Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the

Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☒

As of ~~November 1, 2021,~~May 2, 2022, there were ~~12,086,977~~12,000,490 outstanding shares of the registrant’s common stock, par value $1.00 per share.

CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~CASH FLOWS (Unaudited)

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

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 reduced the target federal funds rate range to 0.00% to 0.25%, at which it remains as of September 30, 2021. These reductions in interest rates and other 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. As a result of the spread of COVID-19 and its variants, economic uncertainties have arisen which can negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impact remains unknown at this time.

~~There is 0 allowance for credit losses recorded for our available for sale or held to maturity debt securities as of September 30, 2021 or December 31, 2020.~~

There were 26152 investments in an unrealized loss position, ~~and 22~~of which 79 were available for sale debt securities in an unrealized loss position with 0 recorded allowance for credit losses ~~at September 30, 2021.~~as of March 31, 2022. The available for sale securities in a loss position were composed of U.S. government agencies, corporate bonds, collateralized mortgage obligations and mortgage-backed securities.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 decline in fair value is 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 municipal 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 loss exceeds ~~20%~~20% of its book value. Consideration is given to (1) the extent to which fair value is 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 security for a period of time sufficient to allow for any anticipated recovery in fair value. Based on evaluation of available evidence, management believes the unrealized losses on the securities as of ~~September 30, 2021 is~~March 31, 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 has been recorded for these securities.

Management assesses held to maturity securities sharing similar risk characteristics on a collective basis for expected credit losses under CECL. As of ~~September 30, 2021,~~March 31, 2022, our held to maturity securities consisted of municipal bonds, treasury securities and mortgage-backed securities issued by the U.S. Government and its agencies. With regard to the treasuries 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. Accordingly, no allowance for credit losses has been recorded for these securities.

Mortgage-backed securities and collateralized mortgage obligations are backed by pools of mortgages that are insured or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association or the Government National Mortgage Association.

As of ~~September 30, 2021,~~March 31, 2022, there were 0 holdings of securities of any one issuer, other than the collateralized mortgage obligations and mortgage-backed securities issued by the U.S. government and its agencies, in an amount greater than 10% of ~~shareholders’ equity.~~total equity attributable to Guaranty Bancshares, Inc.

Securities with fair values of approximately ~~$279,726~~$349,612 and ~~$314,962~~$310,958 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.

There were 0 securities sold during the three ~~or nine~~ months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~

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 at the date of transfer are retained in other comprehensive income and in the carrying value of the held to maturity securities and are amortized over the remaining life of the security. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income in the accompanying balance sheet totaled $9,684 at September 30, 2021. ~~This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.~~

During the year ended December 31, 2020, a total allowance for credit losses provision of ~~$13,200~~$13,200 was recorded primarily to account for the estimated impact of COVID-19 on credit quality and resulted largely from changes to individual loan risk ratings, as well as COVID-specific qualitative factors primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were impacted by the effects of COVID-19. WeDuring 2021, we recorded 0 provision in the first quarter, ~~of 2021,~~ a ~~$1,000~~$1,000 reverse provision in the second quarter and a ~~$700~~$700 reverse provision in the third quarter. These provision reversals ~~capture the~~captured improvements that ~~have~~ occurred to macroeconomic factors evaluated at the onset of the pandemic as part of the aforementioned COVID-specific qualitative factors, as well as risk rating upgrades for specific loans, which ~~impact~~impacted the reserve calculations within our ~~model, offset by growth~~model. In the first quarter of 2022, we unwound the remaining COVID-specific qualitative factors and recorded an additional reverse provision of $1,250 to account for significant improvements in ~~our overall loan portfolio. Although management is cautiously optimistic about improving vaccination and hospitalization rates~~COVID-related health statistics and economic ~~trends, it is very likely that the economic effects of the pandemic will continue into 2022.~~impacts.

The Company uses the weighted-average remaining maturity ("WARM") method as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate containing 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 in a segment 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 unadjusted historical charge-off rate is then adjusted, using qualitative factors, for current conditions and for reasonable and supportable forecast periods. Qualitative loss factors are based on the Company’s judgment of company, market, industry or business specific data, differences in loan-specific risk characteristics such as underwriting standards, portfolio mix, risk grades, delinquency level, or term. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. Additionally, we have adjusted for changes in expected environmental and economic conditions, such as changes in unemployment rates, property values, and other relevant factors over the next 12 to 24 months. Management adjusted the historical loss experience for these expectations. No reversion adjustments were necessary, as the starting point for the Company’s estimate was a cumulative loss rate covering the expected contractual term of the portfolio.

The ACL is measured on a collective segment basis when similar risk characteristics exist. Our loan portfolio is segmented first by regulatory call report code, and second, by internally identified risk grades for our commercial loan segments and by delinquency status for our consumer loan segments. We also have separate segments for our warehouse lines of credit, for our internally originated SBA loans, for our SBA loans acquired from Westbound Bank and for SBA-guaranteed PPP loans. Consistent forecasts of the loss drivers are used across the loan segments. For loans that do not share general risk characteristics with segments, we estimate a specific reserve on an individual basis. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan's initial effective interest rate or the fair value of collateral for collateral-dependent loans.

