulting from changes in certain financial ratios used in the calculation and the addition of one new board member. Director and committee fees increased for the year ended December 31, 2016, by $81,000, or 9.4%, compared to $859,000 for the year ended December 31, 2015. Thisan overall increase was due to the addition of two new board members in 2016.Other. This category includes operating and administrative expenses, suchour assessment base, which is calculated as stock option expense, expenses and losses related to repossession ofaverage total assets small hardware and software purchases, expense of the value of stock appreciation rights, losses incurred on problem assets, losses on sale of other real estate owned and other assets, other real estate owned expense and write-downs, business development expenses (i.e., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense remained consistent at $4.4 million for the years ended December 31, 2017 and 2016, with a slight decrease of $49,000, or 1.1%. The decrease was primarily due to overall improved efficiencies and decreases in expenses such as office supplies and loan filing expenses. Other noninterest expense decreased $92,000, or 2.04%, in 2016 compared to 2015, due primarily to no acquisition-related expenses during 2016, as well as lower losses sustained.The Tax Cuts and Jobs Act of 2017 was signed into law by President Trump on December 22, 2017, and reduced the corporate tax rate, beginning on January 1, 2018, from 35% to 21%. As a result of the signing of this law, we recorded during the fourth quarter of 2017, a one-time, non-cash charge to income tax provision of $1.7 million to reduce the value of our net deferred tax assets due to the new tax rate at which they are expected to reverse.yearsyear ended December 31, 2017, 2016,2023 and 2015,2022, income tax expense totaled $8.2$7.1 million including the one-time deferred tax asset adjustment ofand $8.8 million, respectively. The $1.7 million described above, $4.7 million and $4.4 million, respectively.decrease in income tax expense was primarily due to a decrease in net earnings before taxes of $12.1 million. Our effective tax raterates for the years ended December 31, 2017, 20162023 and 2015 was 36.3%, 28.0%,2022 were 19.20% and 30.1%17.93%, respectively.increased $134.3decreased $166.7 million, or 7.3%5.0%, from $1.8$3.35 billion as of December 31, 20162022 to $2.0$3.18 billion as of December 31, 2017.2023. Our asset growth in 2017decline was primarily due to organic growtha $97.5 million decrease in total investment securities, and a decrease in gross loans of $55.6 million. Additionally, our traditional East Texas marketcash and our Central Texas and Dallas/Fort Worth metroplex markets, including the opening of de novo branches in Austin and Fort Worth, Texas, by enhancing our lending and deposit relationships with existing customers and attracting new customers, as well as cross-selling our deposit and treasury management products. Total assets increased $145.7 million, or 8.7%, from $1.7 billion as of December 31, 2015 to $1.8 billion as of December 31, 2016. Our growth in 2016 was achieved organically as well, with growth in both our traditional East Texas markets and in our maturing Central Texas and Dallas/Fort Worth metroplex markets.2017,2023, total gross loans excluding deferred loan fees,held for investment were $1.4$2.32 billion, an increasea decrease of $115.6$55.6 million, or 9.3%2.3%, compared to $1.2 billion as offrom the December 31, 2016. The increase during 2017 was primarily due to continued organic growth in our primary market areas and opening2022 balance of new locations in Austin and Fort Worth, Texas. Total loans as of December 31, 2016 represented an increase of $176.5 million, or 16.5%, compared to $1.1 billion as of December 31, 2015. The increase during 2016 was primarily due to our continued organic growth in our primary market areas and the maturation of newer locations opened or acquired in the Central Texas and Dallas/Fort Worth metroplex markets.$2.38 billion. In addition to these amounts, $1.9 million, $2.6 million$976,000 and $3.9$3.2 million in loans were classified as held for sale as of December 31, 2017, 20162023 and 2015,2022, respectively.loansthose held for sale, as a percentage of deposits, were 81.1%, 78.9%88.2% and 72.8%88.7% as of December 31, 2017, 20162023 and 2015,2022, respectively. Total loans, excluding loansthose held for sale, as a percentage of total assets, were 69.3%, 68.0%72.9% and 63.4%71.0% as of December 31, 2017, 20162023 and 2015,2022, respectively. As of December 31, 2017 2016 2015 2014 2013 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands) Commercial and industrial $ 197,508 14.53 % $ 223,712 17.98 % $ 181,716 17.02 % $ 139,258 17.71 % $ 140,207 20.10 % Real estate: Construction and development 196,774 14.47 % 129,631 10.42 % 122,904 11.51 % 77,760 9.89 % 57,483 8.24 % Commercial real estate 418,137 30.76 % 368,077 29.59 % 301,910 28.29 % 205,648 26.15 % 170,500 24.45 % Farmland 59,023 4.34 % 62,366 5.01 % 47,668 4.47 % 34,131 4.34 % 25,850 3.71 % 1-4 family residential 374,371 27.54 % 361,665 29.07 % 312,306 29.26 % 245,889 31.26 % 227,491 32.62 % Multi-family residential 36,574 2.69 % 26,079 2.10 % 30,395 2.85 % 24,075 3.06 % 16,301 2.34 % Consumer and overdrafts 51,561 3.79 % 53,494 4.30 % 50,954 4.77 % 44,439 5.65 % 44,900 6.44 % Agricultural 25,596 1.88 % 18,901 1.52 % 19,524 1.83 % 15,319 1.95 % 14,672 2.10 % Total loans held for investment $ 1,359,544 100.00 % $ 1,243,925 100.00 % $ 1,067,377 100.00 % $ 786,519 100.00 % $ 697,404 100.00 % Total loans held for sale $ 1,896 $ 2,563 $ 3,867 $ 3,915 $ 7,118 Loans$26.2$26.5 million, or 11.7%8.4%, to $197.5from $314.1 million as of December 31, 2017 from $223.72022 to $287.6 million as of December 31, 2016. Commercial and industrial loans as of December 31, 2016 represented an increase of $42.0 million, or 23.1%, from $181.7 million as of December 31, 2015.2023. The fluctuationsdecrease in the commercial and industrial portfolio in both years is primarilywas partially due to normal variancesa $10.7 million decrease in our warehouse lending portfolio, which we unwound during 2023, as well as paydowns and payoffs during the year in the balancesnormal course of underlying lines of credit.increased $67.1decreased $80.5 million, or 51.8%21.3%, to $196.8$296.6 million as of December 31, 20172023 from $129.6$377.1 million as of December 31, 2016. Construction2022. The decrease resulted primarily from completion of construction projects that were started in 2021 or 2022 and development loans as of December 31, 2016 represented an increase of $6.7 million, or 5.5%, from $122.9 million as of December 31, 2015. The increases resulted from continued organic growth, especiallyfewer new construction projects approved and funded in our Central Texas and Dallas/Fort Worth metroplex markets, as well as increases in market demand and our decision in 2017 to seek a larger volume of such loans due to our belief that our loan portfolio was sufficiently diverse to sustain them.1-4 Family Residential. Our 1-4 family residential loan portfolio is comprised of loans secured by 1-4 family homes, which are both owner occupied and investor owned. Our 1-4 family residential loans have a relatively small balance spread between many individual borrowers compared to our other loan categories. Our 1-4 family residential loans increased $12.7 million, or 3.5%, to $374.4 million as of December 31, 2017 from $361.7 million as of December 31, 2016. Our 1-4 family residential loans as of December 31, 2016 represented an increase of $49.4 million, or 15.8%, from $312.3 million as of December 31, 2015. This increases in both years were primarily the result of continued organic growth.$50.1$35.6 million, or 13.6%4.0%, to $418.1$923.2 million as of December 31, 20172023 from $368.1$887.6 million as of December 31, 2016. Commercial real estate loans as of December 31, 2016 represented an increase of $66.2 million, or 21.9%, from $301.9 million as of December 31, 2015.2022. The increase in commercial real estate loans during these periodsthe period was mostly driven by organic growth and movement of construction projects into permanent financing.general1-4 family residential structure if the value of the land exceeds the value of the residence. These loans are subject to risk related to climate change, fluctuations in feed and cattle prices and changes in property values. Farmland loans increased $478,000, or 0.3%, to $186.3 million as of December 31, 2023 from $185.8 million as of December 31, 2022.lending activity, primarily inresidential loans, as well as the decision by some borrowers to forego long-term fixed rate secondary market loans and instead financing 1-4 family properties directly with our Central Texas and Dallas/Fort Worth metroplex markets. farmland and agricultural loans made to farmers and ranchers relating to their operations, multi-family residential loans and consumer loans. None of these categories of loans represents a significant portion of our total loan portfolio.Maturities. date indicatedDecember 31, 2023 are summarized in the following tables: As of December 31, 2017 Total (Dollars in thousands) Commercial and industrial $ 106,487 $ 62,367 $ 28,654 $ 197,508 Real estate: Construction and development 70,911 57,123 68,740 196,774 Commercial real estate 15,955 65,600 336,582 418,137 Farmland 5,049 4,478 49,496 59,023 1-4 family residential 24,514 26,653 323,204 374,371 Multi-family residential 20,385 8,021 8,168 36,574 Consumer 15,494 33,602 2,465 51,561 Agricultural 15,500 10,018 78 25,596 Total loans $ 274,295 $ 267,862 $ 817,387 $ 1,359,544 Amounts with fixed rates $ 212,237 $ 204,396 $ 69,607 $ 486,240 Amounts with floating rates $ 62,058 $ 63,466 $ 747,780 $ 873,304 As of December 31, 2016 Total (Dollars in thousands) Commercial and industrial $ 102,728 $ 89,827 $ 31,157 $ 223,712 Real estate: Construction and development 70,910 29,553 29,168 129,631 Commercial real estate 14,124 59,389 294,564 368,077 Farmland 15,948 2,796 43,622 62,366 1-4 family residential 30,211 22,810 308,644 361,665 Multi-family residential 757 8,515 16,807 26,079 Consumer 16,911 33,398 3,185 53,494 Agricultural 11,177 7,627 97 18,901 Total loans $ 262,766 $ 253,915 $ 727,244 $ 1,243,925 Amounts with fixed rates $ 196,734 $ 195,603 $ 82,967 $ 475,304 Amounts with floating rates $ 66,032 $ 58,312 $ 644,277 $ 768,621 As of December 31, 2015 Total (Dollars in thousands) Commercial and industrial $ 85,947 $ 58,319 $ 37,450 $ 181,716 Real estate: Construction and development 52,613 33,660 36,631 122,904 Commercial real estate 15,514 47,638 238,758 301,910 Farmland 9,845 5,276 32,547 47,668 1-4 family residential 15,982 28,851 267,473 312,306 Multi-family residential 1,233 8,697 20,465 30,395 Consumer 15,313 32,607 3,034 50,954 Agricultural 12,000 7,422 102 19,524 Total loans $ 208,447 $ 222,470 $ 636,460 $ 1,067,377 Amounts with fixed rates $ 160,894 $ 167,579 $ 86,755 $ 415,228 Amounts with floating rates $ 47,553 $ 54,891 $ 549,705 $ 652,149
or Less
Through
Five Years
Through
Fifteen Years
Fifteen YearsWe had $8.7 millionasis primarily due to the resolution of December 31, 2017, compared to $9.6several nonperforming assets during the second quarter, four of which had outstanding principal balances of $6.7 million and $4.2were Small Business Administration (SBA) 7(a), partially guaranteed (75%) loans, acquired in the June 2018 acquisition of Westbound Bank. An additional nonperforming loan with an outstanding balance of $1.4 million aswas resolved in the second quarter and paid off. Each of December 31, 2016 and 2015, respectively. We had $4.0 million in nonperforming loans as of December 31, 2017, compared to $4.4 million and $2.4 million as of December 31, 2016 and 2015, respectively. Ourthese nonperforming assets and nonperforming loans were slightly decreased, by $917 and $405 respectively, asresolved with minimal incurred losses.atas of the dates indicated: As of December 31, 2017 2016 2015 2014 2013 (Dollars in thousands) Nonaccrual loans $ 4,004 $ 4,409 $ 2,431 $ 4,077 $ 7,233 Accruing loans 90 or more days past due — — — — — Total nonperforming loans 4,004 4,409 2,431 4,077 7,233 Other real estate owned: Commercial real estate, construction and development, and farmland 758 1,074 1,075 70 604 Residential real estate 1,486 618 618 742 758 Total other real estate owned 2,244 1,692 1,693 812 1,362 Repossessed assets owned 2,466 3,530 116 106 236 Total other assets owned 4,710 5,222 1,809 918 1,598 Total nonperforming assets $ 8,714 $ 9,631 $ 4,240 $ 4,995 $ 8,831 Restructured loans-nonaccrual $ — $ 43 $ 160 $ 685 $ 877 Restructured loans-accruing $ 657 $ 462 $ 3,541 $ 2,574 $ 1,422 0.29 % 0.35 % 0.23 % 0.52 % 1.04 % Ratio of nonperforming assets to total assets 0.44 % 0.53 % 0.25 % 0.37 % 0.71 % As of December 31, 2017 2016 2015 2014 2013 (Dollars in thousands) Nonaccrual loans by category: Commercial and industrial $ 77 $ 82 $ 118 $ 507 $ 707 Real estate: Construction and development — 1,825 — — 173 Commercial real estate 1,422 415 77 672 1,372 Farmland 163 176 169 184 692 1-4 family residential 1,937 1,699 1,829 2,614 3,840 Multi-family residential 217 5 — — — Consumer 138 192 238 99 307 Agricultural 50 15 — 1 142 Total $ 4,004 $ 4,409 $ 2,431 $ 4,077 $ 7,233 (1)Excludes loans held for sale of $1.9 million, $2.6 million, $3.9 million, $3.9 million and $7.1 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.(2)Restructured loans-nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.categories:risk ratings: pass, special mention, substandard, doubtful or loss. Within the pass category,rating, we classify loans into one of the following fourfive subcategories based on perceived credit risk, including repayment capacity and collateral security: superior, excellent, good, acceptable and acceptable.acceptable/watch. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific reserveACL allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).table summarizestables summarize the internal ratings of our performing, classified and nonaccrual (as well as substandard) loans, by category, as of the dates indicated. As of December 31, 2017 Pass Special Mention Substandard Doubtful Loss Total (Dollars in thousands) Commercial and industrial $ 196,890 $ 348 $ 270 $ — $ — $ 197,508 Real estate: Construction and development 196,515 259 — — — 196,774 Commercial real estate 412,488 1,135 4,514 — — 418,137 Farmland 58,623 226 174 — — 59,023 1-4 family residential 373,154 442 775 — — 374,371 Multi-family residential 16,073 20,284 217 — — 36,574 Consumer 51,409 65 87 — — 51,561 Agricultural 24,650 454 492 — — 25,596 Total $ 1,329,802 $ 23,213 $ 6,529 $ — $ — $ 1,359,544 As of December 31, 2016 Pass Special Mention Substandard Doubtful Loss Total (Dollars in thousands) Commercial and industrial $ 218,690 $ 4,299 $ 706 $ 17 $ — $ 223,712 Real estate: Construction and development 127,802 4 1,825 — — 129,631 Commercial real estate 360,591 2,021 5,465 — — 368,077 Farmland 61,717 248 401 — — 62,366 1-4 family residential 352,196 4,311 5,121 37 — 361,665 Multi-family residential 25,871 — 208 — — 26,079 Consumer 52,320 524 568 82 — 53,494 Agricultural 17,965 478 458 — — 18,901 Total $ 998,462 $ 11,885 $ 14,752 $ 136 $ — $ 1,020,213 As of December 31, 2015 Pass Special Mention Substandard Doubtful Loss Total (Dollars in thousands) Commercial and industrial $ 169,577 $ 7,670 $ 4,356 $ 113 $ — $ 181,716 Real estate: Construction and development Commercial real estate 121,585 848 337 134 — 122,904 Farmland 294,709 4,360 2,841 — — 301,910 1-4 family residential 46,606 730 332 — — 47,668 Multi-family residential 300,690 5,448 6,168 — — 312,306 Consumer 28,932 1,192 271 — — 30,395 Agricultural 49,779 710 438 27 — 50,954 Total 18,703 713 108 — — 19,524 Commercial and industrial $ 861,004 $ 21,671 $ 14,851 $ 274 $ — $ 897,800 LoanCredit Lossesloancredit losses (“ACL”) that represents management’s best estimate of the loanappropriate level of losses and risks inherent in our loan portfolio.applicable financial assets under CECL. The amount of the allowance for loancredit losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. The determination of the amount of allowance involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to the financial statements for discussion regarding our ACL methodologies for loans held for investment and available for sale securities.allowanceACL for loan losses,loans held for investment, we primarily estimate losses on specific loans, or groupssegments of loans with similar risk characteristics and where the probablepotential loss can be identified and reasonably determined. For loans that do not share similar risk characteristics with our existing segments, they are evaluated individually for an ACL. Our portfolio is segmented by regulatory call report codes, with additional segments for SBA loans acquired from Westbound Bank, SBA loans originated by us and in prior years, SBA PPP loans. The segments are further disaggregated by internally assigned risk rating classifications. The balance of the allowance for loan lossesACL is based on internally assigned risk classifications of loans,determined using CECL, which considers historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and reasonable and supportable forecasts of the estimated impact of currentfuture economic conditions on certain historical loan loss rates. Please see “— Critical Accounting Policies—Policies - Allowance for LoanCredit Losses.”2017, our2023, the allowance for loancredit losses totaled $12.9$30.9 million, or 0.95%1.33%, of total loans.loans, excluding those held for sale. As of December 31, 2016, our2022, the allowance for loancredit losses totaled $11.5$32.0 million, or 0.92%1.34%, of total loans. Asloans, excluding those held for sale. The slight decrease in the ACL of December 31, 2015, the allowance for loan losses totaled $9.3$1.1 million, or 0.87%3.3%, was primarily due to a decrease in the overall loan portfolio, which was offset by incorporation of total loans.economic forecasts for a minimal recession and potential debt-service stressors for certain segments into our CECL model throughout 2023.loancredit losses and other related data: As of December 31, 2017 2016 2015 2014 2013 (Dollars in thousands) $ 1,283,253 $ 1,179,938 $ 991,889 $ 738,539 $ 659,334 $ 1,359,544 $ 1,243,925 $ 1,067,377 $ 786,519 $ 697,404 Allowance for loan losses at beginning of the period 11,484 9,263 7,721 7,093 6,354 Provision for loan losses 2,850 3,640 2,175 1,322 1,745 Charge offs: Commercial and industrial 1,080 1,213 192 241 326 Real Estate: Construction and development — 9 6 14 37 Commercial real estate 84 — 53 27 112 Farmland — — — 96 — 1-4 family residential 543 71 215 163 165 Multi-family residential — — — — — Consumer 344 269 219 178 300 Agriculture 242 — 1 — 8 Overdrafts 165 200 227 233 259 Total charge-offs 2,458 1,762 913 952 1,207 Recoveries: Commercial and industrial 797 17 20 38 20 Real Estate: Construction and development — 4 — 4 1 Commercial real estate — — — 1 11 Farmland — — 96 — — 1-4 family residential 23 75 8 1 36 Multi-family residential — — — — — Consumer 108 121 50 90 86 Agriculture — — 1 20 6 Overdrafts 55 126 105 104 41 Total recoveries 983 343 280 258 201 Net charge-offs 1,475 1,419 633 694 1,006 Allowance for loan losses at end of period $ 12,859 $ 11,484 $ 9,263 $ 7,721 $ 7,093 0.95 % 0.92 % 0.87 % 0.98 % 1.02 % 0.11 % 0.12 % 0.06 % 0.09 % 0.15 % (1)Includes average outstanding balances of loans held for sale of $1.7 million, $3.0 million, $4.4 million, $4.2 million and $6.3 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.(2)Excludes loans held for sale of $1.9 million, $2.6 million, $3.9 million, $3.9 million and $7.1 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.20132019 to December 31, 2017.2023. Loan balances, excluding loans held for sale, increased from $697.4 million as of December 31, 2013, to $1.36$1.71 billion as of December 31, 2017.2019, to $2.32 billion as of December 31, 2023. Net charge-offs have been minimal, representing on average 0.11%0.03% of average loan balances during the same period.loancredit losses in accordance with GAAP and that the allowance for loancredit losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loancredit losses will be subject to ongoing evaluations of the risks in our loan portfolio. If our primary market areas experience economic declines, if asset quality deteriorates or if we are successful in growing the size of our loan portfolio, our allowance could become inadequate and material additional provisions for loancredit losses could be required.loancredit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loancredit losses as shown in the As of December 31, 2017 2016 2015 2014 2013 Amount Amount Amount Amount Amount (Dollars in thousands) Commercial and industrial $ 1,581 12.29 % $ 1,592 13.86 % $ 1,878 20.27 % $ 1,473 19.08 % $ 1,503 21.19 % Real estate: Construction and development 1,724 13.41 % 1,161 10.11 % 1,004 10.84 % 615 7.97 % 460 6.49 % Commercial real estate 4,585 35.66 % 3,264 28.42 % 2,106 22.74 % 1,870 24.22 % 1,502 21.18 % Farmland 523 4.07 % 482 4.20 % 400 4.32 % 387 5.01 % 380 5.36 % 1-4 family residential 3,022 23.50 % 3,960 34.48 % 2,839 30.65 % 2,395 31.02 % 2,236 31.52 % Multi-family residential 629 4.89 % 281 2.45 % 325 3.51 % 232 3.00 % 153 2.16 % Total real estate 10,483 93.82 % 9,148 93.52 % 6,674 92.33 % 5,499 90.30 % 4,731 87.90 % Consumer 608 4.73 % 591 5.15 % 573 6.18 % 612 7.93 % 725 10.21 % Agricultural 187 1.45 % 153 1.33 % 138 1.49 % 137 1.77 % 134 1.89 % Total allowance for loan losses $ 12,859 100.00 % $ 11,484 100.00 % $ 9,263 100.00 % $ 7,721 100.00 % $ 7,093 100.00 %
to Total
to Total
to Total2017,2023, the carrying amount of our investment securities totaled $407.1$600.4 million, an increasea decrease of $60.8$97.5 million, or 17.5%14.0%, compared to $346.3$697.9 million as of December 31, 2016. The increase was due primarily to the investment of a portion of the funds received from our initial public offering and investment of excess cash due to growth in deposits. The carrying amount of our investment securities as of December 31, 2016 represented a decrease of $51.7 million, or 13.0%, compared to $398.0 million as of December 31, 2015. The decrease was due primarily to the sale of certain available for sale securities and the use of proceeds from maturing securities to fund increases in the loan portfolio.2022. Investment securities represented 20.7%, 18.9% and 23.7%20.8% of total assets as of December 31, 2017, 20162023 and 2015,2022, respectively.Our investment portfolio consists of securities classified as available for sale and held to maturity. 2017,2023, securities available for sale totaled $196.2 million and securities held to maturity, totaled $232.4 million and $174.7 million, respectively.$404.2 million. As of December 31, 2016,2022, securities available for sale totaled $188.9 million, and $509.0 million securities in held to maturity. Held to maturity totaled $156.9 millionsecurities represented 67.3% and $189.4 million, respectively, and72.9% of our investment portfolio as of December 31, 2015, $272.9 million2023 and $125.0 million,2022, respectively. Held to maturity percentages were 42.9% as of December 31, 2017, 54.7% as of December 31, 2016, and 31.4% at December 31, 2015. We generally seek to maintain 50.0% or less of our portfolio in held to maturity securities. table summarizestables summarize the amortized cost and estimated fair value of our investment securities assecurities:
Unrealized
Gains
Unrealized
Losses As of December 31, 2017 Fair Value (Dollars in thousands) Corporate bonds $ 18,823 $ 64 $ 50 $ 18,837 Municipal securities 154,242 2,244 418 156,068 Mortgage-backed securities 114,497 199 2,023 112,673 Collateralized mortgage obligations 122,971 116 1,503 121,584 Total $ 410,533 $ 2,623 $ 3,994 $ 409,162 As of December 31, 2016 Fair Value (Dollars in thousands) Corporate bonds $ 25,254 $ 6 $ 377 $ 24,883 Municipal securities 157,261 901 4,511 153,651 Mortgage-backed securities 89,748 318 1,898 88,168 Collateralized mortgage obligations 77,290 275 1,187 76,378 Total $ 349,553 $ 1,500 $ 7,973 $ 343,080 As of December 31, 2015 Fair Value (Dollars in thousands) U.S. government agencies $ 5,158 $ 121 $ — $ 5,279 Corporate bonds 28,399 — 412 27,987 Municipal securities 67,350 2,384 18 69,716 U.S. treasury securities 29,985 — — 29,985 Mortgage-backed securities 145,686 484 1,969 144,201 Collateralized mortgage obligations 124,490 564 1,466 123,588 Total $ 401,068 $ 3,553 $ 3,865 $ 400,756
Unrealized
Gains
Unrealized
Losses2017,2023 and 2022, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages, non-U.S. agency mortgage-backed securities or corporate collateralized mortgage obligations.Our management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. As of December 31, 2017, there was no other-than-temporary impairment recorded.table setstables set forth the fair value of available for sale securities and the amortized cost of held to maturity securities, and the fair value of available for sale securities, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of our securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. As of December 31, 2017 Total Amount Yield Amount Yield Amount Yield Amount Yield Total Yield (Dollars in thousands) Corporate bonds $ — — % $ 6,129 2.67 % $ 12,708 3.04 % $ — — % $ 18,837 2.92 % Municipal securities 2,663 2.18 % 5,769 3.47 % 42,711 3.73 % 102,899 3.63 % 154,042 3.63 % Mortgage-backed securities — — % 48,969 2.19 % 63,735 2.59 % — — % 112,704 2.42 % Collateralized mortgage obligations 307 4.24 % 80,203 2.58 % 40,963 2.57 % — — % 121,473 2.58 % Total $ 2,970 2.40 % $ 141,070 2.48 % $ 160,117 2.92 % $ 102,899 3.63 % $ 407,056 2.93 % As of December 31, 2016 Total Amount Yield Amount Yield Amount Yield Amount Yield Total Yield (Dollars in thousands) Corporate bonds $ — — % $ 7,453 2.30 % $ 17,430 2.93 % $ — — % $ 24,883 2.75 % Municipal securities 732 3.98 % 6,103 3.45 % 38,634 3.49 % 111,170 3.62 % 156,639 3.58 % Mortgage-backed securities — — % 74,047 2.02 % 14,093 2.27 % — — % 88,140 2.06 % Collateralized mortgage obligations — — % 27,668 2.92 % 26,184 2.68 % 22,782 2.98 % 76,634 2.81 % Total $ 732 3.98 % $ 115,271 2.33 % $ 96,341 3.00 % $ 133,952 3.50 % $ 346,296 2.97 % As of December 31, 2015 Total Amount Yield Amount Yield Amount Yield Amount Yield Total Yield (Dollars in thousands) U.S. government agencies $ — — % $ — — % $ 5,158 2.92 % $ — — % $ 5,158 2.92 % Corporate bonds — — % 10,515 2.20 % 17,472 2.92 % — — % 27,987 2.66 % Municipal securities 995 2.44 % 1,152 4.18 % 33,676 3.43 % 31,527 4.08 % 67,350 3.74 % U.S. treasury securities 29,985 0.22 % — — % — — % — — % 29,985 0.22 % Mortgage-backed securities — — % 104,532 2.07 % 39,343 2.49 % — — % 143,875 2.18 % Collateralized mortgage obligations 170 5.18 % 89,527 2.33 % 12,314 2.65 % 21,609 2.88 % 123,620 2.46 % Total $ 31,150 0.32 % $ 205,726 2.20 % $ 107,963 2.90 % $ 53,136 3.59 % $ 397,975 2.43 %
Within Five Years
Within Ten Years
Within Five Years
Within Ten Yearstend totypically cause the average life of the securities to be much different thanfrom the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and, consequently, the average life of this security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 7.315.19 years with an estimated effective duration of 4.274.09 years as of December 31, 2017.2017, 20162023 and 2015,2022, respectively, we did not own securities of any one issuer, other than the U.S. government and its agencies, for which aggregate adjusted cost exceeded 10.0% of the consolidated shareholders’ equity.20172023 were $1.6$2.62 billion, an increasea decrease of $109.4$129.1 million, or 7.2%4.7%, over $1.5compared to $2.75 billion for the year ended December 31, 2016. Average deposits grew $249.6 million, or 19.7%, from $1.3 billion for the year ended December 31, 2015. The increase in both periods is primarily due to our continued growth in our primary market areas and the increase in commercial lending relationships for which we also seek deposit balances.2022. The average rate paid on total interest-bearing deposits was 0.85%, 0.77%2.65% and 0.68%0.58% for the years ended December 31, 2017, 20162023 and 2015,2022, respectively. The increasesincrease in average rates for 2016 and 2017 were2023 was driven primarily by the increaseincreases in our money market balances, in partrates due to the strategic decision to increase the average rates paid on money market accounts in order to grow core deposits in our newer markets, as well as the Federal Reserve raising market interest rates. For the Years Ended December 31, 2017 2017 2016 2015 (Dollars in thousands) Now and interest-bearing demand accounts $ 258,356 0.58 % $ 278,521 0.32 % $ 238,902 0.36 % Savings accounts 64,704 0.13 % 59,961 0.11 % 53,425 0.12 % Money market accounts 599,336 0.98 % 482,089 0.97 % 318,934 0.75 % Certificates and other time deposits 318,719 0.99 % 354,949 0.97 % 353,639 0.91 % Total interest-bearing deposits 1,241,115 0.85 % 1,175,520 0.77 % 964,900 0.68 % Noninterest-bearing demand accounts 384,049 — % 340,240 — % 301,288 — % Total deposits $ 1,625,164 0.65 % $ 1,515,760 0.60 % $ 1,266,188 0.52 %
Balance
Rate
Balance
Rate2017, 20162023 and 20152022 was 23.63%, 22.45%35.3% and 23.79%39.3%, respectively.20172023 were $1.68$2.63 billion, an increasea decrease of $99.5$47.9 million, or 6.3%1.8%, compared to $1.58$2.68 billion as of December 31, 2016. Total deposits as2022. We believe the majority of December 31, 2016 increased $110.6 million, or 7.5%, comparedthe deposit balance decrease was due to $1.47 billion as of December 31, 2015. The increasesdepositors using their excess cash for operating needs and to invest funds in both periods were due primarily to organic growth.20172023 were $410.0$853.0 million compared to $358.8 million$1.05 billion as of December 31, 2016, an increase2022, a decrease of $51.3$199.2 million, or 14.3%18.9%. The balance for non-interestingWe believe the decrease was primarily the result of depositors moving funds from non-interest bearing accounts to other interest bearing alternatives.2016 represented an increase of $33.2 million, or 10.2%,2023 were $1.78 billion, compared to $325.6 million$1.63 billion as of December 31, 2015.Total savings2022, an increase of $151.3 million, or 9.3%.interest-bearing demand account balancesother time deposits in denominations of $250,000 or more as of December 31, 2017 were $969.52023 and 2022 was $279.0 million compared to $876.4and $130.0 million, asrespectively.Total certificate of deposit balances as of December 31, 2017, were $296.8 million, a decrease of $44.8 million, or 13.1%, from the total certificate deposit balances of $341.6 million as of December 31, 2016. The total certificate of deposit balances as of December 31, 2016, represented an decrease of $12.5 million, or 3.5% compared to the total certificate of deposit balances as of December 31, 2015, which were $354.2 million. $100,000$250,000 by time remaining until maturity as of December 31, 2017: 2017 Three months or less $ 47,237 Over three months through six months 28,911 Over six months through 12 months 62,926 Over 12 months through three years 31,830 Over three years 15,558 Total $ 186,462 fundstotal deposits is calculated as total interest expense divided by average total deposits plus average total borrowings.deposits. Our cost of fundstotal deposits was 0.92%, 0.85%1.71%% and 0.75%0.35%% in 2017, 20162023 and 2015,2022, respectively. The increase in our cost of fundstotal deposits for 2017 and 20162023 was primarily due to increases in our average rates on interest-bearing deposits, which were 0.85%, 0.77%2.65% and 0.68%0.58% in 2017, 20162023 and 2015, respectively. These increases were primarily due2022, respectively, in addition to both an increase in the proportion of our deposits consisting of higher cost money market accounts offered in our newer markets from 26.0% of our total deposits in 2015 to 34.5% and 38.2% in 2016 and 2017, respectively, and an increasea decrease in the average rates offered on thosebalance of noninterest-bearing deposits of $157.6 million, or 14.6%,from 0.75%$1.08 billion in 20152022 to 0.97% and 0.98%$924.9 million in 2016 and 2017, respectively, which is part of our expansion strategy.2017, 20162023 and 2015,2022, total borrowing capacity of $498.0 million, $400.4$939.8 million and $330.1$755.0 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within five years.one year. As of December 31, 2017,2023, approximately $1.0$1.96 billion in real estate loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to fund certain fixedhedge interest rate loans in our portfolio.risk. The following table presents our FHLB borrowings as of the dates indicated: FHLB Advances (Dollars in Thousands) December 31, 2017 Amount outstanding at year-end $ 45,153 Weighted average interest rate at year-end 1.26 % Maximum month-end balance during the year $ 65,168 Average balance outstanding during the year $ 46,256 Weighted average interest rate during the year 1.00 % December 31, 2016 Amount outstanding at year-end $ 55,170 Weighted average interest rate at year-end 0.47 % Maximum month-end balance during the year $ 106,325 Average balance outstanding during the year $ 62,789 Weighted average interest rate during the year 0.55 % December 31, 2015 Amount outstanding at year-end $ 21,342 Weighted average interest rate at year-end 1.23 % Maximum month-end balance during the year $ 111,523 Average balance outstanding during the year $ 104,118 Weighted average interest rate during the year 0.67 %
Interest Rate2017, 20162023 and 2015, $143.0 million, $168.32022, $222.2 million and $145.9$227.6 million, respectively, were2017,2023 and 2022, approximately $185.1$290.7 million and $289.5 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of December 31, 2017, 20162023 and 2015,2022, no borrowings were outstanding under this arrangement. The Company hasWe have historically used a line of credit with a correspondent bank as a source of funding for working capital needs, the payment of dividends when there is a temporary timing difference in cash flows, and repurchases of equity securities. We had a $25.0 millionIn March 2017, we entered into an unsecured revolving line of credit with this correspondent bank set to mature in July 2016. In May 2016,for $25.0 million, and we renegotiated the loan agreement suchrenewed that $15.0 million was renewed as a revolving line of credit and $10.0 million of the outstanding balance of the revolving line of credit was rolled into an amortizing note. Inin March 2017, we renegotiated the loan agreement such that the outstanding balance of our revolving line of credit and amortizing note was converted to a $25.0 million unsecured revolving line of credit.2023. The line of credit bears interest at the prime rate plus 0.50%(8.50% as of December 31, 2023) subject to a floor of 3.50%, with quarterly interest payments, and matures in March 2018. Under the terms of the line of credit, we have agreed not to pledge or grant a lien or security interest in the stock of the Bank or in any of our other assets without the prior consent of the lender.2024. As of December 31, 2017,2023, there was $4.5 million outstanding balance on the line of credit. As of December 31, 2022, there was no outstanding balance on thethis line of credit.events.events, such as COVID-19. For the years ended December 31, 2017, 20162023 and 2015,2022, liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios.2017, 20162023 and 2015,2022, we maintained threetwo federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate $10.9$55.0 million in federal funds. There were no funds under these lines of credit outstanding as of December 31, 2017, 2016 or 2015.2023 and 2022. In addition to these federal funds lines of credit, our $25.0 million unsecured revolving line of credit discussed above in “Other Borrowings”provides an additional source of liquidity.$1.9$3.25 billion for the year ended December 31, 2017, $1.82023 and $3.26 billion for the year ended December 31, 2016 and $1.6 billion for the year ended December 31, 2015. For the Years Ended December 31, 2017 2016 2015 Sources of Funds: Deposits: Noninterest-bearing 20.22 % 19.15 % 19.42 % Interest-bearing 65.34 % 66.16 % 62.20 % Federal funds purchased — % 0.01 % — % Advances from FHLB 2.44 % 3.53 % 6.71 % Other debt 0.35 % 0.74 % 0.68 % Subordinated debentures 0.84 % 1.14 % 0.91 % Securities sold under agreements to repurchase 0.70 % 0.73 % 0.72 % Consideration payable — % — % 0.24 % Accrued interest and other liabilities 0.35 % 0.36 % 0.35 % Shareholders’ equity 9.76 % 8.18 % 8.77 % Total 100.00 % 100.00 % 100.00 % Uses of Funds: Loans 66.92 % 65.80 % 63.38 % Securities available for sale 11.75 % 11.17 % 15.05 % Securities held to maturity 9.61 % 10.29 % 8.16 % Nonmarketable equity securities 0.38 % 0.48 % 0.48 % Federal funds sold 2.51 % 2.96 % 3.87 % Interest-bearing deposits in other banks 1.21 % 1.44 % 0.83 % Other noninterest-earning assets 7.62 % 7.86 % 8.23 % Total 100.00 % 100.00 % 100.00 % Average noninterest-bearing deposits to average deposits 23.63 % 22.45 % 23.79 % Average loans to average deposits 78.96 % 77.84 % 78.34 %
December 31, 2023
December 31, 20228.8%$225.3 million, or 10.6%, for the year ended December 31, 20172023 compared to 2022, while our average deposits decreased $129.1 million, or 4.7%, for the same period in 2016, and 19.0% for the year ended December 31, 2016 compared to the same period in 2015. Our securities portfolio had a weighted average life of 7.31 years and an effective duration of 4.27 years as of December 31, 2017, and a weighted average life of 8.06 years and an effective duration of 5.31 years as of December 31, 2016.time periods. We predominantly invest excess deposits in overnight deposits with our correspondent banks, federal funds sold, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth.2017,2023, we had $326.9$336.0 million in outstanding commitments to extend credit and $8.3$7.5 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2016,2022, we had $297.6$474.7 million in outstanding commitments to extend credit and $8.9$8.3 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.20172023 and 2016,2022, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of December 31, 2017,2023, we had cash and cash equivalents of $91.4$89.5 million, compared to $127.5$106.5 million as of December 31, 2016.2022. The decrease was primarily due to an decrease in federal funds soldthe deployment of $34.4 million.including KSOP-owned shares, increased to $207.3$303.8 million as of December 31, 2017,2023, compared to $141.9 millionas of December 31, 2016, an increase of $65.4 million, or 46.1%, after giving effect to $5.6 million in dividends paid to common shareholders in 2017. This increase was primarily the result of the proceeds from the initial public offering of our common stock in May 2017, as well as $14.4 million in net earnings for the period, partially offset by the dividends paid. Total shareholders’ equity, including KSOP-owned shares, increased to $141.9$295.6 million as of December 31, 2016, compared to $137.7 million as of December 31, 2015,2022, an increase of $4.2$8.3 million, or 3.0%, after giving effect2.8%. The increase from December 31, 2022 was due to $4.6net earnings attributable to Guaranty Bancshares, Inc. of $30.0 million, partially offset by $11.2 million in stock repurchases and $10.7 million in dividends paid to common shareholders in 2016. This increase was primarilyduring the result of $12.1 million in net earnings for the period as well as the sale of 359,566 shares of treasury stock for $8.6 million, partially offset by the dividends paid and the purchase of 509,086 shares of treasury stock for $12.2 million.20172023 and 2016, the Company and the Bank2022, we were in compliance with all applicable regulatory capital requirements at the bank and bank holding company levels, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we deploy our capital, and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings.earnings and provisions for credit losses. However, we expect to closely monitor our loan portfolio, operating expenses and control our growthoverall capital levels in order to remain in compliance with all regulatory capital standards applicable to us.indicated. As of December 31, 2017 As of December 31, 2016 Amount Ratio Amount Ratio Guaranty Bancshares, Inc. (Dollars in thousands) Total capital (to risk weighted assets) $ 215,720 14.13 % $ 149,468 10.86 % Tier 1 capital (to risk weighted assets) 202,861 13.29 % 137,984 10.03 % Tier 1 capital (to average assets) 202,861 10.53 % 137,984 7.71 % Common equity tier 1 risk-based capital 192,551 12.61 % 127,674 9.28 % Guaranty Bank & Trust, N.A. Total capital (to risk weighted assets) $ 206,490 13.53 % $ 173,528 12.63 % Tier 1 capital (to risk weighted assets) 193,631 12.68 % 162,044 11.79 % Tier 1 capital (to average assets) 193,631 10.05 % 162,044 9.06 % Common equity tier 1 risk-based capital 193,631 12.68 % 162,044 11.79 % which will mature on October 30, 2032. were redeemed in May 2022. Financial Trust I, which issued $5.