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 closely monitors economic conditions and loan performance trends to manage and evaluate the exposure to credit risk. Key factors tracked by the Company and utilized in evaluating the credit quality of the loan portfolio include trends in delinquency ratios, the level of nonperforming assets, borrower’s repayment capacity, and collateral coverage.

The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of ~~September 30, 2021:~~March 31, 2022:

September 30, 2021

2021

2020

2019

2018

2017

Prior

Revolving Loans Amortized Cost

Total

Commercial and industrial:

Pass

$
199,537

$
40,901

$
20,982

$
9,595

$
4,333

$
17,616

$
86,768

$
379,732

Special mention

0

96

—

—

21

—

—

117

Substandard

—

278

60

196

43

5

—

582

Nonaccrual

—

—

0

25

—

14

0

39

Total commercial and industrial loans

$
199,537

$
41,275

$
21,042

$
9,816

$
4,397

$
17,635

$
86,768

$
380,470

Charge-offs

$
—

$
—

$
(167
)

$
(67
)

$
(19
)

$
—

$
(47
)

$
(300
)
Recoveries

—

—

—

—

—

0

15

15

Current period net

$
—

$
—

$
(167
)

$
(67
)

$
(19
)

$
0

$
(32
)

$
(285
)

Construction and development:

Pass

$
153,740

$
78,121

$
29,164

$
7,149

$
16,405

$
14,347

$
8,313

$
307,239

Special mention

—

710

—

—

955

—

—

1,665

Substandard

—

—

609

3

—

—

—

612

Nonaccrual

—

—

230

—

—

—

—

230

Total construction and development loans

$
153,740

$
78,831

$
30,003

$
7,152

$
17,360

$
14,347

$
8,313

$
309,746

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

1

—

1

Current period net

$
—

$
—

$
—

$
—

$
—

$
1

$
—

$
1

Commercial real estate:

Pass

$
100,853

$
98,665

$
80,197

$
64,919

$
44,565

$
176,005

$
14,699

$
579,903

Special mention

398

—

0

2,439

4,591

1,629

—

9,057

Substandard

—

7,040

0

10,124

13,110

13,732

—

44,006

Nonaccrual

—

60

—

73

33

221

—

387

Total commercial real estate loans

$
101,251

$
105,765

$
80,197

$
77,555

$
62,299

$
191,587

$
14,699

$
633,353

Charge-offs

$
—

$
—

$
(17
)

$
(56
)

$
(472
)

$
(271
)

$
—

$
(816
)
Recoveries

—

—

—

—

11

—

—

11

Current period net

$
—

$
—

$
(17
)

$
(56
)

$
(461
)

$
(271
)

$
—

$
(805
)

Farmland:

Pass

$
72,382

$
12,776

$
8,683

$
8,541

$
5,345

$
21,626

$
5,777

$
135,130

Special mention

—

—

—

—

—

28

—

28

Substandard

—

—

—

—

—

118

—

118

Nonaccrual

—

—

—

—

—

109

28

137

Total farmland loans

$
72,382

$
12,776

$
8,683

$
8,541

$
5,345

$
21,881

$
5,805

$
135,413

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—


March 31, 2022	2022		2021		2020			2019		2018		Prior		Revolving Loans Amortized Cost			Total
Commercial and industrial:
Pass	$	42,707	$	96,935	$	27,986		$	14,909	$	5,920	$	16,305	$	88,106		$	292,868
Special mention		—		156		—			—		—		—		—			156
Substandard		—		—		265			659		210		37		—			1,171
Nonaccrual		—		33		71			—		—		—		35			139
Total commercial and industrial loans	$	42,707	$	97,124	$	28,322		$	15,568	$	6,130	$	16,342	$	88,141		$	294,334

Charge-offs	$	—	$	—	$	(30	)	$	—	$	—	$	—	$	(89	)	$	(119	)
Recoveries		—		—		—			—		—		33		6			39
Current period net	$	—	$	—	$	(30	)	$	—	$	—	$	33	$	(83	)	$	(80	)

Construction and development:
Pass	$	42,538	$	176,595	$	48,275		$	18,242	$	6,119	$	18,559	$	5,960		$	316,288
Special mention		—		0		814			—		0		932		—			1,746
Substandard		—		—		0			0		1		—		—			1
Nonaccrual		—		—		—			—		—		—		—			—
Total construction and development loans	$	42,538	$	176,595	$	49,089		$	18,242	$	6,120	$	19,491	$	5,960		$	318,035

Charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—		$	—
Recoveries		—		—		—			—		—		—		—			—
Current period net	$	—	$	—	$	—		$	—	$	—	$	—	$	—		$	—