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $155,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $5.2 million of the Company’s junior subordinated debentures, which will mature on June 15, 2037.indebtedness of the Company.indebtedness. The terms of the debentures are such that they qualify as Tier 1 capital under the Federal Reserve’s regulatory capital guidelines applicable to bank holding companies. Interest on the Trust IIIII Debentures is payable at a variable rate per annum, reset quarterly, equal to the then-current three month term Secured Overnight Financing Rate ("SOFR") plus 1.93%. Interest on the DCB Trust I Debentures is payable at a variable rate per annum, reset quarterly, equal to 3-month LIBORSOFR plus 3.35%, thereafter. Interest on the Trust III debentures was payable at a fixed rate per annum equal to 7.43% until October 1, 2016 and is a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.67%, thereafter. Interest on the DCB Financial Trust I debenture is payable at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.80%2.06%. The interest is deferrable on a cumulative basis for up to five consecutive years following a suspension of dividend payments on all other capital stock. No principal payments are due until maturity for each of the debentures.On any interest payment date on or after June 15, 2012, forFinancial debentures, October 30, 2012, for the Trust II debentures,I Debentures and October 1, 2016, for the Trust III debentures, and before their maturity date, the debenturesDebentures are redeemable, in whole or in part, for cash at theour option of the Company onafter at least 30, but not more than 60, days’days' notice, on any interest payment date, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.Beginning in April 2013,has from time to time issuedcompleted a private placement of $35.0 million aggregate principal amount of its fixed-to-floating rate subordinated debentures. Allnote due April 1, 2032. The subordinated note initially bears a fixed interest rate of 3.625% per year, due semi-annually in arrears on April 1 and October 1. Commencing on April 1, 2027, the debentures pay interest semi-annually and are redeemable before their maturity daterate on the subordinated note will reset each quarter at the Company’s option, with 30 days’ notice to the holder, for a cash amountfloating interest rate equal to the principalthen-current three month term SOFR plus 192 basis points. The Company may at its option redeem in whole or in part the subordinated note on or after March 4, 2027 without a premium. The subordinated note is treated as Tier 2 capital for regulatory purposes (subject to reductions in the amount includable as Tier 2 Capital in the final five years prior to maturity), and all accrued interest. In July 2015,is presented net of $432,000 in related unamortized issuance costs on the consolidated balance sheets.$4,000$10.0 million in debentures of which $3,000 were issued to directors and other related parties. The $3,000debentures have stated maturity dates between November 1, 2020 and November 1, 2024, and bear interest at fixed annual rates between 1.00% and 4.00%. The Company pays interest semi-annually on May 1st and November 1st in arrears during the term of the debentures. Various portions of these debentures to related parties were repaidhave matured since issuance and $4.0 million remains outstanding as of December 31, 2023. The debentures are redeemable by the Company at its option, in May 2017 and a $500 par value debenture, which carried a 2.5%, matured and was repaidwhole in July 2017. The remaining $500 debenture has a rate of 4.00% and a maturity date of January 1, 2019. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holderor part, at any time on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued but unpaid interest. In December 2015, the Company issued $5,000 in debentures, of which $2,500 were issued to directors and other related parties. In May 2017, $2,000 of the related party debentures were repaid with a portion of the proceeds of Guaranty's initial public offering. The remaining $3,000 of debentures were issued at par value of $500 each with rates ranging from 3.00% to 5.00% and maturity dates from July 1, 2018 to July 1, 2020. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holder on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued interest.20172023 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.
or less
year but less
than 3 years
more but less
than 5 years
or more As of December 31, 2017 1 year or less Total (Dollars in thousands) Time deposits $ 224,772 $ 49,479 $ 22,589 $ — $ 296,840 Advances from FHLB 25,000 — 20,153 — 45,153 Subordinated debentures 1,000 2,500 — 10,310 13,810 Total $ 250,772 $ 51,979 $ 42,742 $ 10,310 $ 355,803 the date indicatedDecember 31, 2023 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. As of December 31, 2017 1 year or less Total (Dollars in thousands) Standby and commercial letters of credit 6,299 218 91 1,728 8,336 Commitments to extend credit 163,997 41,976 63,417 57,489 326,879 Total 170,296 42,194 63,508 59,217 335,215
or less
1 year but
less than
3 years
more but
less than
5 years
or more"Item 8. Financial Statements and Supplementary Data"this Report have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.Annual Report on Form 10-K as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.Annual Report on Form 10-K should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss hereinin this Report may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures. As of December 31, 2017 2016 2015 2014 2013 (Dollars in thousands, except per share data) Tangible Common Equity Total shareholders’ equity, including KSOP-owned shares $ 207,345 $ 141,914 $ 137,736 $ 112,289 $ 97,095 Adjustments: Goodwill (18,742 ) (18,742 ) (18,601 ) (6,116 ) (6,436 ) Core deposit and other intangibles (2,724 ) (3,308 ) (3,846 ) (2,881 ) (3,310 ) Total tangible common equity $ 185,879 $ 119,864 $ 115,289 $ 103,292 $ 87,349 11,058,956 8,751,923 8,901,443 8,015,614 7,374,610 Book value per common share $ 18.75 $ 16.22 $ 15.47 $ 14.01 $ 13.17 Tangible book value per common share $ 16.81 $ 13.70 $ 12.95 $ 12.89 $ 11.84 (1)Excludes the dilutive effect, if any, of 2,233, 0, 5,958, 8,066 and 82,529 shares of common stock issuable upon exercise of outstanding stock options as of December 31, 2013, 2014, 2015, 2016 and 2017, respectively.(2)Common shares outstanding as of December 31, 2013 were adjusted to reflect a 2-for-1 stock split completed in 2014.Tangible book value per share increased from 2016 to 2017 primarily as a result of the increase in our total shareholders’ equity as a result of earnings and the issuance of new shares in our initial public offering in May 2017. Tangible book value per share increased from 2015 to 2016 primarily as a result of the increase in our total shareholders’ equity, partially offset by the recognition of $141,000 of goodwill and $42,000 of core deposit intangibles related to the Denton acquisition.shareholders’ equity to tangible common equity and total assets to tangible assets: As of December 31, 2017 2016 2015 2014 2013 (Dollars in thousands, except per share data) Tangible Common Equity Total shareholders’ equity, including KSOP-owned shares $ 207,345 $ 141,914 $ 137,736 $ 112,289 $ 97,095 Adjustments: Goodwill (18,742 ) (18,742 ) (18,601 ) (6,116 ) (6,436 ) Core deposit and other intangibles (2,724 ) (3,308 ) (3,846 ) (2,881 ) (3,310 ) Total tangible common equity $ 185,879 $ 119,864 $ 115,289 $ 103,292 $ 87,349 Tangible Assets Total assets $ 1,962,624 $ 1,828,336 $ 1,682,640 $ 1,334,068 $ 1,246,451 Adjustments: Goodwill (18,742 ) (18,742 ) (18,601 ) (6,116 ) (6,436 ) Core deposit and other intangibles (2,724 ) (3,308 ) (3,846 ) (2,881 ) (3,310 ) Total tangible assets $ 1,941,158 $ 1,806,286 $ 1,660,193 $ 1,325,071 $ 1,236,705 Tangible Common Equity to Tangible Assets 9.58 % 6.64 % 6.94 % 7.80 % 7.06 % RISK As of December 31, 2017 As of December 31, 2016 300 1.70 % (14.25 )% 1.44 % (18.99 )% 200 1.67 % (6.77 )% 1.42 % (9.58 )% 100 1.46 % (2.10 )% 1.19 % (3.45 )% Base 0.00 % 0.00 % 0.00 % 0.00 % (100) 0.05 % (4.22 )% (0.29 )% (1.80 )%
(Basis Points)
in Net Interest
Income
in Fair Value
of Equity
in Net Interest
Income
in Fair Value
of EquityDATAQuarterly Financial InformationThe following tables present certain unaudited consolidated quarterly financial information regarding the Company's results of operations for each of the eight consecutive quarters in the fiscal years of 2017 and 2016. This information is derived from unaudited consolidated financial statements that include, in our opinion, all adjustments necessary for a fair presentation when read in conjunction with the Company's consolidated financial statements and notes thereto as of and for the years ended December 31, 2017 and 2016 appearing elsewhere in this Annual Report on Form 10-K.(Dollars in Thousands, except Per Share Amounts) 2017 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Interest income $ 18,689 $ 18,165 $ 17,792 $ 17,136 Interest expense 3,201 3,063 2,993 2,895 Net interest income 15,488 15,102 14,799 14,241 Provision for loan losses 600 800 800 650 Net interest income after provision for loan losses 14,888 14,302 13,999 13,591 Noninterest income 3,779 3,702 3,516 3,282 Noninterest expense 12,265 12,166 11,906 12,045 Income tax provision 3,594 1,699 1,633 1,312 Net earnings $ 2,808 $ 4,139 $ 3,976 $ 3,516 Earnings per common share, basic $ 0.25 $ 0.37 $ 0.40 $ 0.40 Earnings per common share, diluted $ 0.25 $ 0.37 $ 0.39 $ 0.40 (Dollars in Thousands, except Per Share Amounts) 2016 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Interest income $ 16,717 $ 16,427 $ 16,095 $ 15,469 Interest expense 2,692 2,759 2,751 2,666 Net interest income 14,025 13,668 13,344 12,803 Provision for loan losses 400 840 1,950 450 Net interest income after provision for loan losses 13,625 12,828 11,394 12,353 Noninterest income 3,414 3,402 3,309 2,891 Noninterest expense 12,040 11,480 11,383 11,477 Income tax provision 1,425 1,380 820 1,090 Net earnings $ 3,574 $ 3,370 $ 2,500 $ 2,677 Earnings per common share, basic $ 0.40 $ 0.38 $ 0.27 $ 0.30 Earnings per common share, diluted $ 0.40 $ 0.38 $ 0.27 $ 0.30 DISCLOSUREPROCEDURESquarteryear ended December 31, 2017,2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.2017,2023, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in 2013. This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y‑9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2017. an, Plano, Texas, (U.S. PCAOB Auditor Firm I.D.: 726), the independent registered public accounting firm that audited the consolidated financial statements of the Company for the years ended December 31, 2017, 2016 and 2015 included in this Annual Report on Form 10‑K. Their10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, is included in “Item 15. Exhibits and Financial Statement Schedules”this Item under the heading “Report of Independent Registered Public Accounting Firm.” This Annual ReportForm 10‑K does not include an attestation report of the Company’s registered public accounting firm on the Company’sInternal Control Over Financial Reportingdue to a transition periodas of December 31, 2023, based on criteria established in 2013 Internal Control—Integrated Framework issued by rulesthe Committee of Sponsoring Organizations of the SECTreadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Emerging Growth Company.unqualified opinion on those consolidated financial statements.INFORMATIONNone.19, 2018,15, 2024, a copy of which will be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2017. 19, 2018,15, 2024, a copy of which will be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2017. 19, 2018,15, 2024, a copy of which will be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2017. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.The information called for by this item is incorporated herein by reference from our Definitive Proxy Statement for our Annual Meeting of Shareholders being held on May 19, 2018, a copy of which will be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2017. 19, 2018,15, 2024, a copy of which will be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2017. SCHEDULES1.Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the report thereon and the notes thereto commencing at page F-1 of this Annual Report on Form 10-K. Set forth below is a list of such Consolidated Financial Statements.FirmFirm;20172023 and 20162022;2017, 20162023, 2022 and 20152021;2017, 20162023, 2022 and 20152021;2017, 20162023, 2022 and 20152021;2017, 20162023, 2022 and 20152021;StatementsStatements.2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or notes thereto.Exhibit No.Description2.12.22.33.110.1Exhibit No.Description10.310.1410.1521.1101.INS10-K the 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.15, 201814, 2024NameTitleDate15/201814/2024CliftonShalene A. PayneJacobsonSenior 15/201814/2024CliftonPayneJacobson15/201814/2024/s/ Randall R. KuceraVice President and General Counsel3/15/2018Randall R. Kucera15/201814/202415/201814/2024Johnny O. ConroySondra Cunningham15/201814/2024Johnny O. Conroy/s/ Molly S. CurlDirector3/15/2018Molly S. Curl15/201814/202415/201814/202415/201814/2024Weldon C. MillerJames M. Nolan, Jr.15/201814/2024Weldon C. Miller/s/ William D. PriefertDirector3/15/2018William D. Priefert/s/ Arthur B. Scharlach, Jr.Director3/15/2018Arthur B. Scharlach, Jr.Table of Contents
20172023 and 20162022 and for each of the three years ending December 31, 2017, 20162023, 2022 and 2015.F-120172023, 2022 and 20162021F-3EarningsComprehensive Income for the Years Ended December 31, 2017, 20162023, 2022 and 2015.F-4Comprehensive IncomeChanges in Shareholders’ Equity for the Years Ended December 31, 2017, 20162023, 2022 and 2015.F-5Changes in Shareholders’ EquityCash Flows for the Years Ended December 31, 2017, 20162023, 2022 and 2015.F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015.F-7F-9
Opinion on the Financial Statements, as of December 31, 20172023 and 2016,2022, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the three-year period ended December 31, 20172023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of their operations and their cash flows for each of the three years in the three-year period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America.Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
•WHITLEY PENNWhitley Penn LLPCompany'sCompany’s auditor since 2015.Dallas,15, 201814, 2024Table of Contents
20172023 and 2016 2017 2016 ASSETS Cash and due from banks $ 40,482 $ 39,605 Federal funds sold 26,175 60,600 Interest-bearing deposits 24,771 27,338 Total cash and cash equivalents 91,428 127,543 Securities available for sale 232,372 156,925 Securities held to maturity 174,684 189,371 Loans held for sale 1,896 2,563 Loans, net 1,347,779 1,233,651 Accrued interest receivable 8,174 7,419 Premises and equipment, net 43,818 44,810 Other real estate owned 2,244 1,692 Cash surrender value of life insurance 19,117 17,804 Deferred tax asset 2,543 4,892 Core deposit intangible, net 2,724 3,308 Goodwill 18,742 18,742 Other assets 17,103 19,616 Total assets $ 1,962,624 $ 1,828,336 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest-bearing $ 410,009 $ 358,752 Interest-bearing 1,266,311 1,218,039 Total deposits 1,676,320 1,576,791 Securities sold under agreements to repurchase 12,879 10,859 Accrued interest and other liabilities 7,117 6,006 Other debt — 18,286 Federal Home Loan Bank advances 45,153 55,170 Subordinated debentures 13,810 19,310 Total liabilities 1,755,279 1,686,422 Commitments and contingent liabilities KSOP-owned shares — 31,661 Shareholders’ equity Preferred stock, $5.00 par value, 15,000,000 shares authorized, no shares issued — — Common stock, $1.00 par value, 50,000,000 shares authorized, 11,921,298 and 9,616,275 shares issued, and 11,058,956 and 8,751,923 shares outstanding, respectively 11,921 9,616 Additional paid-in capital 155,601 101,736 Retained earnings 66,037 57,160 Treasury stock, 862,342 and 864,352 shares at cost (20,087 ) (20,111 ) Accumulated other comprehensive loss (6,127 ) (6,487 ) 207,345 141,914 Less KSOP-owned shares — 31,661 Total shareholders’ equity 207,345 110,253 Total liabilities and shareholders' equity $ 1,962,624 $ 1,828,336 statementsstatements.endedEnded December 31, 2017, 20162023, 2022 and 2015 2017 2016 2015 Interest income Loans, including fees $ 61,014 $ 55,565 $ 47,845 Securities Taxable 5,811 5,170 6,317 Nontaxable 3,679 3,231 1,529 Federal funds sold and interest-bearing deposits 1,278 742 391 Total interest income 71,782 64,708 56,082 Interest expense Deposits 10,604 9,050 6,524 FHLB advances and federal funds purchased 472 350 699 Subordinated debentures 724 882 603 Other borrowed money 352 586 497 Total interest expense 12,152 10,868 8,323 Net interest income 59,630 53,840 47,759 Provision for loan losses 2,850 3,640 2,175 Net interest income after provision for loan losses 56,780 50,200 45,584 Noninterest income Service charges 3,746 3,530 3,493 Net realized gain on securities transactions 167 82 77 Net realized gain on sales of loans 1,981 1,718 1,053 Other operating income 8,385 7,686 6,860 Total noninterest income 14,279 13,016 11,483 Noninterest expense Employee compensation and benefits 27,078 25,611 22,469 Occupancy expenses 7,400 6,870 6,468 Other operating expenses 13,904 13,899 13,657 Total noninterest expense 48,382 46,380 42,594 Income before income taxes 22,677 16,836 14,473 Income tax provision 8,238 4,715 4,362 Net earnings $ 14,439 $ 12,121 $ 10,111 Basic earnings per share $ 1.41 $ 1.35 $ 1.15 Diluted earnings per share $ 1.40 $ 1.35 $ 1.15 endedEnded December 31, 2017, 20162023, 2022 and 2015 2017 2016 2015 Net earnings $ 14,439 $ 12,121 $ 10,111 Other comprehensive income (loss): Unrealized gains (losses) on securities Unrealized holding losses arising during the period (54 ) (83 ) (1,152 ) Amortization of net unrealized gains on held to maturity securities 377 113 92 Reclassification adjustment for net gains included in net earnings (167 ) (82 ) (77 ) Tax effect 80 58 430 Unrealized gains (losses) on securities, net of tax 236 6 (707 ) Unrealized holding gains (losses) arising during the period on interest rate swaps 124 80 (42 ) Total other comprehensive income (loss) 360 86 (749 ) Comprehensive income $ 14,799 $ 12,207 $ 9,362 endedEnded December 31, 2017, 20162023, 2022 and 2015thousands) Balance at January 1, 2015 $ — $ 8,097 $ 67,865 $ 44,069 $ (1,918 ) $ (5,824 ) $ (36,300 ) $ 75,989 Net earnings — — — 10,111 — — — 10,111 Other comprehensive loss — — — — — (749 ) — (749 ) Purchase of treasury stock — — — — (14,568 ) — — (14,568 ) Issuance of common stock — 1,519 33,423 — — — (597 ) 34,345 Stock based compensation — — 237 — — — — 237 Net change in fair value of KSOP shares — — — — — — 1,513 1,513 Dividends: Common - $0.50 per share — — — (4,526 ) — — — (4,526 ) Balance at December 31, 2015 — 9,616 101,525 49,654 (16,486 ) (6,573 ) (35,384 ) 102,352 Net earnings — — — 12,121 — — — 12,121 Other comprehensive income — — — — — 86 — 86 Exercise of stock options — — — — 36 — — 36 Purchase of treasury stock — — — — (12,218 ) — (3,000 ) (15,218 ) Sale of treasury stock — — — — 8,557 — 8,261 16,818 Stock based compensation — — 211 — — — — 211 Net change in fair value of KSOP shares — — — — — — (1,538 ) (1,538 ) Dividends: Common - $0.52 per share — — — (4,615 ) — — — (4,615 ) Balance at December 31, 2016 — 9,616 101,736 57,160 (20,111 ) (6,487 ) (31,661 ) 110,253 Net earnings — — — 14,439 — — — 14,439 Other comprehensive income — — — — — 360 — 360 Terminated KSOP put option — — — — — — 34,300 34,300 Exercise of stock options — 5 55 — 24 — — 84 Sale of common stock — 2,300 53,455 — — — — 55,755 Stock based compensation — — 355 — — — — 355 Net change in fair value of KSOP shares — — — — — — (2,639 ) (2,639 ) Dividends: Common - $0.53 per share — — — (5,562 ) — — — (5,562 ) Balance at December 31, 2017 $ — $ 11,921 $ 155,601 $ 66,037 $ (20,087 ) $ (6,127 ) $ — $ 207,345 See accompanying notes to consolidated financial statementsGUARANTY BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years ended December 31, 2017, 2016 and 2015(Dollars in thousands) 2017 2016 2015 Cash flows from operating activities Net earnings $ 14,439 $ 12,121 $ 10,111 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation 3,162 3,183 2,958 Amortization 1,033 980 951 Deferred taxes 2,428 (1,330 ) 9 Premium amortization, net of discount accretion 4,576 4,974 4,196 Net realized gain on securities transactions (167 ) (82 ) (77 ) Gain on loans held for sale (1,981 ) (1,718 ) (1,053 ) Provision for loan losses 2,850 3,640 2,175 Origination of loans held for sale (64,817 ) (62,620 ) (59,217 ) Proceeds from loans held for sale 67,465 65,642 60,318 Write-down of other real estate and repossessed assets 12 122 172 Net (gain) loss on sale of premises, equipment, other real estate owned and other assets (906 ) 108 132 Stock based compensation 355 211 237 Net change in accrued interest receivable and other assets (15 ) (3,786 ) (3,781 ) Net change in accrued interest payable and other liabilities 1,235 964 (8,917 ) Net cash provided by operating activities 29,669 22,409 8,214 Cash flows from investing activities Securities available for sale: Purchases (517,155 ) (250,485 ) (414,191 ) Proceeds from sales 213,813 103,942 140,668 Proceeds from maturities and principal repayments 225,516 259,719 246,113 Securities held to maturity: Purchases — (86,642 ) (9,088 ) Proceeds from sales 3,298 1,866 — Proceeds from maturities and principal repayments 9,516 18,336 13,835 Acquisition of Denton branch, net of cash paid — 2,399 — Acquisition of DCB Financial Corporation, net of cash paid — — (2,308 ) Acquisition of Texas Leadership Bank, net of cash paid — — 354 Net purchases of premises and equipment (2,320 ) (1,599 ) (4,013 ) Net proceeds from sale of premises, equipment, other real estate owned and other assets 2,279 2,609 1,290 Net increase in loans (118,754 ) (184,126 ) (120,155 ) Net cash used in investing activities (183,807 ) (133,981 ) (147,495 ) GUARANTY BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years ended December 31, 2017, 2016 and 2015(Dollars in thousands) 2017 2016 2015 Cash flows from financing activities Net change in deposits 99,529 105,966 229,458 Net change in securities sold under agreements to repurchase 2,020 (2,104 ) 3,565 Proceeds from FHLB advances 60,000 120,178 — Repayment of FHLB advances (70,017 ) (86,350 ) (90,197 ) Proceeds from other debt 2,000 19,000 18,000 Repayment of other debt (20,286 ) (18,714 ) (11,000 ) Issuance of debentures — — 9,000 Repayments of debentures (5,500 ) (2,000 ) (2,000 ) Purchase of treasury stock — (12,218 ) (14,568 ) Sale of treasury stock — 8,557 — Exercise of stock options 84 36 — Sale of common stock 55,755 — 7,266 Cash dividends (5,562 ) (4,615 ) (4,526 ) Net cash provided by financing activities 118,023 127,736 144,998 Net change in cash and cash equivalents (36,115 ) 16,164 5,717 Cash and cash equivalents at beginning of year 127,543 111,379 105,662 Cash and cash equivalents at end of year $ 91,428 $ 127,543 $ 111,379 Supplemental disclosures of cash flow information Interest paid $ 12,119 $ 10,966 $ 7,929 Income taxes paid 6,660 5,810 3,350 Supplemental schedule of noncash investing and financing activities Transfer loans to other real estate owned and repossessed assets $ 1,775 $ 6,241 $ 808 Common stock issued in acquisitions — — 27,676 Transfer of KSOP shares — (8,261 ) — Terminated KSOP put option (34,300 ) — — Net change in fair value of KSOP shares 2,639 1,538 (1,513 )
Stock
Stock
Paid-in
Capital
Earnings
Stock
Other
Comprehensive
Income (Loss)
EquityF-8Table of Contents
NOTES TO CONSOLIDATED FINANCIALS STATEMENTSand its wholly-owned subsidiary("Guaranty"), Guaranty Bank & Trust N.A., (the “Bank”"Bank") and indirect subsidiaries that are wholly-owned or "Guaranty Bank & Trust"). All entities combinedcontrolled. Subsidiaries that are collectively referred toless than wholly owned are fully consolidated if they are controlled by Guaranty or one of its subsidiaries, and the portion of any subsidiary not owned by Guaranty is reported as the “Company”.noncontrolling interest. All significant intercompany balances and transactions have been eliminated in consolidation.Non-Bank Investments: Guaranty The Bank & Trust has fiveeight wholly-owned or controlled non-bank subsidiaries, Guaranty Company, GB Com, Inc., G B COM, INC., 2800 South Texas Avenue LLC, Pin Oak Realty Holdings, Inc. and, Pin Oak Energy, LLC.Asset Management, LLC, Guaranty Bank & Trust Political Action Committee, White Oak Aviation, LLC and Caliber Guaranty Private Account, LLC, the entity which has a noncontrolling interest. The accounting and financial reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the financial services industry.significant intercompany balancesdollar amounts referenced and transactions have been eliminateddiscussed in consolidation.the notes to the consolidated financial statements in this report are presented in thousands, unless noted otherwise. operates several banking locations in Texas.” “we,” “us” and “our” mean Guaranty and its subsidiaries, when appropriate. The Company’s main sources of income are derived from granting loans primarily in East Texas, Central Texas and the Dallas/Fort Worth metroplexthroughout its markets and investing in securities issued or guaranteed by the U.S. Treasury, U.S. government agencies and state and political subdivisions. A variety of financial products and services are provided to individual and corporate customers. The primary deposit products are checking accounts, money market accounts and certificates of deposit. TheCompany’s primary lending products are real estate, commercial and consumer loans. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ abilities to honor contracts is dependent on the economy of East Texas, Centralthe State of Texas and primarily the economies of East Texas, Dallas/Fort Worth, metroplex.Greater Houston and Central Texas. The Company primarily funds its lending activities with deposit operations. The Company’s primary deposit products are checking accounts, money market accounts and certificates of deposit.accounting principles generally accepted in the United States of America,GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual future results could differ.income.loss. Management determines the appropriate classification of securities at the time of purchase.purchase or transfer. Interest income includes amortization and accretion of purchase premiums and discounts. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.other-than-temporary impairment (“OTTI”)credit-related factors, in order to determine if an allowance for credit losses is required. This evaluation is performed on at least a quarterly basis, and more frequently whenTable of Contents
aan available for sale security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, any previous allowance for credit loss is written off and the entire difference between amortized cost andbasis of the securities is written down to fair value, is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, management will determine if the amount of impairment is split into two components as follows: 1) OTTI related todecline in fair value has resulted from a credit loss which must be recognizedor other factors and apply the following: 1) recognize an allowance for credit loss by a charge to earnings for the credit-related component of the decline in fair value (subject to a floor of the income statementexcess of the amortized cost over fair value) and 2) OTTI related to other factors, which is recognizedrecognize the noncredit-related component of the fair value decline, if any, in other comprehensive income.loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. To the extent that expected cash flows improve, the standard permits reversal of allowance amounts in the current period earnings.F-9GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Non-marketable the Independent Bankers Financial Corporation, the Federal Reserve Bank and the Federal Home Loan Bank are accounted for on the cost basis and are carried in other assets. Stock in Valesco Commerce Street Capital, L.P., Independent Bankers CapitalValesco Fund II, L.P. and, Valesco Fund III, L.P., Independent Bankers Capital Fund III, L.P., Independent Bankers Capital Fund IV, L.P., Lightspring Capital I, L.P., Pharos Capital Partners IV-A, L.P., Bluehenge Capital SBIC II, L.P., JAM FINTOP Blockchain, L.P., JAM FINTOP Frontier Fund, L.P., Castle Creek Launchpad Fund I, and Austin Housing Conservancy Fund are accounted for on the cost basis in other assets. market value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. To mitigate the interest rate risk, fixed commitments may be obtained at the time loans are originated or identified for sale. All sales are made without recourse. Gains or losses on sales of mortgage loans are recognized at settlement dates based on the difference between the selling price and the carrying value of the related mortgage loans sold.loancredit losses, discounts and any deferred fees or costs on originated loans. Interest income was reported on the level-yield interest method and included amortization of net deferred loan fees and costs over the loan term.Impaired Loans: Loans are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan’s observable market price.Certain Acquired LoansDuring 2015,Government leaders and the Federal Reserve took several actions designed to mitigate the economic fallout resulting from the coronavirus ("COVID-19"). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law on March 27, 2020, authorized more than $2 trillion to battle COVID-19 and its economic effects, including immediate cash relief for individual citizens, loan programs for small businesses, support for hospitals and other medical providers, and various types of economic relief for impacted businesses and industries. The goal of CARES Act was to prevent severe economic downturn. The CARES Act also provided for temporary interest only or payment deferral modifications for loans without classifying them as troubled debt restructurings under current accounting rules. Additional government-backed hardship relief measures were signed into law in early 2021, as well as extension of many of the CARES Act provisions, throughout 2021 and 2022.Table of Contents
acquired a groupfirst assesses whether or not it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of loansits amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the securities amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the acquisition of DCB Financial Corporation (“DCB”), the holding company for Preston State Bank, and Texas Leadership Bank (“TLB”) as described in Note 2. During 2016,aforementioned criteria, the Company acquired overdrafts and recorded as loans throughevaluates whether the acquisition of a branch locationdecline in Denton, Texas, as described in Note 2. Acquired loans are recorded at their estimated fair value athas resulted from credit losses or other factors. In making this assessment, management considers the acquisition date,extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and are initially classified as either purchasedadverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit impaired (“PCI”) loans (i.e. loans that reflect credit deterioration since origination and it is probable at acquisition thatloss exists, the Company will be unable to collect all contractually required payments) or purchased non-impaired loans (“acquired performing loans”).Acquired performing loans are accounted for under Financial Accounting Standards Board’s Accounting Standards Codification (ASC) 310-20, “Nonrefundable Fees and Other Costs”. Performance of certain loans may be monitored and based on management’s assessmentpresent value of the cash flows and other facts available, portionsexpected to be collected from the security are compared to the amortized cost basis of the accretable difference maysecurity. If the present value of cash flows expected to be delayedcollected are less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive loss.suspended ifreversal of credit loss expense. Losses are charged against the allowance when management deems appropriate. The Company’s policy for determiningbelieves a security is uncollectible or when either of the criteria regarding intent to discontinue accruingsell or required to sell is met. Accrued interest receivable on acquired performing loans andsecurities is excluded from the subsequent accounting for such loans is essentially the same as the policy for originated loans described above.Allowance for Loan Losses: estimate of credit losses.loancredit losses is a valuation allowance for probable incurred credit losses. Loan lossesaccount that is deducted from the loans' amortized cost basis to present the net amount expected to be collected over the lifetime of the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Subsequent recoveries, if any, are credited to the allowance.required using relevant available information, from internal and external sources, relating to past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economicevents, current conditions, and other factors. Allocationsreasonable and supportable forecasts. We use the weighted-average remaining maturity method (WARM method) as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the allowance may be madecredit loss reserve for specificthe remaining outstanding balances of loans butin a segment at the entire allowancebalance sheet date. The average annual charge-off rate is available for any loan that, in management’s judgment, should be charged off.F-10Table of Contents
(continued)losses consists of specificportfolio segments include both regulatory call report codes and general components. The specific component relates toby internally identified risk ratings for our commercial loan segments and by delinquency status for our consumer loan segments. We also have separately identified internally originated SBA loans that are individually classified as impaired when, basedand SBA loans acquired from Westbound Bank in 2018 for inherent risk analysis. Accrued interest receivable on current information and events, itloans is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.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 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.Loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral, less costs to sell, if repayment is expected solelyexcluded from the collateral. Large groupsestimate of homogeneous loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loancredit losses.The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; effects of changes in credit concentrations; changes in the quality of the Company’s loan review system; and changes in the values of underlying collateral.An allowance for loan losses for acquired performing loans is calculated using a methodology similar to that described for originated loans. Acquired performing loans are subsequently evaluated for any required allowance at each reporting date. Such required allowance for each loan is compared to the remaining fair value discount for that loan. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan. estate. Risksestate or may be secured by real estate but made for the primary purpose of a short-term revolving line of credit. Credit risks inherent in this portfolio segment include fluctuations in the local and national economy.non agriculturalnon-agricultural vacant land. RisksCredit risks inherent in this portfolio include fluctuations in property values, unemployment, and changes in the local and national economy.F-11GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)pasture landpastureland and timberland. This segment includes land with a 1-4 family residential structure if the value of the land exceeds the value of the residence. Risks inherent in this portfolio segment include adverse changes in climate, fluctuations in feed and cattle prices and changes in property values.Table of Contents
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loancredit losses. Information for the credit quality indicators is updated monthly or quarterly for classified assets and at least annually for the remainder of the portfolio.respectiveloan portfolio, segment classes:financemake principal and interest payments in the event that he isthey are unable to sell the completed structure to be a primary credit quality indicator. For real estate development loans, management also considers the likelihood of the successful sale of the constructed properties in the development.F-12GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Farmland:Table of Contents
Bank BuildingsUp to 40 yearsEquipmentto 10 yearsF-13GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Table of Contents
KSOP Repurchase Right: In accordance with applicable provisions of the Internal Revenue Code, the terms of Guaranty’s employee stock ownership plan with 401(k) provisions (“KSOP”) provided that, for so long as Guaranty was a privately-held company without a public market for its common stock, KSOP participants would have the right, for a specified period of time, to require Guaranty to repurchase shares of its common stock that are distributed to them by the KSOP. This repurchase obligation terminated upon the consummation of Guaranty’s initial public offering and listing of its common stock on the NASDAQ Global Select Market in May 2017. However, because Guaranty was privately-held without a public market for its common stock as of and for the years ended December 31, 2016 and 2015, the shares of common stock held by the KSOP are reflected in the Company’s consolidated balance sheet as of December 31, 2016 and consolidated statement of changes in shareholders' equity for the years ended December 31, 2016 and 2015 as a line item called “KSOP-owned shares,” which appears between total liabilities and shareholders’ equity in the consolidated balance sheet. As a result, the KSOP-owned shares are deducted from shareholders’ equity in the Company’s consolidated balance sheet as of December 31, 2016, and the consolidated statement of changes in shareholders' equity for the year ended December 31, 2017 includes an adjustment for the inclusion of such KSOP-owned shares in total shareholders' equity as "terminated KSOP put option." For all periods following Guaranty’s initial public offering and continued listing of the Company’s common stock on the NASDAQ Global Select Market, the KSOP-owned shares will be included in, and not be deducted from, shareholders’ equity.F-14GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)incomeloss and/or current earnings, as appropriate. On the date the Company enters into a derivative contract, the Company designates the derivative instrument as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period operations. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive incomeloss and subsequently reclassified to operations in the same period(s) that the hedged transaction impacts operations. For free-standing derivative instruments, changes in fair value are reported in current period operations.18.16.20172023 and 2016.2022. Deposits held with the Federal Reserve Bank earn interest.share basedshare-based compensation prescribed by the standard. The fair value of options granted is determined using the Black-Scholes option valuation model.Table of Contents
KSOP shares are considered outstanding for this calculation unless unearned. All outstanding unvestednonvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are presented as if all stock splits and stock dividends were effective from the earliest period presented through the date of issuance of the financial statements. (Loss) (loss) consists of net income and other comprehensive income (loss).loss. Other comprehensive income (loss)loss includes unrealized gains and losses on securities available for sale, unrealized gains and losses on securities transferred from available for sale to held to maturity and unrealized gains and losses on cash flow hedges which are also recognized as separate components of equity.
•F-15Fiduciary income. Trust income includes fees and commissions from investment management, administrative and advisory services primarily for individuals, and to a lesser extent, partnerships and corporations. Investment management income is recognized on an accrual basis at the time the services are performed and when we have a right to invoice and are based on either the market value of the assets managed or the services provided. Administrative and advisory services income is recognized as incurred.Table of Contents
(continued)stockholders’stockholders' equity.Subsequent Events: The Company has evaluated all subsequent events for potential recognition and disclosure through March 15, 2018, the date of which the consolidated financial statements were available to be issued and noted the following subsequent event requiring financial statement recognition or disclosure.On January 29, 2018, the Company entered into a definitive agreement, which we refer to as the merger agreement, with Katy, Texas-based Westbound Bank. The merger agreement provides for the merger of Westbound Bank with and into Guaranty Bank & Trust, with Guaranty Bank & Trust surviving the merger. As of December 31, 2017, Westbound Bank reported, per their regulatory Call Report, total assets of $228.0 million, total loans of $160.3 million and total deposits of $188.5 million. Upon the completion of the proposed acquisition of Westbound Bank, the Company will have acquired Westbound Bank's four branches in the Houston, Texas metropolitan area. Under the terms of the merger agreement, the Company will issue 900,000 shares of its common stock and will pay cash in the aggregate amount of approximately $6.4 million to the shareholders and option holders of Westbound, subject to certain potential adjustments as described in the merger agreement. The merger agreement contains customary representations, warranties and covenants by the Company and Westbound Bank. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the merger agreement by the shareholders of Westbound Bank. The transaction is expected to close during the second quarter of 2018.Pronouncements:February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company determined it will early adopt ASU 2018-02 in the first quarter of 2018 and will reclassify its stranded tax debit of $487 within accumulated other comprehensive income to retained earnings at March 31, 2018.In January 2017,2022, the FASB issued ASU 2017-01, Business Combinations2022-02, Financial Instruments - Credit Losses (Topic 805)326): ClarifyingTroubled Debt Restructurings and Vintage Disclosures, which eliminates the Definition ofrecognition and measurement guidance for troubled debt restructurings ("TDRs") by creditors in ASC 310-40. The update also enhances disclosure requirements for certain loan restructurings by creditors when a Business. This ASUborrower is intended to clarifyexperiencing financial difficulty. Specially, rather than applying the definition of a business withrecognition and measurement guidance for TDRs, an entity will apply the objective of addingloan refinancing and restructuring guidance to assist entities with evaluatingdetermine whether transactions should be accounted for as acquisitions (or disposals)a modification or other form of assetsrestructuring results in a new loan or businesses. In addition,a continuation of an existing loan. Finally, the amendments in this ASU providerequire a detailed frameworkpublic business entity to assist entitiesdisclose current-period gross write-offs by year of origination for financing receivables and net investments in evaluating whether a set of assets and activities constitutes a business, as well as clarifyleases in the definition of the term output so the term is consistent with how outputs are described in Topic 606. ASU 2017-01 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods.existing vintage disclosures. The Company doesadopted this ASU effective on January 1, 2023, and used the prospective method, which did not expect this pronouncement to have a significant impact on its consolidated financial statements.In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment changes to be based on the first step in today’s two-step impairment test, thus eliminating step two from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step two of the goodwill impairment test. For pubic companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on its consolidated financial statements.In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents,F-16GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)and amounts generally described as restricted cash or restricted cash equivalents. For public companies, ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to be material to its consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following nine specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned; 6) life insurance policies; 7) distributions received from equity method investees; 8) beneficial interests in securitization transactions; and 9) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to be material to its consolidated financial statements.In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit loss" ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has assembled a transition team to assess the adoption of this ASU, and has developed a project plan regarding implementation.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption of this ASU is permitted for all entities. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU permits early adoption of the instrument-specific credit risk provision. The Company does not expect the adoption of this guidance to be material to its consolidated financial statements.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), followed by various amendments: ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the EffectiveF-17GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in these updates amend existing guidance related to revenue from contracts with customers. The amendments supersede and replace nearly all existing revenue recognition guidance, including industry-specific guidance, establish a new control-based revenue recognition model, change the basis for deciding when revenue is recognized over a time or point in time, provide new and more detailed guidance on specific topics and expand and improve disclosures about revenue. In addition, these amendments specify the accounting for some costs to obtain or fulfill a contract with a customer. The amendments are effective for annual and interim periods beginning after December 15, 2017, and must be retrospectively applied. The majority of the Company's income consists of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of the amendments. The Company continues to evaluate the impact of the amendments on the components of noninterest income that have recurring revenue streams; however, the Company does not expect any recognition changes to have a significant impact to its consolidated financial statements.ACQUISITIONSOn close of business March 27, 2015, the Company acquired 100% of the outstanding common shares of DCB, the holding company for Preston State Bank, in exchange for a combination of cash and stock amounting to total consideration of $29,681. Under the terms of the acquisition, 68 common shareholders received 923,133 shares of the Company’s common stock in exchange for 1,378,345 shares of DCB. With the acquisition, the Company expanded its market to the Dallas/Fort Worth metroplex. Results of operations of the acquired company were included in the Company’s results beginning March 28, 2015. Acquisition-related costs of $403 are included in other operating expenses in the Company’s consolidated statement of earnings for the year ended December 31, 2015. The fair value of the common shares issued as part of the consideration paid for DCB was determined based upon the closing price of the Company’s common shares on the acquisition date.On close of business April 10, 2015, the Company acquired 100% of the outstanding common shares of TLB in exchange for combination of cash and stock amounting to total consideration of $14,215. Under the terms of the acquisition, 124 common shareholders received 280,160 shares of the Company’s common stock in exchange for 594,779 shares of TLB. Results of operations were included in the Company’s results beginning April 11, 2015. Acquisition-related costs of $239 are included in other operating expenses in the Company’s consolidated statement of earnings for the year ended December 31, 2015. The fair value of the common shares issued as part of the consideration paid for TLB was determined based upon the closing price of the Company’s common shares on the acquisition date.On close of business August 6, 2016, the Company acquired certain assets and liabilities comprised of a branch location in Denton, Texas (the "Denton Branch"), which resulted in the addition of approximately $4,659 in assets and liabilities. The Company acquired the bank premises at 4101 Wind River Lane in Denton, Texas and recorded it at fair market value of $2,075. Other assets acquired, at fair value, included cash of $2,399, core deposit intangible of $42, goodwill of $141 and loans of $2. Liabilities assumed included non-interest bearing deposits of $581, interest bearing deposits of $4,047 and other liabilities of $30. Consideration paid by the Company for the acquired assets and assumed liabilities of $66 was netted against the cash received. Acquisition-related costs of $41 are included in other operating expenses in the Company’s consolidated statement of earnings for the year ended December 31, 2016.Goodwill of $8,670 for DCB, $3,815 for TLB, and $140 for the Denton Branch arising from the acquisitions consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. Goodwill of $141 is expected to be deductible for income taxes purposes. table summarizes the consideration paid for DCB and TLB and the fair value of the assets acquired and liabilities assumed recognized at the acquisition date:Consideration:F-18GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued) DCB TLB Cash $ 8,449 $ 7,771 Equity instruments 21,232 6,444 Contingent consideration — — Fair value of total consideration transferred $ 29,681 $ 14,215 The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisitions, March 27, 2015 and April 10, 2015, respectively. DCB TLB Cash $ 5,794 $ 8,124 Investment securities available for sale 2,862 19,794 Loans, net of discount of $1,389 and $468, respectively 118,154 43,568 Accrued interest receivable 299 173 Premises and equipment 199 2,664 Nonmarketable equity securities 168 — Core deposit intangible 968 534 Other assets 1,726 1,558 Total assets acquired 130,170 76,415 Noninterest-bearing deposits 25,607 16,702 Interest-bearing deposits 68,844 48,794 Subordinated debentures 5,155 — Other liabilities 9,553 519 Total liabilities assumed 109,159 66,015 Net assets acquired (liabilities assumed) 21,011 10,400 Total consideration paid 29,681 14,215 Goodwill $ 8,670 $ 3,815 The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date (“acquired performing loans”). The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Acquired performing loans had fair value and gross contractual amounts receivable of $118,154 and $119,543, respectively for DCB, $43,568 and $44,036, respectively for TLB, and $2 and $2, respectively for the Denton Branch on the date of acquisition.NOTE 3 - MARKETABLE SECURITIESThe following table summarizestables summarize the amortized cost and fair value of securities available for sale and securities held to maturity atsecurities as of December 31, 20172023 and 20162022 and the corresponding amounts of gross unrealized gains and losses:
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Cost
Unrealized
Gains
Unrealized
Losses
Fair
ValueTable of Contents
(continued)December 31, 2017 Available for sale: Corporate bonds $ 18,823 $ 64 $ 50 $ 18,837 Municipal securities 7,746 — 200 7,546 Mortgage-backed securities 92,471 — 1,793 90,678 Collateralized mortgage obligations 116,809 5 1,503 115,311 Total available for sale $ 235,849 $ 69 $ 3,546 $ 232,372 Held to maturity: Municipal securities $ 146,496 $ 2,244 $ 218 $ 148,522 Mortgage-backed securities 22,026 199 230 21,995 Collateralized mortgage obligations 6,162 111 — 6,273 Total held to maturity $ 174,684 $ 2,554 $ 448 $ 176,790 December 31, 2016 Available for sale: Corporate bonds $ 25,254 $ 6 $ 377 $ 24,883 Municipal securities 7,841 — 622 7,219 Mortgage-backed securities 61,298 — 1,608 59,690 Collateralized mortgage obligations 65,789 10 666 65,133 Total available for sale $ 160,182 $ 16 $ 3,273 $ 156,925 Held to maturity: Municipal securities $ 149,420 $ 901 $ 3,889 $ 146,432 Mortgage-backed securities 28,450 318 290 28,478 Collateralized mortgage obligations 11,501 265 521 11,245 Total held to maturity $ 189,371 $ 1,484 $ 4,700 $ 186,155 At2016,2023 compared to an unrealized gain of $5,860 at December 31, 2022. This amount will continue to be amortized and accreted out of accumulated other comprehensive loss over the Company’s mortgage-backedremaining life of the underlying securities portfolio included non-agencyas an adjustment of the yield on those securities.
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Valuemarketdecline in fair value is mainly attributable to rate, and not due to credit-related factors. The Company monitors the credit quality of other debt securities through the use of credit ratings and other factors specific to an individual security in assessing whether or not the decline in fair value of $1,636 which hadmunicipal or corporate securities, relative to their amortized cost, is due to credit-related factors. Triggers to prompt further investigation of securities when the fair value is less than the amortized cost are when a security has been downgraded and falls below an A credit rating, and the security’s unrealized lossesloss exceeds 20% of $521 and other than temporary impairment, which was recorded in 2013, of $324. These non-agency mortgage-backed securities, which were sold during 2017, were rated AAA at purchase.Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.its book value. Consideration is given to (1) the length of time and the extent to which the fair value has beenis less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuersecurity for a period of time sufficient to allow for any anticipated recovery in fair value. There were no other than temporary impairmentBased on evaluation of available evidence, management believes the unrealized losses on debtthe securities relatedas of December 31, 2023 and 2022 are not credit-related. Management does not have the intent to sell any of these securities and believes that it is more likely than not the Company will not have to sell any such securities before recovery of cost. The fair values are expected to recover as the securities approach their maturity date or repricing date or if market yields for the investments decline. Accordingly, no allowance for credit losses recognized during the years ended December 31, 2017 and 2016.has been recorded for these securities.Information pertaining to securities with gross unrealized losses at December 31, 2017 and December 31, 2016 aggregated by investment category and lengthTable of
time that individual securities have been in a continuous loss position is detailed in the following tables. At December 31, 2017, the Company held 62 securities which had been in continuous loss positions over twelve months and 36 securities which had been in continuous loss position less than twelve months. Of the securities in a loss position over twelve months, 17 were classified as available for sale and 45 were classified as held to maturity. Of the securities in a loss position less than twelve months, 20 were classified as available for sale and 16 were classified as held to maturity. The securities in a loss position were composed of tax exempt municipal bonds, corporate bonds, collateralized mortgage obligations and mortgage backed securities.F-20 (continued)believesassesses held to maturity securities sharing similar risk characteristics on a collective basis for expected credit losses under the unrealizedcurrent expected credit loss on the remainingmodel ("CECL"). As of December 31, 2023 and 2022, our held to maturity securities is a functionconsisted of the movement of interest rates since the time of purchase. Based on evaluation of available evidence, including recent changes in interest rates, credit rating informationU.S. government agencies, municipal securities, treasury securities, collateralized mortgage obligations and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment would be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The Company does not have the intent to sell these mortgage-backed securities issued by the U.S. government and its agencies. With regard to the treasuries, collateralized mortgage obligations and mortgage-backed securities issued by the U.S. government, or agencies thereof, it is likelyexpected that itthe securities will not be required to sellsettled at prices less than the amortized cost bases of the securities before their anticipated recovery. The Company does not consider theseas such securities to be other-than-temporarily impaired at December 31, 2017.The following table summarizes securities with unrealized losses at December 31, 2017are backed by the full faith and 2016, aggregatedcredit of and/or guaranteed by major security type and length of time in a continuous unrealized loss position: Less Than 12 Months 12 Months or Longer Total December 31, 2017 Available for sale: Corporate bonds $ (50 ) $ 8,019 $ — $ — $ (50 ) $ 8,019 Municipal securities — — (200 ) 7,546 (200 ) 7,546 Mortgage-backed securities (658 ) 42,881 (1,135 ) 47,797 (1,793 ) 90,678 Collateralized mortgage obligations (1,091 ) 93,584 (412 ) 21,258 (1,503 ) 114,842 Total available for sale $ (1,799 ) $ 144,484 $ (1,747 ) $ 76,601 $ (3,546 ) $ 221,085 Held to maturity: Municipal securities $ (37 ) $ 9,230 $ (181 ) $ 19,961 $ (218 ) $ 29,191 Mortgage-backed securities (57 ) 6,499 (173 ) 9,747 (230 ) 16,246 Collateralized mortgage obligations — — — — — — Total held to maturity $ (94 ) $ 15,729 $ (354 ) $ 29,708 $ (448 ) $ 45,437 Less Than 12 Months 12 Months or Longer Total December 31, 2016 Available for sale: Corporate bonds $ (377 ) $ 22,529 $ — $ — $ (377 ) $ 22,529 Municipal securities (622 ) 7,219 — — (622 ) 7,219 Mortgage-backed securities (1,047 ) 44,420 (561 ) 15,270 (1,608 ) 59,690 Collateralized mortgage obligations (437 ) 55,435 (229 ) 9,049 (666 ) 64,484 Total available for sale $ (2,483 ) $ 129,603 $ (790 ) $ 24,319 $ (3,273 ) $ 153,922 Held to maturity: Municipal securities $ (3,889 ) $ 98,943 $ — $ — $ (3,889 ) $ 98,943 Mortgage-backed securities (290 ) 19,983 — — (290 ) 19,983 Collateralized mortgage obligations — — (521 ) 2,350 (521 ) 2,350 Total held to maturity $ (4,179 ) $ 118,926 $ (521 ) $ 2,350 $ (4,700 ) $ 121,276 (FHLMC), the Federal National Mortgage Association (FNMA) or the Governmentgovernment National Mortgage Association (GNMA).2017,2023, there were no holdings of securities of any one issuer, other than the collateralized mortgage obligations, treasuries and mortgage-backed securities issued by the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.F-21GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)$245,600$317,112 and $259,499$396,584 at December 31, 20172023 and December 31, 2016,2022, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.The proceedsbelow: 2017 2016 2015 Proceeds $ 217,111 $ 105,808 $ 140,668 Gross gains 180 243 222 Gross losses (13 ) (161 ) (145 ) Duringbelow. There were no securities sold during the year ended December 31, 2017, the Company sold five2021.securities. The Companysecurities sold these securities, which consisted of three municipal securities and two corporate bonds, based upon internal credit analysis that they had experienced significant deterioration in creditworthiness. The risk exposure presented by these securities had increased beyond acceptable levels and management determined that it was reasonably possible that all amounts due would not be collected. The credit analysis of the municipalities determined that they had been significantly impacted by the declines in market oil prices due to the fact that their tax bases are heavily reliant on the energy industry relative to other sectors of the economy. Specifically, the revenues of these municipalities had been adversely impacted by the sustained low-level of oil prices. The current credit analysis of the corporate bonds, which were both a non-agency collateralized mortgage obligation bond, indicated evidence of significant deterioration in its creditworthiness. In early 2017 one bond rating agency withdrew its current rating on the bond, and prior to 2017 another rating agency had downgraded it to a ‘No Rating’ position. The Company believes the sales of these securities were merited and permissible under the applicable accounting guidelines because of the significant deterioration in the creditworthiness of the issuers.Sales of securities held to maturity were as follows forduring the years ended December 31: 2017 2016 2015 Proceeds from sales $ 3,298 $ 1,866 $ — Amortized cost 3,140 1,842 — Gross realized gains 158 24 — Gross realized losses — — — Tax expense related to securities gains/losses (44 ) (7 ) — Included in the amortized cost of held to maturity securities shown above for the year ended December 31, 2017 was $324 of other than temporary impairment that was recorded during 2013, as well as $499 in prior principal write-downs on corporate bonds that were sold during 2017.20172023 of available for sale and held to maturity securities at carrying value and estimated fair value are shown below. The Company invests in mortgage-backed securities and collateralized mortgage obligations that may have expected maturities that differ from their contractual maturities. These differences arise because borrowers and/or issuers may have the right to call or prepay their obligation with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Cost