Commercial real estate:
Pass	$	67,507	$	137,731	$	104,126		$	76,086	$	57,139	$	173,813	$	16,875		$	633,277
Special mention		0		—		0			0		8,921		13,406		—			22,327
Substandard		—		0		0			0		1,034		17,415		—			18,449
Nonaccrual		—		0		—			115		64		326		—			505
Total commercial real estate loans	$	67,507	$	137,731	$	104,126		$	76,201	$	67,158	$	204,960	$	16,875		$	674,558

Charge-offs	$	—	$	—	$	—		$	—	$	—	$	—	$	—		$	—
Recoveries		—		—		—			—		1		—		—			1
Current period net	$	—	$	—	$	—		$	—	$	1	$	—	$	—		$	1

(Continued)

~~22.~~14.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

September 30, 2021

2021

2020

2019

2018

2017

Prior

Revolving Loans Amortized Cost

Total

1-4 family residential:

Pass

$
101,523

$
72,986

$
48,075

$
38,577

$
29,077

$
97,575

$
13,368

$
401,181

Special mention

—

—

—

—

0

57

—

57

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

—

—

184

383

254

1,344

—

2,165

Total 1-4 family residential loans

$
101,523

$
72,986

$
48,259

$
38,960

$
29,331

$
98,976

$
13,368

$
403,403

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Multi-family residential:

Pass

$
13,113

$
4,312

$
4,392

$
15,448

$
545

$
2,194

$
131

$
40,135

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

675

—

—

675

Nonaccrual

—

—

—

—

—

—

—

—

Total multi-family residential loans

$
13,113

$
4,312

$
4,392

$
15,448

$
1,220

$
2,194

$
131

$
40,810

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Consumer and overdrafts:

Pass

$
21,949

$
14,015

$
5,654

$
5,400

$
820

$
656

$
4,838

$
53,332

Special mention

—

1

9

—

—

—

—

10

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

8

25

22

70

9

11

—

145

Total consumer loans and overdrafts

$
21,957

$
14,041

$
5,685

$
5,470

$
829

$
667

$
4,838

$
53,487

Charge-offs

$
(180
)

$
(34
)

$
(38
)

$
(32
)

$
(2
)

$
—

$
—

$
(286
)
Recoveries

45

3

—

8

2

19

—

77

Current period net

$
(135
)

$
(31
)

$
(38
)

$
(24
)

$
0

$
19

$
—

$
(209
)

Agricultural:

Pass

$
2,611

$
2,081

$
1,052

$
1,082

$
275

$
592

$
6,366

$
14,059

Special mention

—

—

—

—

20

—

—

20

Substandard

—

—

5

31

39

13

—

88

Nonaccrual

—

20

—

9

3

—

—

32

Total agricultural loans

$
2,611

$
2,101

$
1,057

$
1,122

$
337

$
605

$
6,366

$
14,199

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Total loans:

Pass

$
665,708

$
323,857

$
198,199

$
150,711

$
101,365

$
330,611

$
140,260

$
1,910,711

Special mention

398

807

9

2,439

5,587

1,714

—

10,954

Substandard

—

7,318

674

10,354

13,867

13,868

—

46,081

Nonaccrual

8

105

436

560

299

1,699

28

3,135

Total loans

$
666,114

$
332,087

$
199,318

$
164,064

$
121,118

$
347,892

$
140,288

$
1,970,881

Charge-offs

$
(180
)

$
(34
)

$
(222
)

$
(155
)

$
(493
)

$
(271
)

$
(47
)

$
(1,402
)
Recoveries

45

3

—

8

13

20

15

104

Total current period net (charge-offs) recoveries

$
(135
)

$
(31
)

$
(222
)

$
(147
)

$
(480
)

$
(251
)

$
(32
)

$
(1,298
)


March 31, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total
Farmland:
Pass	$	45,866	$	92,766	$	12,486	$	7,915	$	7,375	$	14,292	$	5,914	$	186,614
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		70		—		70
Nonaccrual		—		—		195		—		—		103		0		298
Total farmland loans	$	45,866	$	92,766	$	12,681	$	7,915	$	7,375	$	14,465	$	5,914	$	186,982

Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—		—
Current period net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

1-4 family residential:
Pass	$	35,231	$	131,940	$	63,134	$	38,256	$	32,144	$	112,524	$	15,667	$	428,896
Special mention		—		—		—		91		—		203		—		294
Substandard		—		—		—		—		—		—		—		—
Nonaccrual		—		163		0		—		172		1,230		—		1,565
Total 1-4 family residential loans	$	35,231	$	132,103	$	63,134	$	38,347	$	32,316	$	113,957	$	15,667	$	430,755

Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		30		—		30
Current period net	$	—	$	—	$	—	$	—	$	—	$	30	$	—	$	30

Multi-family residential:
Pass	$	12,469	$	16,723	$	2,742	$	6,385	$	900	$	2,501	$	301	$	42,021
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		0		—		0
Total multi-family residential loans	$	12,469	$	16,723	$	2,742	$	6,385	$	900	$	2,501	$	301	$	42,021

Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—		—
Current period net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

(Continued)

~~23.~~15.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)


March 31, 2022	2022			2021			2020			2019		2018		Prior		Revolving Loans Amortized Cost			Total
Consumer and overdrafts:
Pass	$	8,612		$	20,436		$	9,551		$	3,709	$	3,965	$	931	$	5,375		$	52,579
Special mention		—			9			6			4		—		9		250			278
Substandard		—			—			—			—		—		—		—			—
Nonaccrual		—			50			6			26		31		3		—			116
Total consumer loans and overdrafts	$	8,612		$	20,495		$	9,563		$	3,739	$	3,996	$	943	$	5,625		$	52,973

Charge-offs	$	(68	)	$	(6	)	$	(10	)	$	—	$	—	$	—	$	—		$	(84	)
Recoveries		30			1			—			10		—		5		—			46
Current period net	$	(38	)	$	(5	)	$	(10	)	$	10	$	—	$	5	$	—		$	(38	)

Agricultural:
Pass	$	393		$	2,952		$	1,589		$	830	$	801	$	621	$	7,089		$	14,275
Special mention		—			—			—			—		—		6		—			6
Substandard		—			—			14			3		14		32		—			63
Nonaccrual		—			—			—			—		6		53		—			59
Total agricultural loans	$	393		$	2,952		$	1,603		$	833	$	821	$	712	$	7,089		$	14,403

Charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—		$	—
Recoveries		—			—			—			—		—		—		—			—
Current period net	$	—		$	—		$	—		$	—	$	—	$	—	$	—		$	—

Total loans:
Pass	$	255,323		$	676,078		$	269,889		$	166,332	$	114,363	$	339,546	$	145,287		$	1,966,818
Special mention		—			165			820			95		8,921		14,556		250			24,807
Substandard		—			—			279			662		1,259		17,554		—			19,754
Nonaccrual		—			246			272			141		273		1,715		35			2,682
Total loans	$	255,323		$	676,489		$	271,260		$	167,230	$	124,816	$	373,371	$	145,572		$	2,014,061

Charge-offs	$	(68	)	$	(6	)	$	(40	)	$	—	$	—	$	—	$	(89	)	$	(203	)
Recoveries		30			1			—			10		1		68		6			116
Total current period net (charge-offs) recoveries	$	(38	)	$	(5	)	$	(40	)	$	10	$	1	$	68	$	(83	)	$	(87	)

(Continued)

16.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of December 31, ~~2020:~~2021:

December 31, 2020

2020

2019

2018

2017

2016

Prior

Revolving Loans Amortized Cost

Total

Commercial and industrial:

Pass

$
278,687

$
30,563

$
12,860

$
4,366

$
6,131

$
16,294

$
90,074

$
438,975

Special mention

124

119

222

4,040

1,324

—

—

5,829

Substandard

—

307

540

50

43

—

—

940

Nonaccrual

—

—

13

—

14

—

—

27

Total commercial and industrial loans

$
278,811

$
30,989

$
13,635

$
8,456

$
7,512

$
16,294

$
90,074

$
445,771

Charge-offs

$
—

$
—

$
(43
)

$
—

$
—

$
—

$
(25
)

$
(68
)
Recoveries

—

—

43

—

—

14

44

101

Current period net

$
—

$
—

$
—

$
—

$
—

$
14

$
19

$
33

Construction and development:

Pass

$
118,590

$
76,926

$
26,212

$
24,524

$
7,742

$
10,507

$
3,266

$
267,767

Special mention

356

—

—

990

—

—

—

1,346

Substandard

—

609

5

—

680

—

—

1,294

Nonaccrual

—

—

—

—

—

—

—

—

Total construction and development loans

$
118,946

$
77,535

$
26,217

$
25,514

$
8,422

$
10,507

$
3,266

$
270,407

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Commercial real estate:

Pass

$
91,819

$
80,753

$
89,542

$
72,311

$
86,946

$
123,463

$
5,890

$
550,724

Special mention

—

2,716

3,542

849

5,724

449

—

13,280

Substandard

—

—

2,010

4,913

4,445

8,240

—

19,608

Nonaccrual

—

1,140

151

4,158

4,769

386

—

10,604

Total commercial real estate loans

$
91,819

$
84,609

$
95,245

$
82,231

$
101,884

$
132,538

$
5,890

$
594,216

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

1

—

1

Current period net

$
—

$
—

$
—

$
—

$
—

$
1

$
—

$
1

Farmland:

Pass

$
17,444

$
12,668

$
10,327

$
6,620

$
9,904

$
15,402

$
5,864

$
78,229

Special mention

—

—

—

—

—

35

—

35

Substandard

—

—

—

—

—

129

—

129

Nonaccrual

—

—

—

—

—

115

—

115

Total farmland loans

$
17,444

$
12,668

$
10,327

$
6,620

$
9,904

$
15,681

$
5,864

$
78,508

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—


December 31, 2021	2021		2020		2019			2018			2017			Prior			Revolving Loans Amortized Cost			Total
Commercial and industrial:
Pass	$	176,972	$	31,337	$	16,207		$	6,449		$	3,493		$	14,657		$	74,364		$	323,479
Special mention		—		88		—			—			14			—			—			102
Substandard		—		272		55			192			40			1			—			560
Nonaccrual		14		101		—			22			—			11			—			148
Total commercial and industrial loans	$	176,986	$	31,798	$	16,262		$	6,663		$	3,547		$	14,669		$	74,364		$	324,289

Charge-offs	$	—	$	—	$	(168	)	$	(67	)	$	(115	)	$	—		$	(61	)	$	(411	)
Recoveries		—		—		—			—			—			—			21			21
Current period net	$	—	$	—	$	(168	)	$	(67	)	$	(115	)	$	—		$	(40	)	$	(390	)

Construction and development:
Pass	$	180,056	$	68,765	$	20,499		$	6,507		$	8,235		$	13,565		$	8,615		$	306,242
Special mention		—		—		—			—			944			—			—			944
Substandard		—		—		609			2			—			—			—			611
Nonaccrual		—		—		—			—			—			—			—			—
Total construction and development loans	$	180,056	$	68,765	$	21,108		$	6,509		$	9,179		$	13,565		$	8,615		$	307,797

Charge-offs	$	—	$	—	$	—		$	—		$	—		$	—		$	—		$	—
Recoveries		—		—		—			—			—			1			—			1
Current period net	$	—	$	—	$	—		$	—		$	—		$	1		$	—		$	1

Commercial real estate:
Pass	$	134,617	$	93,806	$	80,733		$	59,380		$	43,457		$	145,477		$	16,065		$	573,535
Special mention		—		765		—			—			4,550			788			—			6,103
Substandard		—		6,987		0			10,041			12,981			12,553			—			42,562
Nonaccrual		—		0		124			69			32			337			80			642
Total commercial real estate loans	$	134,617	$	101,558	$	80,857		$	69,490		$	61,020		$	159,155		$	16,145		$	622,842

Charge-offs	$	—	$	—	$	(17	)	$	(56	)	$	(472	)	$	(271	)	$	—		$	(816	)
Recoveries		—		—		19			—			11			—			—			30
Current period net	$	—	$	—	$	2		$	(56	)	$	(461	)	$	(271	)	$	—		$	(786	)

(Continued)

~~24.~~17.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

December 31, 2020

2020

2019

2018

2017

2016

Prior

Revolving Loans Amortized Cost

Total

1-4 family residential:

Pass

$
87,578

$
62,937

$
52,087

$
37,224

$
43,858

$
93,486

$
10,091

$
387,261

Special mention

—

—

—

—

—

168

—

168

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

—

—

326

44

163

1,134

—

1,667

Total 1-4 family residential loans

$
87,578

$
62,937

$
52,413

$
37,268

$
44,021

$
94,788

$
10,091

$
389,096

Charge-offs

$
—

$
—

$
—

$
—

$
(9
)

$
(59
)

$
—

$
(68
)
Recoveries

—

—

—

—

—

2

—

2

Current period net

$
—

$
—

$
—

$
—

$
(9
)

$
(57
)

$
—

$
(66
)

Multi-family residential:

Pass

$
5,889

$
4,498

$
3,617

$
1,371

$
1,737

$
4,391

$
198

$
21,701

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

—

—

—

—

—

—

—

—

Total multi-family residential loans

$
5,889

$
4,498

$
3,617

$
1,371

$
1,737

$
4,391

$
198

$
21,701

Charge-offs

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Recoveries

—

—

—

—

—

—

—

—

Current period net

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

Consumer and overdrafts:

Pass

$
24,740

$
11,176

$
9,369

$
1,701

$
735

$
513

$
2,825

$
51,059

Special mention

16

83

9

7

—

—

—

115

Substandard

—

—

—

—

—

—

—

—

Nonaccrual

24

36

131

20

1

—

—

212

Total consumer loans and overdrafts

$
24,780

$
11,295

$
9,509

$
1,728

$
736

$
513

$
2,825

$
51,386

Charge-offs

$
(243
)

$
(63
)

$
(31
)

$
(43
)

$
(3
)

$
(6
)

$
—

$
(389
)
Recoveries

49

2

12

8

4

13

—

88

Current period net

$
(194
)

$
(61
)

$
(19
)

$
(35
)

$
1

$
7

$
—

$
(301
)

Agricultural:

Pass

$
3,489

$
1,718

$
1,893

$
607

$
273

$
189

$
7,408

$
15,577

Special mention

—

—

—

36

—

—

—

36

Substandard

—

7

10

—

24

—

—

41

Nonaccrual

—

—

33

—

45

2

—

80

Total agricultural loans

$
3,489

$
1,725

$
1,936

$
643

$
342

$
191

$
7,408

$
15,734

Charge-offs

$
—

$
—

$
(18
)