Fair
Value
Cost
Fair
ValueF-22Table of Contents
(continued) Available for Sale Held to Maturity December 31, 2017 Due within one year $ — $ — $ 2,663 $ 2,665 Due after one year through five years 6,158 6,129 5,769 5,849 Due after five years through ten years 12,665 12,708 42,711 43,903 Due after ten years 7,746 7,546 95,353 96,105 Mortgage-backed securities 92,471 90,678 22,026 21,995 Collateralized mortgage obligations 116,809 115,311 6,162 6,273 $ 235,849 $ 232,372 $ 174,684 $ 176,790 43 - LOANS AND ALLOWANCE FOR LOANCREDIT LOSSESourthe Company’s loan portfolio by type of loan at December 31: 2017 2016 Commercial and industrial $ 197,508 $ 223,712 Real estate: Construction and development 196,774 129,631 Commercial real estate 418,137 368,077 Farmland 59,023 62,366 1-4 family residential 374,371 361,665 Multi-family residential 36,574 26,079 Consumer 51,267 53,177 Agricultural 25,596 18,901 Overdrafts 294 317 Total loans 1,359,544 1,243,925 Net of: Deferred loan fees 1,094 1,210 Allowance for loan losses (12,859 ) (11,484 ) Total net loans $ 1,347,779 $ 1,233,651 In 2016, the Company acquired overdrafts and recorded as loans with a fair value and gross contractual fair value of $2 as part of the acquisition of the Denton branch. All loans acquired in 2016 were classified as acquired performing loans.of:20172023 and December 31, 2016,2022, totaled $44,506$63,551 and $29,436,$72,539, respectively. Unfunded commitments to such related parties at December 31, 20172023 totaled $8,416.2017,2023, was as follows:F-23Table of Contents
(continued) 2017 Beginning balance $ 29,436 New loans 38,564 Repayments (23,494 ) Ending balance $ 44,506 table presentstables present the activity in the allowance for loan losses and the recorded investment inACL by class of loans by portfolio segment and based on impairment method for the years ended December 31, 2017, 20162023, 2022 and 2015:
December 31, 2023
and
industrial
and
development
real
estate
residential
residential
December 31, 2022
and
industrial
and
development
real
estate
residential
residential
December 31, 2021
and
industrial
and
development
real
estate
residential
residentialDecember 31, 2017 Farmland Consumer Agricultural Overdrafts Total Allowance for loan losses: Beginning balance $ 1,592 $ 1,161 $ 3,264 $ 482 $ 3,960 $ 281 $ 585 $ 153 $ 6 $ 11,484 Provision for loan losses 272 563 1,405 41 (418 ) 348 253 276 110 2,850 Loans charged-off (1,080 ) — (84 ) — (543 ) — (344 ) (242 ) (165 ) (2,458 ) Recoveries 797 — — — 23 — 108 — 55 983 Ending balance $ 1,581 $ 1,724 $ 4,585 $ 523 $ 3,022 $ 629 $ 602 $ 187 $ 6 $ 12,859 Allowance ending balance: Individually evaluated for impairment $ 17 $ — $ 27 $ 85 $ 5 $ — $ — $ — $ — $ 134 Collectively evaluated for impairment 1,564 1,724 4,558 438 3,017 629 602 187 6 12,725 Ending balance $ 1,581 $ 1,724 $ 4,585 $ 523 $ 3,022 $ 629 $ 602 $ 187 $ 6 $ 12,859 Loans: Individually evaluated for impairment $ 463 $ — $ 4,258 $ 163 $ 842 $ 217 $ — $ 397 $ — $ 6,340 Collectively evaluated for impairment 197,045 196,774 413,879 58,860 373,529 36,357 51,267 25,199 294 1,353,204 Ending balance $ 197,508 $ 196,774 $ 418,137 $ 59,023 $ 374,371 $ 36,574 $ 51,267 $ 25,596 $ 294 $ 1,359,544 December 31, 2016 Farmland Consumer Agricultural Overdrafts Total Allowance for loan losses: Beginning balance $ 1,878 $ 1,004 $ 2,106 $ 400 $ 2,839 $ 325 $ 562 $ 138 $ 11 $ 9,263 Provision for loan losses 910 162 1,158 82 1,117 (44 ) 171 15 69 3,640 Loans charged-off (1,213 ) (9 ) — — (71 ) — (269 ) — (200 ) (1,762 ) Recoveries 17 4 — — 75 — 121 — 126 343 Ending balance $ 1,592 $ 1,161 $ 3,264 $ 482 $ 3,960 $ 281 $ 585 $ 153 $ 6 $ 11,484 Allowance ending balance: Individually evaluated for impairment $ 64 $ — $ — $ 47 $ 108 $ — $ 34 $ — $ — $ 253 Collectively evaluated for impairment 1,528 1,161 3,264 435 3,852 281 551 153 6 11,231 Ending balance $ 1,592 $ 1,161 $ 3,264 $ 482 $ 3,960 $ 281 $ 585 $ 153 $ 6 $ 11,484 Loans: Individually evaluated for impairment $ 231 $ 1,825 $ 1,196 $ 258 $ 2,588 $ 5 $ 200 $ 15 $ — $ 6,318 Collectively evaluated for impairment 223,481 127,806 366,881 62,108 359,077 26,074 52,977 18,886 317 1,237,607 Ending balance $ 223,712 $ 129,631 $ 368,077 $ 62,366 $ 361,665 $ 26,079 $ 53,177 $ 18,901 $ 317 $ 1,243,925 F-24Table of Contents
(continued)December 31, 2015 Farmland Consumer Agricultural Overdrafts Total Allowance for loan losses: Beginning balance $ 1,473 $ 615 $ 1,870 $ 387 $ 2,395 $ 232 $ 593 $ 137 $ 19 $ 7,721 Provision for loan losses 577 395 289 (83 ) 651 93 138 1 114 2,175 Loans charged-off (192 ) (6 ) (53 ) — (215 ) — (219 ) (1 ) (227 ) (913 ) Recoveries 20 — — 96 8 — 50 1 105 280 Ending balance $ 1,878 $ 1,004 $ 2,106 $ 400 $ 2,839 $ 325 $ 562 $ 138 $ 11 $ 9,263 Allowance ending balance: Individually evaluated for impairment $ 316 $ — $ — $ 47 $ 63 $ — $ 101 $ — $ — $ 527 Collectively evaluated for impairment 1,562 1,004 2,106 353 2,776 325 461 138 11 8,736 Ending balance $ 1,878 $ 1,004 $ 2,106 $ 400 $ 2,839 $ 325 $ 562 $ 138 $ 11 $ 9,263 Loans: Individually evaluated for impairment $ 3,592 $ — $ 77 $ 251 $ 2,064 $ — $ 98 $ — $ — $ 6,082 Collectively evaluated for impairment 178,124 122,904 301,833 47,417 310,242 30,395 50,543 19,524 313 1,061,295 Ending balance $ 181,716 $ 122,904 $ 301,910 $ 47,668 $ 312,306 $ 30,395 $ 50,641 $ 19,524 $ 313 $ 1,067,377 Credit QualityThe Company closely monitors economic conditions and loan performance trendsmanage and evaluatemacroeconomic factors evaluated at the exposure to credit risk. Keyonset of the pandemic as well as risk rating upgrades for specific loans. During 2022, the remaining COVID-specific qualitative factors tracked by the Company and utilizedwere removed. However, growth in evaluating the credit quality of the loan portfolio, include trendsas well as declines in delinquency ratios,economic outlooks during the level of nonperforming assets, borrower’s repayment capacity,year and collateral coverage.typically measures impairment based onclosely monitors economic conditions and loan performance trends to manage and evaluate the present value of expected future cash flows, discounted atexposure to credit risk. Key factors tracked by the loan’s effective interest rate, or based onCompany and utilized in evaluating the loan’s observable market price or the fair valuecredit quality of the loan portfolio include trends in delinquency ratios, the level of nonperforming assets, borrower’s repayment capacity, and collateral if the loan is collateral-dependent.coverage.The following tables summarize the credit exposure in the Company's consumer and commercial loan portfolios as of:December 31, 2017 Farmland Agricultural Total Grade: Pass $ 196,890 $ 196,515 $ 412,488 $ 58,623 $ 373,154 $ 16,073 $ 51,409 $ 24,650 $ 1,329,802 Special mention 348 259 1,135 226 442 20,284 65 454 23,213 Substandard 270 — 4,514 174 775 217 87 492 6,529 Doubtful — — — — — — — — — Total $ 197,508 $ 196,774 $ 418,137 $ 59,023 $ 374,371 $ 36,574 $ 51,561 $ 25,596 $ 1,359,544 December 31, 2016 Commercial
and
industrial Construction
and
development Commercial
real estate Farmland 1-4
family
residential Agricultural Total Grade: Pass $ 218,690 $ 127,802 $ 360,591 $ 61,717 $ 352,196 $ 25,871 $ 52,320 $ 17,965 $ 1,217,152 Special mention 4,299 4 2,021 248 4,311 — 524 478 11,885 Substandard 706 1,825 5,465 401 5,121 208 568 458 14,752 Doubtful 17 — — — 37 — 82 — 136 Total $ 223,712 $ 129,631 $ 368,077 $ 62,366 $ 361,665 $ 26,079 $ 53,494 $ 18,901 $ 1,243,925 F-25Table of Contents
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and loans classified as nonperforming as of:
Past Due
Past Due
or Greater
Past Due
Past Due
Loans
Investment >
90 Days and
Accruing
development
estate
Past Due
Past Due
or Greater
Past Due
Past Due
Loans
Investment >
90 Days and
Accruing
development
estateDecember 31, 2017 Current Total Loans Commercial and industrial $ 1,273 $ 93 $ 17 $ 1,383 $ 196,125 $ 197,508 $ — Real estate: Construction and development 117 — — 117 196,657 196,774 — Commercial real estate 192 265 1,067 1,524 416,613 418,137 — Farmland 139 — 6 145 58,878 59,023 — 1-4 family residential 3,998 416 800 5,214 369,157 374,371 — Multi-family residential — — 217 217 36,357 36,574 — Consumer 381 69 87 537 50,730 51,267 — Agricultural 204 2 — 206 25,390 25,596 — Overdrafts — — — — 294 294 — Total $ 6,304 $ 845 $ 2,194 $ 9,343 $ 1,350,201 $ 1,359,544 $ — December 31, 2016 Current Commercial and industrial $ 941 $ 105 $ 25 $ 1,071 $ 222,641 $ 223,712 $ — Real estate: Construction and development 73 — 1,825 1,898 127,733 129,631 — Commercial real estate 1,629 32 134 1,795 366,282 368,077 — Farmland 100 26 7 133 62,233 62,366 — 1-4 family residential 3,724 803 1,041 5,568 356,097 361,665 — Multi-family residential 207 49 — 256 25,823 26,079 — Consumer 613 205 87 905 52,272 53,177 — Agricultural 59 — 15 74 18,827 18,901 — Overdrafts — — — — 317 317 — Total $ 7,346 $ 1,220 $ 3,134 $ 11,700 $ 1,232,225 $ 1,243,925 $ — theinformation regarding nonaccrual loans by category as of December 31:of: 2017 2016 Commercial and industrial $ 77 $ 82 Real estate: Construction and development — 1,825 Commercial real estate 1,422 415 Farmland 163 176 1-4 family residential 1,937 1,699 Multi-family residential 217 5 Consumer 138 192 Agricultural 50 15 Total $ 4,004 $ 4,409 $173$167 and $24$434 for the years ended December 31, 20172023 and 2016,2022, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as impaired.nonaccrual. There were no individually analyzed loans classified as nonaccrual with an associated allowance for credit losses applied as of December 31, 2023 and 2022.F-26Table of Contents
(continued)Impaired Loans andA and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructuring (“TDR”) is a restructuring in which a bank,restructurings and enhanced disclosures for economic or legal reasons relatedloan modifications to a borrower’sborrowers experiencing financial difficulties, grants a concession to the borrower that it would not otherwise consider. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with original contractual terms of the loan. Loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance nonperforming loans and TDRs.The outstanding balances of TDRs are shown below at December 31: 2017 2016 Nonaccrual TDRs $ — $ 43 Performing TDRs 657 462 Total $ 657 $ 505 Specific reserves on TDRs $ 17 $ 4 tables presenttable presents the amortized cost basis of loans by class modified as TDRs that occurred during the years ended:December 31, 2017 Troubled Debt Restructurings: Commercial and industrial 2 $ 381 $ 364 Commercial real estate — — Consumer — — — 1-4 family residential 1 11 11 Farmland — — — Multi-family residential — — — Agricultural — — — Total 3 $ 392 $ 375 There were no TDRs that subsequently defaulted in 2017. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the year ended December 31, 2017.2023 to borrowers experiencing financial difficulty:
December 31, 2023
ExtensionDecember 31, 2016 Troubled Debt Restructurings: Commercial and industrial 1 $ 90 $ 90 1-4 family residential 3 248 244 Total 4 $ 338 $ 334 There were no TDRs that subsequently defaulted in 2016. TDRs describedfollowing table presents the financial effect of the loan modifications presented above did not increase the allowance for loan losses and resulted in no charge-offsto borrowers experiencing financial difficulty during the year ended December 31, 2016.F-27
Past Due
or Greater
Past Due
2023
2022Table of Contents
(continued)The following table presents information about the Company’s impaired loans as of December 31, 2017:December 31, 2017 With no related allowance recorded: Commercial and industrial $ 437 $ 437 $ — $ 434 Real estate: Construction and development — — — 311 Commercial real estate 3,979 3,979 — 4,230 Farmland 6 6 — 90 1-4 family residential 681 681 — 1,096 Multi-family residential 217 217 — 180 Consumer — — — 61 Agricultural 397 397 — 384 Subtotal 5,717 5,717 — 6,786 With allowance recorded: Commercial and industrial 26 26 17 315 Real estate: Construction and development — — — 7 Commercial real estate 279 279 27 505 Farmland 157 157 85 131 1-4 family residential 161 161 5 754 Multi-family residential — — — 19 Consumer — — — 42 Agricultural — — — 180 Subtotal 623 623 134 1,953 Total $ 6,340 $ 6,340 $ 134 $ 8,739 F-28GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)The following table presents information about the Company’s impaired loans as of December 31, 2016:December 31, 2016 With no related allowance recorded: Commercial and industrial $ 28 $ 28 $ — $ 809 Real estate: Construction and development 1,825 1,825 — 172 Commercial real estate 1,196 1,196 — 871 Farmland 89 89 — 109 1-4 family residential 1,799 1,799 — 1,575 Multi-family residential 5 5 — 2 Consumer 105 105 — 89 Agricultural 15 15 — 68 Subtotal 5,062 5,062 — 3,695 With allowance recorded: Commercial and industrial 203 203 64 3,153 Real estate: Construction and development — — — — Commercial real estate — — — — Farmland 169 169 47 169 1-4 family residential 789 789 108 639 Multi-family residential — — — — Consumer 95 95 34 155 Agricultural — — — 2 Subtotal 1,256 1,256 253 4,118 Total $ 6,318 $ 6,318 $ 253 $ 7,813 During the years ended December 31, 2017, 2016 and 2015, total interest income and cash-based interest income recognized on impaired loans was minimal.PREMISES AND EQUIPMENT December 31, 2017 December 31, 2016 Land $ 9,857 $ 9,959 Building and improvements 45,525 44,240 Furniture, fixtures and equipment 12,845 14,188 Automobiles 247 368 68,474 68,755 Less: accumulated depreciation 24,656 23,945 $ 43,818 $ 44,810 Depreciation expense on premises and equipment totaled $3,162, $3,183 and $2,958 for the years ended December 31, 2017, 2016 and 2015, respectively and is included in occupancy expenses on the consolidated statements of earnings.NOTE 6 - GOODWILLF-29GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Changesare summarized as follows:2023 or 2022. 2017 2016 Beginning of year $ 18,742 $ 18,601 Effect of acquisitions — 141 End of year $ 18,742 $ 18,742 76 - CORE DEPOSIT INTANGIBLES 2017 2016 Beginning of year $ 3,308 $ 3,846 Effect of acquisitions — 42 Amortization (584 ) (580 ) End of year $ 2,724 $ 3,308 $3,107$7,113 and $2,523$6,672 at December 31, 20172023 and 2016,2022, respectively. Amortization expense related to core deposit intangibles was $584, $580$441, $454 and $535$686 during the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively. The estimated aggregate future amortization expense for core deposit intangibles remaining as of December 31, 20172023 was as follows:Year Ended December 31, Amount 2018 $ 584 2019 584 2020 584 2021 417 2022 183 Thereafter 372 $ 2,724 87 - INTEREST-BEARING DEPOSITS December 31, 2017 December 31, 2016 NOW accounts $ 263,980 $ 269,712 Savings and money market accounts 705,491 606,706 Time deposits less than $250,000 207,185 239,569 Time deposits $250,000 and over 89,655 102,052 $ 1,266,311 $ 1,218,039 F-30GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)2017,2023, were as follows:Year Ended December 31, Amount 2018 $ 224,772 2019 39,553 2020 9,926 2021 14,709 2022 7,880 Thereafter — $ 296,840 20172023 and December 31, 20162022 totaled $68,082$40,799 and $72,443,$56,291, respectively.98 - BORROWED MONEYadvances ,were $140,000 at a 5.36% weighted average rate as of December 31, 2017,2023 and $290,000 at a 4.74% weighted average rate as of December 31, 2022, and were as follows:collateralized by blanketFixed-rateTable of Contents
monthly interest payments,all principal due in:Year Principal due 2018 1.06 % $ 25,000 2022 1.11 % 20,000 45,000 Fixed-rateat maturity. The following table presents the scheduled maturities of FHLB advances and their weighted average rates, each as of December 31, 2023:
Weighted
Average Ratemonthly principal and interest payments, principal due in:Year Principal due 2021 1.38 % 153 $ 45,153 had a $25,000has an unsecured $25,000 revolving line of credit with a correspondent bank that was set to mature in July 2016. In May 2016, the Company renegotiated the loan agreement such that $15,000 was renewed as a revolving line of credit and $10,000 of the outstanding balance of the revolving line of credit was rolled into an amortizing note. As of December 31, 2016, the outstanding balances of the revolving line of credit and amortizing note were $9,000. In March 2017, the Company renegotiated the loan agreement such that the outstanding balance of the revolving line of credit and amortizing note was converted to a $25,000 unsecured revolving line of credit. The line of credit bears interest at the greater of (i) the prime rate, plus 0.50%which was 8.50% at December 31, 2023, or (ii) the rate floor of 3.50%, with quarterly interest payments,payable quarterly, and matures in March 2018.2024. Under the terms of the line of credit, the Company agreed not to pledge or grant a lien or security interest in the stock of the Bank or in any other assets without prior consent of the lender. As of December 31, 2017, the2023, there was a $4,500 outstanding balance on the line of credit was $0.credit. To be in compliance with the loan covenants, the Bank is required to maintain no less than a 10%10% total risk-based capital ratio, must maintain no less than $85,000$85,000 in tangible net worth, the ratio of non-performing assets to equity plus allowance for loancredit losses must not exceed 15%15%, the cash flow coverage must be greater than 1.25 times, the ratio of other additional debt to total assets must not exceed 15%, and the Company is limited to acquiring additional debt of no more than $500$500 without prior approval. The Company believes that it is in compliance with all loan covenants.F-31GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)109 - SUBORDINATED DEBENTURESdebentures aredebt was made up of the following as of: December 31, 2017 December 31, 2016 Trust II Debentures $ 3,093 $ 3,093 Trust III Debentures 2,062 2,062 DCB Trust I Debentures 5,155 5,155 Other debentures 3,500 9,000 $ 13,810 $ 19,310 Thethreetwo active trusts, Guaranty (TX) Capital Trust II (“Trust II”), Guaranty (TX) Capital Trust III (“Trust III”), and DCB Financial Trust I ("(“DCB Trust I") (“Trust II”, “Trust III” and together with "DCB Trust I", the “Trusts”I”). Upon formation, the Trusts issued pass-through securities (“TruPS”) with a liquidation value of $1,000,000$1,000 per share to third parties in private placements. Concurrently with the issuance of the TruPS, the Trusts (composed of Trust III and DCB Trust I) issued common securities to the Company. The Trusts invested the proceeds of the sales of securities to the Company (“Debentures”). The Debentures mature approximately 30 years after the formation date, which may be shortened if certain conditions are met (including the Company having received prior approval of the Federal Reserve and any other required regulatory approvals). Trust II Trust III DCB Trust I Formation date Oct 30, 2002 Jul 25, 2006 Mar 29, 2007 Capital trust pass-through securities Number of shares 3,000 2,000 5,000 Original liquidation value $ 3,000 $ 2,000 $ 5,000 Common securities liquidation value 93 62 155 can qualify as Tier I1 capital for the Company under Federal Reserve Board guidelines. The Federal Reserve’s guidelines restrict core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred securities is less than the limit of 25% of Tier I1 capital, net of goodwill, the full amount is includable in Tier I1 capital at December 31, 20172023 and 2016.December 31, 2022. Additionally, the terms provide that trust preferred securities would no longer qualify for Tier I1 capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the junior subordinated debentures.Table of Contents
areis payable quarterly. The interest is deferrable on a cumulative basis for up to five consecutive years following a suspension of dividend payments on all other capital stock. No principal payments are due until maturity for each of the Debentures.