$
—

$
—

$
—

$
—

$
(18
)
Recoveries

—

—

—

—

20

—

—

20

Current period net

$
—

$
—

$
(18
)

$
—

$
20

$
—

$
—

$
2

Total loans:

Pass

$
628,236

$
281,239

$
205,907

$
148,724

$
157,326

$
264,245

$
125,616

$
1,811,293

Special mention

496

2,918

3,773

5,922

7,048

652

—

20,809

Substandard

—

923

2,565

4,963

5,192

8,369

—

22,012

Nonaccrual

24

1,176

654

4,222

4,992

1,637

—

12,705

Total loans

$
628,756

$
286,256

$
212,899

$
163,831

$
174,558

$
274,903

$
125,616

$
1,866,819

Charge-offs

$
(243
)

$
(63
)

$
(92
)

$
(43
)

$
(12
)

$
(65
)

$
(25
)

$
(543
)
Recoveries

49

2

55

8

24

30

44

212

Total current period net (charge-offs) recoveries

$
(194
)

$
(61
)

$
(37
)

$
(35
)

$
12

$
(35
)

$
19

$
(331
)


December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost		Total
Farmland:
Pass	$	94,491	$	11,868	$	8,664	$	7,456	$	5,191	$	11,145	$	6,290	$	145,105
Special mention		—		—		—		—		—		26		—		26
Substandard		—		—		—		—		—		72		—		72
Nonaccrual		—		195		—		—		—		103		—		298
Total farmland loans	$	94,491	$	12,063	$	8,664	$	7,456	$	5,191	$	11,346	$	6,290	$	145,501

Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—		—
Current period net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

1-4 family residential:
Pass	$	132,448	$	64,590	$	43,016	$	36,501	$	26,987	$	91,864	$	13,714	$	409,120
Special mention		—		—		—		—		—		18		—		18
Substandard		—		—		—		—		—		—		—		—
Nonaccrual		170		—		—		180		58		1,127		—		1,535
Total 1-4 family residential loans	$	132,618	$	64,590	$	43,016	$	36,681	$	27,045	$	93,009	$	13,714	$	410,673

Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—		—
Current period net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Multi-family residential:
Pass	$	16,663	$	4,286	$	6,436	$	908	$	474	$	2,113	$	91	$	30,971
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Nonaccrual		—		—		—		—		—		—		—		—
Total multi-family residential loans	$	16,663	$	4,286	$	6,436	$	908	$	474	$	2,113	$	91	$	30,971

Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—		—
Current period net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

(Continued)

~~25.~~18.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)


December 31, 2021	2021			2020			2019			2018			2017			Prior			Revolving Loans Amortized Cost			Total
Consumer and overdrafts:
Pass	$	24,715		$	11,589		$	4,557		$	4,647		$	558		$	543		$	4,478		$	51,087
Special mention		76			—			5			—			—			—			—			81
Substandard		—			—			—			—			—			—			—			—
Nonaccrual		56			27			10			62			5			—			—			160
Total consumer loans and overdrafts	$	24,847		$	11,616		$	4,572		$	4,709		$	563		$	543		$	4,478		$	51,328

Charge-offs	$	(285	)	$	(36	)	$	(57	)	$	(32	)	$	(2	)	$	(2	)	$	—		$	(414	)
Recoveries		61			3			—			8			2			21			—			95
Current period net	$	(224	)	$	(33	)	$	(57	)	$	(24	)	$	—		$	19		$	—		$	(319	)

Agricultural:
Pass	$	3,557		$	1,866		$	927		$	917		$	221		$	526		$	6,492		$	14,506
Special mention		—			—			—			—			13			—			—			13
Substandard		—			14			4			15			39			—			—			72
Nonaccrual		—			—			—			8			—			40			—			48
Total agricultural loans	$	3,557		$	1,880		$	931		$	940		$	273		$	566		$	6,492		$	14,639

Charge-offs	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Recoveries		—			—			—			—			—			8			—			8
Current period net	$	—		$	—		$	—		$	—		$	—		$	8		$	—		$	8

Total loans:
Pass	$	763,519		$	288,107		$	181,039		$	122,765		$	88,616		$	279,890		$	130,109		$	1,854,045
Special mention		76			853			5			—			5,521			832			—			7,287
Substandard		—			7,273			668			10,250			13,060			12,626			—			43,877
Nonaccrual		240			323			134			341			95			1,618			80			2,831
Total loans	$	763,835		$	296,556		$	181,846		$	133,356		$	107,292		$	294,966		$	130,189		$	1,908,040

Charge-offs	$	(285	)	$	(36	)	$	(242	)	$	(155	)	$	(589	)	$	(273	)	$	(61	)	$	(1,641	)
Recoveries		61			3			19			8			13			30			21			155
Total current period net charge-offs	$	(224	)	$	(33	)	$	(223	)	$	(147	)	$	(576	)	$	(243	)	$	(40	)	$	(1,486	)

There were 0 loans classified in the “doubtful” or “loss” risk rating categories as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

A troubled debt restructuring (“TDR”) is a restructuring in which a bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider.