Debentures Trust II Debentures Trust III Debentures DCB Trust I Debentures Original amount $3,093 $2,062 $5,155 Maturity date October 30, 2032 October 1, 2036 June 15, 2037 Interest due Quarterly Quarterly Quarterly “”" the junior subordinated debentures issued by the Company to the subsidiary trusts are shown as liabilities in the consolidated balance sheets and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of earnings.F-32GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)3 months LIBOR3-month Secured Overnight Financing Rate (SOFR) plus 3.35%, thereafter.On any interest payment date on or after October 30, 2012 and prior to maturity date, the debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days notice, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.Trust III DebenturesInterest was payable at a variable rate per annum, reset quarterly, equal to 3 month LIBOR plus 1.67%1.93%.is equal to 100%100% of the principal amount ifto be redeemed, plus accrued interest to the date of redemption. I3 month LIBOR3-month SOFR plus 1.80%2.06%.100%100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.July 2015,May 2020, the Company issued $4,000$10,000 in debentures of which $3,000 were issued to directors and other related parties. The $3,000 of debentures to related parties were repaid in May 2017 andissued at a $500 par value debenture, which carried a 2.5% rate,of $500 each with fixed annual rates between 1.00% and 4.00% and maturity dates between November 1, 2020 and November 1, 2024. Various of these debentures have matured since issuance and was repaid in July 2017. The remaining $500 debenture has a rate$4,000 remains as of 4.00% and a maturity date of January 1, 2019.December 31, 2023. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holder on or before the duematurity date of any debenture. The redemption price is equal to 100%100% of the face amount of the debenture redeemed, plus all accrued interest.Maturities of subordinated debentures based on scheduled repayments at December 31, 2017 are as follows (in thousands of dollars):Year Ended December 31 Amount 2018 $ 1,000 2019 2,000 2020 500 2021 — 2022 — Thereafter 10,310 $ 13,810 F-33 (continued)
Weighted
Average Rate11 - STOCK OPTIONS, which was adopted by the Company and approved by its shareholders in April 2015, amended and restated the Company's 2014 Stock Option Plan.2015. The maximum number of shares of common stock that may be issued pursuant to stock-based awards under the Plan equals 1,000,0001,100,000 shares, all of which may be subject to incentive stock option treatment. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods ranging from 5 to 10 years and have 10-year contractual terms.curve in effect at the time of the grant. 2017 2016 Risk-free interest rate 2.00 % 1.57 % Expected term (in years) 6.46 6.50 Expected stock price volatility 18.54 % 20.92 % Dividend yield 1.61 % 2.13 %
Shares
Average
Exercise
Price
Average
Remaining
Contractual
Life in
Years
Intrinsic
Value2017 Outstanding at beginning of year 340,377 $ 23.43 7.34 $ 194 Granted 159,598 27.80 9.40 480 Exercised (7,033 ) 11.94 4.23 132 Forfeited (21,500 ) 25.58 8.59 109 Balance, December 31, 2017 471,442 $ 24.98 7.30 $ 2,696 Exercisable at end of year 134,644 $ 23.60 5.85 $ 950 2016 Outstanding at beginning of year 314,391 $ 23.28 8.00 $ 137 Granted 49,500 23.58 9.38 21 Exercised (3,014 ) 11.94 2.51 36 Forfeited (20,500 ) 23.22 7.74 16 Balance, December 31, 2016 340,377 $ 23.43 7.34 $ 194 Exercisable at end of year 89,677 $ 22.61 6.45 $ 125 F-34Table of Contents
(continued)
Shares
Average
Exercise
Price
Average
Remaining
Contractual
Life in
Years
Intrinsic
Value
Shares
Grant
Date Fair Value
Shares
Grant
Date Fair Value2017 Outstanding at beginning of year 250,700 $ 23.73 7.65 $ 69 Granted 159,598 27.80 9.40 480 Vested (54,500 ) 23.72 6.35 378 Forfeited (19,000 ) 25.58 8.59 109 Balance, December 31, 2017 336,798 $ 25.54 7.88 $ 1,747 2016 Number
of Shares Weighted-Average
Exercise Price Weighted-Average
Remaining
Contractual
Life in Years Aggregate
Intrinsic
ValueOutstanding at beginning of year 267,200 $ 23.72 8.22 $ — Granted 49,500 23.58 9.38 21 Vested (47,700 ) 23.72 6.95 14 Forfeited (18,300 ) 23.22 7.74 16 Balance, December 31, 2016 250,700 $ 23.73 7.65 $ 69 yearyears ended:31:31, 2023 and 2022 follows:
Shares
Grant
Date Fair Value
Shares
Grant
Date Fair ValueTable of Contents
2017 2016 Intrinsic value of options exercised $ 132 $ 36 Cash received from options exercised 84 36 Tax benefit realized from options exercised — — Weighted average fair value of options granted 5.41 4.30 2017,2023, there was $1,781$1,390 of total unrecognized compensation expense related to unvestednonvested stock options granted under the Plan. The expense is expected to be recognized over a weighted-average period of 4.283.10 years.2015 Stock Option Plan in 2017.during both 2023 and 2022. Expense of $355, $211$594, $688 and $237$733 was recorded during the years ended December 31, 2017, 20162023, 2022 and 2015, respectively.NOTE 12 - STOCK APPRECIATION RIGHTSOn June 1, 2017, we terminated2021, respectively, which represents the Guaranty Bancshares, Inc. Fair Market Value Stock Appreciation Rights Plan, paid all accrued benefits through the termination datefair value of restricted stock and issued equivalent stock options to the plan holders that expire 10 years from the issuance date. There were no SARs granted in 2017 and 2016. The Company’s liability for outstanding SARs of $563 at December 31, 2016 is reflected in accrued interest and other liabilities in the accompanying consolidated balance sheets.vested during those periods.1311 - EMPLOYEE BENEFITS5%5% of a participant’s qualified compensation starting January 1, 2016. At December 31, 2016, the plan included a repurchase obligation or "put option", which is a right to demand that the sponsor repurchase shares of employer stock distributed to the participate under the terms of the plan, for which there was no public market for such shares, of an established cashF-35GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)price. This put option was terminated upon completion of Guaranty's initial public offering and listing of its common stock on the NASDAQ Global Select Market in May 2017. Guaranty'sGuaranty’s total contributions accrued or paid during the years ended December 31, 20172023, 2022 and 2021 totaled $1,643, 2016$1,576 and 2015 totaled $965, $935$1,455, respectively, and $824, respectively.Benefitsis included in employee compensation and benefits on the Company’s consolidated statements of earnings.generally aremay be distributed to participantsin kind in the form of cash, although participants have the rightGNTY common shares allocated to receive distributionshis or her account (with the balance payable in cash), or the form of shares of common stock.2016, the fair value of shares of common stock, held by the KSOP, was deducted from permanent shareholders’ equity in the consolidated balance sheets, and reflected in a line item below liabilities and above shareholders’ equity. This presentation is necessary in order to recognize the put option within the KSOP-owned shares, consistent with SEC guidelines, because the Company was not yet publicly traded. The Company used a valuation by an external third party to determine the maximum possible cash obligation related to those securities. The valuation is the same that is used for the stock option plan and stock appreciation rights plan. Increases or decreases in the value of the cash obligation were included in a separate line item in the statements of changes in shareholders’ equity. The fair value of allocated and unallocated shares subject to this repurchase obligation totaled $31,661 at December 31, 2016.As of December 31, 2017 and 2016,2023, the number of shares held by the KSOP were 1,314,277 and 1,319,225, respectively.was 1,021,462. There were no unallocated shares to plan participants as of December 31, 20172023, and there were 50,000 shares unallocated to plan participants as of December 31, 2016. During 2017 and 2016, the Company did not repurchase any shares from KSOP participants that received distributions of shares from the KSOP which were subject to the put option that applied to the KSOP shares before we were publicly traded. Allall shares held by the KSOP were treated as outstanding at each of the respective period ends. the Salary Continuation Plan and the Executive Incentive Retirement Plan, the Company has purchased life insurance policies on the respective officers. The cash surrender value of life insurance policies held by the Company totaled $19,117$42,348 and $17,804$38,404 as of December 31, 20172023 and 2016,2022, respectively.$447, $390$949, $796 and $303$738 for the years ended December 31, 2017, 20162023, 2022 and 2015, respectively, and2021, respectively. This expense is included in employee compensation and benefits on the Company'sCompany’s consolidated statements of earnings. The recorded liability totaled approximately $2,420$6,050 and $2,002$5,388 as of December 31, 20172023 and 2016,2022, respectively, and is included in accrued interest and other liabilities on the Company'sCompany’s consolidated balance sheets.Bonus Planbonus plan that rewards officers and employees based on performance of individual business units of the Company. Earnings and growth performance goals for each business unit and for the Company as a whole are established at the beginning of the calendar year and approved annually by theGuaranty’s board of directors. The Bonus Planbonus plan provides for a predetermined bonus amount to be contributed to the employee bonus pool based on (i) earnings target and growth for individual business units and (ii) achieving certain pre-tax return on average equity and pre-tax return on average asset levels for the Company as a whole. These bonus amounts are established annually by ourGuaranty’s board of directors. The bonus expense under this plan for the years ended December 31, 2017, 20162023, 2022 and 20152021 totaled $2,316, $2,069$3,764, $5,177 and $1,828,$4,867, respectively, which included accrued bonus expense at December 31, 2023, 2022 and 2021 of $1,684, $2,332 andTable of Contents
Company'sconsolidated statements of earnings and the accrual is included in accrued interest and other liabilities on the consolidated balance sheets.1413 - INCOME TAXESTax Cuts and Jobs ActThe Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes,F-36GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations; however, such changes do not currently impact us.As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, we remeasured our deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. Notwithstanding the foregoing, we are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. Nonetheless, we recognized a provisional tax expense related to the remeasurement of our deferred tax assets and liabilities totaling $1.7 million.Table of Contents
werewas as follows as of December 31: 2017 2016 2015 Current federal tax expense $ 5,803 $ 6,045 $ 5,551 Deferred federal tax (benefit) 740 (1,330 ) (1,189 ) Revaluation of net deferred tax assets due to change in U.S. federal statutory income tax rate 1,695 — — Total $ 8,238 $ 4,715 $ 4,362 2017 2016 2015 Federal statutory income tax at 35% $ 7,937 $ 5,893 $ 5,066 Tax exempt interest income (1,560 ) (1,428 ) (818 ) Revaluation of net deferred tax assets due to change in U.S. federal statutory income tax rate 1,695 — — Earnings of bank owned life insurance (161 ) (128 ) (147 ) Non deductible expenses 577 223 320 Other (250 ) 155 (59 ) Total $ 8,238 $ 4,715 $ 4,362 Income tax expense for 2017 was impacted byadjustmentcomponents of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, which is more fully discussed above, we recognized a provisional net tax expense totaling $1.7 million, as reported in the table above.Year-end deferred taxes are presented in the table below. As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, deferred taxes as of December 31, 2017 are based on the newly enacted U.S. statutory federal income tax rate of 21%. Deferred taxes as of December 31, 2016 are based on the previously enacted U.S. statutory federal income tax rate of 35%.F-37GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)The components of the2023 and 2022. Our net deferred tax assets (liabilities),are included in other assets in the accompanying consolidated balance sheets consisted of the following as of December 31:sheets. 2017 2016 Deferred tax assets: Allowance for loan losses $ 2,758 $ 4,192 Deferred compensation 508 701 Unrealized loss on available for sale securities 730 1,140 Stock appreciation rights — 197 Non accrual loans — 90 Other real estate owned 2 18 Basis in securities — 282 Other 556 1,479 Total deferred tax assets 4,554 8,099 Deferred tax liabilities: Premises and equipment (1,432 ) (2,447 ) Prepaid Expenses (179 ) — Deferred loan costs, net (230 ) (388 ) Intangibles (116 ) (299 ) Other (54 ) (73 ) Total deferred tax liabilities (2,011 ) (3,207 ) Net deferred tax asset $ 2,543 $ 4,892 15 - NONINTEREST INCOME AND NONINTEREST EXPENSEOther operating income consisted of the following for the years ended December 31: 2017 2016 2015 Fiduciary income $ 1,463 $ 1,405 $ 1,432 Bank-owned life insurance income 461 453 421 Merchant and debit card fees 3,119 2,741 2,737 Loan processing fee income 597 622 501 Other noninterest income 2,745 2,465 1,769 Total $ 8,385 $ 7,686 $ 6,860 F-38GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Other operating expense consisted of the following for the years ended December 31: 2017 2016 2015 Legal and professional fees $ 2,061 $ 1,935 $ 2,064 Software support fees 2,089 1,870 1,840 Amortization 1,033 980 951 Director and committee fees 1,064 940 859 Advertising and promotions 1,193 1,015 918 ATM and debit card expense 899 933 1,201 Office and computer supplies 426 464 495 Postage 301 325 310 Telecommunication expense 526 609 572 FDIC insurance assessment fees 671 1,200 743 Other real estate owned expenses and write-downs 128 140 118 Other 3,513 3,488 3,586 Total $ 13,904 $ 13,899 $ 13,657 NOTE 1614 - DERIVATIVE FINANCIAL INSTRUMENTSsheetsheets in other liabilities.Table of Contents
10.9. Management believesbelieved that entering into the interest rate swaps exposed the Company to variability in their fair value due to changes in the level of interest rates. It iswas the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that arewere appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in thisthe liability to other liabilities of the Company. To meet this objective,During the Company utilizesquarter ended September 30, 2021, Guaranty terminated these interest rate swaps as an asset/liability management strategy to hedge the change in value of the cash flows due to changes in expected interest rate assumptions.Interest rate swaps with notional amounts totaling $5,000$5,000 at the time of termination, as the risk exposure declined to acceptable levels. The swaps were canceled at an expense of $466, which is included in non-interest expense in the 2021 consolidated statement of earnings.2017 and 2016,2021 were designated as cash flow hedges of the debentures and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been includedFHLB advances. net income.Therefore, the aggregate fair value of the swaps is recorded in accrued interest and other liabilities within the consolidated balance sheets with changes in fair valuewas recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges loss. longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.F-39GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)The information pertaining to outstanding interest rate swap agreements used to hedge floating rate debentures was as follows:December 31, 2017 Pay Rate Receive Rate Effective Date $ 2,000 5.979 % 3 month LIBOR plus 1.67% 10/1/2016 8.25 $ 301 $ 3,000 7.505 % 3 month LIBOR plus 3.35% 10/30/2012 4.83 $ 270 December 31, 2016 Notional
Amount Pay Rate Receive Rate Effective Date Maturity
in Years Unrealized
Losses$ 2,000 5.979 % 3 month LIBOR plus 1.67% 10/1/2016 9.25 $ 342 $ 3,000 7.505 % 3 month LIBOR plus 3.35% 10/30/2012 5.83 $ 353 $724, $882$282 and $603$607 during the years ended December 31, 2017, 20162022 and 2015, respectively, and2021, respectively. This expense is reported as a component of interest expense on the debentures. Atdebentures, FHLB advances and federal funds purchased on the consolidated statements of earnings. No interest expense on swap transactions was recorded during the year ended December 31, 2017, the Company expected none of the unrealized losses to be reclassified as a reduction of interest expense during the remainder of 2018.2023.1715 - COMMITMENTS AND CONTINGENCIESaccounting principles generally accepted in the United States of America,GAAP, are not included in theits consolidated balance sheets. These transactions are referred to as “off-balance sheet commitments.” The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit, which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.assessesconsiders the likelihood of commitments and letters of credit to be funded, along with credit related conditions present in the loan agreements when estimating an ACL for off-balance sheet commitments. Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management has determined that credit risk associatedis minimal and there is no recorded ACL with certainrespect to these commitments to extend credit in determining the levelas of the allowance for credit losses.Table of Contents
20172023 and 2016, 2022, no amounts have been recorded as liabilitiesan ACL for the Bank’s potential obligations under these guarantees.of December 31:of: Contract or Notional Amount 2017 2016 Commitments to extend credit $ 326,879 $ 297,607 Letters of credit 8,336 8,879 F-40GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)2017,2023, the Company had letters of credit of $52,000$5,000 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.Operating LeasesThe Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2023. Minimum future lease payments under these non-cancelable operating leases in excess of one year as of December 31, 2017, are as follows:Year Ended December 31, Amount 2018 $ 736 2019 768 2020 593 2021 421 2022 250 Thereafter 2,668 $ 5,436 Rental expense for the years ended December 31, 2017, 2016, and 2015 was approximately $919, $717 and $474 respectively, and is included in other expenses in the accompanying consolidated statement of earnings.Certain of the operating leases above provide for renewal options at their fair value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by other leases.1816 - REGULATORY MATTERSto bethat were fully phased in byon January 1, 2019. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and or Tier 1 capital to adjusted quarterly average assets (as defined). Management believes, as of December 31, 20172023 and December 31, 20162022, that the Bank met all capital adequacy requirements to which it was subject.When fully phased in on January 1, 2019, the will have (i) introduced a new capital measure called “Common Equity Tier I”1” (“CETI”CET1”), (ii) specified that Tier I1 capital consist of CETICET1 and “Additional Tier I1 Capital” instruments meeting specified requirements, (iii) defined CETICET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CETICET1 and not to the other components of capital, and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.F-41GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Starting in January 2016, the implantationregulations, and (v) imposed a "capital conservation buffer" of the2.5% above minimum risk-based capital conservation buffer was effective for the Company starting at the 0.625% levelrequirements, below which an institution would be subject to limitations on certain activities including payment of dividends, share repurchases and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designeddiscretionary bonuses to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios.20172023 and December 31, 2016,2022, the Company’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Company must maintain minimum total risk-based, CETI, Tier 1 risk-based and Tier I leveragecapital ratios as set forth in the table. There are no conditions or events since December 31, 20172023 that management believes have changed the Company’s category.Table of Contents
I1 capital, net of goodwill, the rules permit the inclusion of $10,310$7,217 of trust preferred securities in Tier I1 capital atas of both December 31, 20172023 and 2016.2022. Additionally, the rules provide that trust preferred securities would no longer qualify for Tier I1 capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the subordinated debentures.isare presented in the following table:tables as of:
For Capital
Adequacy Purposes
Under Basel III
(Including Buffer)
Capitalized Under
Prompt Corrective
Action Provisions
For Capital
Adequacy Purposes
Under Basel III
(Including Buffer)
Capitalized Under
Prompt Corrective
Action Provisions Actual Amount Ratio Amount Ratio Amount Ratio December 31, 2017 Total capital to risk-weighted assets: Consolidated $ 215,720 14.13 % $ 122,111 8.00 % n/a Bank 206,490 13.53 % 122,122 8.00 % $ 152,652 10.00 % Tier 1 capital to risk-weighted assets: Consolidated 202,861 13.29 % 91,583 6.00 % n/a Bank 193,631 12.68 % 91,591 6.00 % 122,122 8.00 % Tier 1 capital to average assets: Consolidated 202,861 10.53 % 77,048 4.00 % n/a Bank 193,631 10.05 % 77,054 4.00 % 96,318 5.00 % Common equity tier 1 risk-based capital: Consolidated 192,551 12.61 % 68,687 4.50 % n/a Bank 193,631 12.68 % 68,694 4.50 % 99,224 6.50 % F-42GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued) Actual Amount Ratio Amount Ratio Amount Ratio December 31, 2016 Total capital to risk-weighted assets: Consolidated $ 149,468 10.86 % $ 110,083 8.00 % n/a Bank 173,528 12.63 % 109,947 8.00 % $ 137,434 10.00 % Tier 1 capital to risk-weighted assets: Consolidated 137,984 10.03 % 82,562 6.00 % n/a Bank 162,044 11.79 % 82,460 6.00 % 109,947 8.00 % Tier 1 capital to average assets: Consolidated 137,984 7.71 % 71,560 4.00 % n/a Bank 162,044 9.06 % 71,505 4.00 % 89,381 5.00 % Common equity tier 1 risk-based capital: Consolidated 127,674 9.28 % 61,922 4.50 % n/a Bank 162,044 11.79 % 61,845 4.50 % 89,332 6.50 % the CompanyGuaranty are mainly provided by dividends from its subsidiaries. However, certain regulatory restrictions exist regarding the ability of its bank subsidiary to transfer funds to Guaranty in the form of cash dividends, loans or advances. The amount of dividends that a subsidiary bank organized aas a national banking association, such as the Bank, may declare in a calendar year is the subsidiary bank’s net profits for that year combined with its retained net profits for the preceding two years. Retained net profits, as defined by the OCC,Office of the Comptroller of the Currency ("OCC"), consist ofTable of Contents
2017,2023, the Bank had $10,756$56,504 available for payment of dividends. Dividends are paid quarterly, and $10,724 in dividends were paid during the year ended December 31, 2023.1917 - CONCENTRATIONS OF CREDIT RISK2018 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASEare secured by collateralized mortgage obligations securities with a market value of $13,029were $25,172 and $7,221 as of December 31, 20172023 and 2022, respectively, and are secured by mortgage-backed securities and collateralized mortgage obligations and agency securities with a market value of $11,033 as of December 31, 2016, respectively. 2017 2016 Average balance during the year $ 12,769 $ 12,475 Average interest rate during the year 0.53 % 0.53 % Maximum month-end balance during the year $ 14,539 $ 14,817 Weighted average interest rate at year-end 0.38 % 0.41 % 2119 - RELATED PARTIESF-43GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)4,3, Note 87 and Note 10,9, the companyCompany has entered into loans, deposits and debenture transactions with related parties. Management believes the transactions entered into with related parties are in the ordinary course of business and are on terms similar to transitions with unaffiliated parties.2220 - FAIR VALUE–- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.–- Significant other 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.–- Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.Table of Contents
Sale:Derivative InstrumentsTheAssets acquired through or instead of loan foreclosure are initially recorded at fair valuesvalue less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of derivatives arecost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation models using observable marketapproach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data as of the measurement dateavailable. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly (Level 2)3).Impairedimpairedindividually evaluated collateral dependent loans with specific allocations of the allowance for loan losses is generally based on the present value of estimated future cash flows using the loan’s existing rate or, if repayment is expected solely from the collateral, the fair value of collateral, less costs to sell. The fair value of real estate collateral is determined using recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant (Level 3). Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business (Level 3). Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly (Level 3).F-44GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)table summarizestables summarize quantitative disclosures about the fair value measurements for each category of financial assets (liabilities) carried at fair value asvalue:
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(Level 3)2017 Fair Value Assets (liabilities) at fair value on a recurring basis: Available for sale securities Mortgage-backed securities $ 90,678 $ — $ 90,678 $ — Collateralized mortgage obligations 115,311 — 115,311 — Municipal securities 7,546 — 7,546 — Corporate bonds 18,837 — 18,837 — Derivative instruments (571 ) — (571 ) — Assets at fair value on a nonrecurring basis: Impaired loans 6,206 — — 6,206 Other real estate owned 2,244 — — 2,244 2016 Fair Value Assets (liabilities) at fair value on a recurring basis: Available for sale securities Mortgage-backed securities $ 59,690 $ — $ 59,690 $ — Collateralized mortgage obligations 65,133 — 65,133 — Municipal securities 7,219 — 7,219 — Corporate bonds 24,883 — 24,883 — Derivative instruments (695 ) — (695 ) — Assets at fair value on a nonrecurring basis: Impaired loans 6,065 — — 6,065 Other real estate owned 1,692 — — 1,692 yearyears ended December 31, 20172023 or 2016.:during the years ended December 31, 2017 and 2016 include certain foreclosed assets which, upon initial recognition, wereare remeasured and reported at fair value through a charge-off to the allowance for loancredit losses and certain foreclosed assets which, subsequent to their initial recognition, wereare remeasured at fair value through a write-down included in current earnings. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.The following table presentsvalue as of December 31: 2017 2016 Other real estate owned remeasured at initial recognition: Carrying value of other real estate owned prior to remeasurement $ 1,082 $ 78 Charge-offs recognized in the allowance for loan losses (195 ) (11 ) Fair value of other real estate owned remeasured at initial recognition $ 887 $ 67 F-45GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued) 2017 2016 2015 Other real estate owned remeasured subsequent to initial recognition: Carrying value of other real estate owned prior to remeasurement $ — $ 170 $ 167 Write-downs included in collection and other real estate owned expense — (69 ) (102 ) Fair value of other real estate owned remeasured subsequent to initial recognition $ — $ 101 $ 65 at:as of December 31, 2022. There were no nonrecurring Level 3 fair value measurements requiring quantitative information as of December 31, 2023.
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Fair Value Unobservable Input(s) December 31, 2017 Impaired loans $ 6,206 Fair value of collateral- sales comparison approach Selling costs or other normal adjustments: Real estate Equipment 10%-20% (16%) 10%-20% (3.6%) Other real estate owned $ 2,244 Appraisal value of collateral Selling costs or other normal adjustments 10%-20% (16%) Fair Value Unobservable Input(s) December 31, 2016 Impaired loans $ 6,065 Fair value of collateral- sales comparison approach Selling costs or other normal adjustments: Real estate Equipment 10%-20% (16%) 40%-50% (42%) Other real estate owned $ 1,692 Appraisal value of collateral Selling costs or other normal adjustments 10%-20% (16%) atas of December 31, 20172023 and 20162022, are as follows:
December 31, 2023 using:
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Fair Value
December 31, 2022 using:
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Fair Value Fair Value Measurements at
December 31, 2017 Using: Carrying Amount Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value Financial assets: Cash, due from banks, federal funds sold and interest-bearing deposits $ 91,428 $ 66,657 $ 24,771 $ — $ 91,428 Marketable securities held to maturity 174,684 — 176,790 — 176,790 Loans, net 1,347,779 — — 1,346,361 1,346,361 Accrued interest receivable 8,174 — 8,174 — 8,174 Nonmarketable equity securities 9,453 — 9,453 — 9,453 Cash surrender value of life insurance 19,117 — 19,117 — 19,117 Financial liabilities: Deposits $ 1,676,320 $ 1,378,467 $ 297,978 $ — $ 1,676,445 Securities sold under repurchase agreements 12,879 — 12,879 — 12,879 Accrued interest payable 922 — 922 — 922 Other debt — — — — — Federal Home Loan Bank advances 45,153 — 44,722 — 44,722 Subordinated debentures 13,810 — 11,495 — 11,495 F-46GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued) Fair Value Measurements at
December 31, 2016 Using: Carrying Amount Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value Financial assets: Cash, due from banks, federal funds sold and interest-bearing deposits $ 127,543 $ 100,205 $ 27,338 $ — $ 127,543 Marketable securities held to maturity 189,371 — 186,155 — 186,155 Loans, net 1,233,651 — — 1,235,306 1,235,306 Accrued interest receivable 7,419 — 7,419 — 7,419 Nonmarketable equity securities 10,500 — 10,500 — 10,500 Cash surrender value of life insurance 17,804 — 17,804 — 17,804 Financial liabilities: Deposits $ 1,576,791 $ 1,234,875 $ 342,615 $ — $ 1,577,490 Securities sold under repurchase agreements 10,859 — 10,859 — 10,859 Accrued interest payable 889 — 889 — 889 Other debt 18,286 — 18,286 — 18,286 Federal Home Loan Bank advances 55,170 — 55,160 — 55,160 Subordinated debentures 19,310 — 16,809 — 16,809 Cash Surrender Value of Life InsuranceThe carrying amounts of bank-owned life insurance approximate their fair value.non-interestnoninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 1). The fair values of deposit liabilities with defined maturities are estimated by discounting future cash flows using interest rates currently offered for deposits of similar remaining maturities (Level 2).Table of Contents
Subordinated debenturessubordinated debt, is estimated by discounting future cash flows using currently available rates for similar financing (Level 2).F-47GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)2321 - ACCUMULATED OTHER COMPREHENSIVE LOSS2017:2023: Total Beginning balance $ (695 ) $ (5,319 ) $ (473 ) $ (6,487 ) Other comprehensive income (loss) before reclassification 124 (33 ) 377 468 Amounts reclassified from accumulated other comprehensive loss — (108 ) — (108 ) Net current period other comprehensive income (loss) 124 (141 ) 377 360 Ending balance $ (571 ) $ (5,460 ) $ (96 ) $ (6,127 ) significant amounts reclassified out of each component of accumulated other comprehensive loss for the year endingended December 31, 2017:2023:
Accumulated Other
Comprehensive Loss
Statement Where Net
Earnings is PresentedDetails about Accumulated Other Comprehensive Loss Components Amount Reclassified From Accumulated Other Comprehensive Loss Affected Line Item in the Statement Where Net Earnings is Presented Unrealized gain on available for sale securities $ (167 ) Net realized gain on sale of securities transactions 59 Tax benefit $ (108 ) Net of Tax endingended December 31, 2016: Total Beginning balance $ (775 ) $ (5,212 ) $ (586 ) $ (6,573 ) Other comprehensive (loss) income before reclassification 80 (54 ) 113 139 Amounts reclassified from accumulated other comprehensive loss — (53 ) — (53 ) Net current period other comprehensive (loss) income 80 (107 ) 113 86 Ending balance $ (695 ) $ (5,319 ) $ (473 ) $ (6,487 ) Table of Contents
(continued) significant amounts reclassified out of each component of accumulated other comprehensive loss for the year endingended December 31, 2016:2022:
Accumulated Other
Comprehensive Loss
Earnings is PresentedDetails about Accumulated Other Comprehensive Loss Components Amount Reclassified From Accumulated Other Comprehensive Loss Affected Line Item in the Statement Where Net Earnings is Presented Unrealized gain on available for sale securities $ (82 ) Net realized gain on sale of securities transactions 29 Tax benefit $ (53 ) Net of Tax lossincome by component, net of tax, for the year endingended December 31, 2015:2021: Total Beginning balance $ (733 ) $ (4,413 ) $ (678 ) $ (5,824 ) Other comprehensive (loss) income before reclassification (42 ) (749 ) 92 (699 ) Amounts reclassified from accumulated other comprehensive loss — (50 ) — (50 ) Net current period other comprehensive (loss) income (42 ) (799 ) 92 (749 ) Ending balance $ (775 ) $ (5,212 ) $ (586 ) $ (6,573 ) significant amounts reclassified out of each component of accumulated other comprehensive loss for the year endingended December 31, 2015:
Accumulated Other
Comprehensive Loss
Statement Where Net
Earnings is PresentedDetails about Accumulated Other Comprehensive Loss Components Amount Reclassified From Accumulated Other Comprehensive Loss Affected Line Item in the Statement Where Net Earnings is Presented Unrealized gain on available for sale securities $ (77 ) Net realized gain on sale of securities transactions 27 Tax benefit $ (50 ) Net of Tax 2422 - EARNINGS PER SHAREF-49GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data) (continued)Table of Contents
2017 2016 2015 Numerator: Net earnings (basic) $ 14,439 $ 12,121 $ 10,111 Net earnings (diluted) $ 14,439 $ 12,121 $ 10,111 Denominator: Weighted-average shares outstanding (basic) 10,230,840 8,968,262 8,796,029 Effect of dilutive securities: Common stock equivalent shares from stock options 82,529 8,066 5,958 Weighted-average shares outstanding (diluted) 10,313,369 8,976,328 8,801,987 Net earnings per share Basic $ 1.41 $ 1.35 $ 1.15 Diluted $ 1.40 $ 1.35 $ 1.15 F-50GUARANTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data)2523 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION 2017 2016 ASSETS Cash and cash equivalents $ 14,009 $ 1,645 Investment in banking subsidiaries 208,995 176,979 Other assets 511 1,781 Total assets $ 223,515 $ 180,405 LIABILITIES AND EQUITY Debt $ 13,810 $ 37,596 Accrued expenses and other liabilities 2,360 895 KSOP-owned shares — 31,661 Shareholders’ equity 207,345 110,253 Total liabilities and shareholders’ equity $ 223,515 $ 180,405 2017 2016 2015 Interest income $ 11 $ 19 $ 3 Dividends from Guaranty Bank & Trust — 12,000 20,000 11 12,019 20,003 Expenses Interest expense 1,024 1,417 1,045 Other expenses 1,682 1,406 1,811 2,706 2,823 2,856 (Loss ) income before income tax and equity in undistributed income of subsidiary (2,695 ) 9,196 17,147 Income tax benefit 354 900 850 Income before equity in undistributed earnings of subsidiary (2,341 ) 10,096 17,997 Equity in undistributed earnings (loss) of subsidiary 16,780 2,025 (7,886 ) Net earnings $ 14,439 $ 12,121 $ 10,111 Comprehensive income $ 14,799 $ 12,207 $ 9,362 F-51Table of Contents
2017 2016 2015 Cash flows from operating activities Net earnings $ 14,439 $ 12,121 $ 10,111 Adjustments: Distributions in excess of (equity in undistributed) subsidiary earnings (16,780 ) (2,025 ) 7,886 Stock based compensation 355 211 237 Change in other assets 1,270 89 (646 ) Change in other liabilities 1,589 (227 ) (95 ) Net cash provided by operating activities 873 10,169 17,493 Cash flows from investing activities Acquisition of DCB Financial Corporation — — (7,329 ) Acquisition of Texas Leadership Bank of Royce City — — (7,771 ) Investment in Guaranty Bank & Trust (15,000 ) — (4,000 ) Net cash used in investing activities (15,000 ) — (19,100 ) Cash flows from financing activities Proceeds of borrowings 2,000 19,000 27,000 Repayments of borrowings (25,786 ) (20,714 ) (13,000 ) Sale of common stock 55,755 — 7,266 Purchase of treasury stock — (12,218 ) (14,568 ) Sale of treasury stock — 8,557 — Exercise of stock options 84 36 — Dividends paid (5,562 ) (4,615 ) (4,526 ) Net cash provided by (used in) financing activities 26,491 (9,954 ) 2,172 Net change in cash and cash equivalents 12,364 215 565 Beginning cash and cash equivalents 1,645 1,430 865 Ending cash and cash equivalents $ 14,009 $ 1,645 $ 1,430 F-52