There were no TDRs that subsequently defaulted during 2020, and the TDRs described above did 0t increase the allowance for credit losses and resulted in 0 charge-offs during the year ended December 31, 2020.

NOTE 6 – EQUITY AWARDS

The Company’s 2015 Equity Incentive Plan (the “Plan”) was adopted by the Company and approved by its shareholders in April 2015. The maximum number of shares of common stock that may be issued pursuant to stock-based awards under the Plan equals 1,100,000 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. Restricted stock awards vest under the period of restriction specified within their respective award agreements as determined by the Company. Forfeitures are recognized as they occur, subject to a 90-day grace period for vested options.

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 risk-free interest rate for the expected term of the option is based on U.S. Treasury yield curve in effect at the time of the grant.

A summary of stock option activity in the Plan during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ follows:


Nine Months Ended September 30, 2021	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Three Months Ended March 31, 2022										Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		506,200		$	26.81		5.82	$	1,805		502,780		$	25.77		5.59	$	5,936
Effect of 10% stock dividend		50,770
Granted		45,500			33.49		9.59		107		39,000			35.89
Exercised		(48,630	)		22.89		3.82		630
Forfeited		(19,020	)		26.01		6.84		187		(5,060	)		26.92
Balance, September 30, 2021		534,820		$	25.22		5.53	$	5,684
Balance, March 31, 2022											536,720		$	26.50		5.65	$	4,626

Exercisable at end of period		307,786		$	23.78		4.33	$	3,715		307,086		$	24.30		4.28	$	3,285

(Continued)

~~30.~~25.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)


Nine Months Ended September 30, 2020	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Three Months Ended March 31, 2021										Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		508,000		$	26.68		6.24	$	3,159		506,200		$	26.81		5.82	$	1,805
Effect of 10% stock dividend											50,770
Granted		39,000			27.43		9.51		24		24,500			33.37
Exercised		(3,000	)		24.00		2.04		3		(24,250	)		21.74
Forfeited		(37,600	)		29.68		8.12		24		(10,000	)		28.54
Balance, September 30, 2020		506,400		$	26.53		5.62	$	304
Balance, March 31, 2021											547,220		$	24.81		5.88	$	6,532

Exercisable at end of period		302,220		$	25.55		4.77	$	244		296,922		$	23.49		4.64	$	3,938

A summary of nonvested stock option activity in the Plan during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ follows:


Nine Months Ended September 30, 2021	Number of Shares			Weighted-Average Grant Date Fair Value
Three Months Ended March 31, 2022							Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		214,680		$	4.46			207,084		$	5.23
Effect of 10% stock dividend		23,218
Granted		45,500			5.82			39,000			6.03
Vested		(47,344	)		(5.72	)		(14,030	)		5.21
Forfeited		(9,020	)		(8.06	)		(2,420	)		9.13
Balance, September 30, 2021		227,034		$	5.11
Balance, March 31, 2022								229,634		$	5.38


Nine Months Ended September 30, 2020	Number of Shares			Weighted-Average Grant Date Fair Value
Three Months Ended March 31, 2021							Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		251,120		$	4.97			214,680		$	4.46
Effect of 10% stock dividend								23,218
Granted		39,000			3.86			24,500			5.67
Vested		(53,340	)		(6.07	)		(12,100	)		4.59
Forfeited		(32,600	)		(2.20	)
Balance, September 30, 2020		204,180		$	5.54
Balance, March 31, 2021								250,298		$	5.11

NaN options were exercised during the quarter ended March 31, 2022. Information related to stock options in the Plan is as follows for the ~~nine~~three months ended:


	March 31, 2022		March 31, 2021
Intrinsic value of options exercised	$	0	$	364
Cash received from options exercised		0		527
Weighted average fair value of options granted		6.03		5.67

Restricted Stock Awards and Units

A summary of restricted stock activity in the Plan during the three months ended March 31, 2022 and 2021 follows:

September 30, 2021

September 30, 2020

Intrinsic value of options exercised

$
630

$
3

Cash received from options exercised

1,113

72

Weighted average fair value of options granted

5.82

3.86


Three Months Ended March 31, 2022	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		30,190		$	27.52
Vested		(4,070	)		27.50
Balance, March 31, 2022		26,120		$	27.52

(Continued)

~~31.~~26.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

~~Restricted Stock Awards and Units~~

~~A summary of restricted stock activity in the Plan during the nine months ended September 30, 2021 and 2020 follows:~~

Nine Months Ended September 30, 2021

Number of
Shares

Weighted-Average
Grant
Date Fair Value

Outstanding at beginning of year

35,300

$
29.72

Effect of 10% stock dividend

3,530

—

Granted

3,500

33.09

Vested

(7,850
)

27.26

Forfeited

0

0

Balance, September 30, 2021

34,480

$
27.41

Nine Months Ended September 30, 2020

Number of
Shares

Weighted-Average
Grant
Date Fair Value

Outstanding at beginning of year

31,459

$
30.29

Granted

0

0

Vested

(13,380
)

30.30

Forfeited

0

0

Balance, September 30, 2020

18,079

$
30.28


Three Months Ended March 31, 2021	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		35,300		$	29.72
Effect of 10% stock dividend		3,530
Vested		(4,840	)		30.25
Balance, March 31, 2021		33,990		$	26.95

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 ~~September 30, 2021,~~March 31, 2022, there was ~~$1,831~~$1,817 of total unrecognized compensation expense related to unvested stock options granted under the Plan. The expense is expected to be recognized over a weighted-average period of ~~3.16~~3.17 years.

The Company granted options ~~and restricted stock~~ under the Plan during the first ~~nine~~three months of ~~2021~~2022 and ~~2020.~~2021. Expense of ~~$512~~$156 and ~~$494~~$162 was recorded during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively, which represents the fair value of shares vested during those periods.

NOTE 7 - EMPLOYEE BENEFITS

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 5%5% of a participant’s qualified compensation starting January 1, 2016. Guaranty’s total contributions accrued or paid during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 totaled $436and ~~2020 totaled $1,146 and $1,031,~~$404, respectively.

Upon separation from service or other distributable event, a participant’s account under the KSOP may be distributed in kind in the form of the GNTY common shares allocated to his or her account (with the balance payable in cash), or the entire account can be liquidated and distributed in cash.

As of ~~September 30, 2021,~~March 31, 2022, the number of shares held by the KSOP was ~~1,287,897.~~1,242,594. There were 0 unallocated shares to plan participants as of ~~September 30, 2021,~~March 31, 2022, and all shares held by the KSOP were treated as outstanding.

~~(Continued)~~

~~32.~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollars in thousands, except per share data)~~

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 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 ~~$36,582~~$37,352 and ~~$35,510~~$37,141 as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. A gain of $277,000 on proceeds from these life insurance policies resulting from the death of a former bank officer was recorded for the nine months ended September 30, 2021. NaN such gains were recorded during the nine months ended September 31, 2020.

Expense related to these plans totaled ~~$588~~$322 and ~~$500~~$358 for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively, and $592 for the year ended December 31, 2020.~~respectively. This expense is included in employee compensation and benefits on the Company’s consolidated statements of earnings. The recorded liability totaled approximately ~~$4,861~~$5,134 and ~~$4,383~~$4,969 as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively and is included in accrued interest and other liabilities on the Company’s consolidated balance sheets.

Bonus Plan

The Company has a bonus 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 Guaranty’s board of directors. The bonus 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

(Continued)

27.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

asset levels for the Company as a whole. These bonus amounts are established annually by Guaranty’s board of directors. The bonus expense under this plan for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 totaled $1,267and ~~2020 totaled $3,529 and $1,610,~~$880, respectively. This expense is included in employee compensation and benefits on the consolidated statements of earnings.

NOTE 8 – 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 14 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 ~~September 30, 2021,~~March 31, 2022, operating lease right-of-use assets were ~~$14,810~~$13,911 and liabilities were ~~$15,243,~~$14,477, and as of December 31, ~~2020,~~2021, lease assets and liabilities were ~~$13,291~~$14,376 and ~~$13,539,~~$14,882, 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 ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ was approximately ~~$1,715~~$549 and ~~$1,416,~~$568, respectively, and is 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:


	March 31, 2022			December 31, 2021
Operating leases
Operating lease right-of-use assets	$	13,911		$	14,376
Operating lease liabilities		14,477			14,882

Weighted average remaining lease term
Operating leases	8 years			8 years
Weighted average discount rate
Operating leases		1.96	%		1.95	%

The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2026 and thereafter. Minimum future lease payments under these non-cancelable operating leases as of March 31, 2022, are as follows:


Year Ended December 31,	Amount
2022	$	1,606
2023		2,093
2024		2,039
2025		1,870
2026		1,642
Thereafter		5,874
Total lease payments		15,124
Less: interest		(647	)
Present value of lease liabilities	$	14,477

NOTE 9 - INCOME TAXES

Income tax expense was as follows for:

(Continued)

~~33.~~28.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

~~The table below summarizes other information related to our operating leases as of:~~

September 30, 2021

December 31, 2020

Operating leases

Operating lease right-of-use assets

$
14,810

$
13,291

Operating lease liabilities

15,243

13,539

Weighted average remaining lease term

Operating leases

9 years

9 years

Weighted average discount rate

Operating leases

1.95
%

2.19
%

The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2025 and thereafter. Minimum future lease payments under these non-cancelable operating leases as of September 30, 2021, are as follows:

Year Ended December 31,

Amount

2021

$
554

2022

2,152

2023

2,090

2024

2,035

2025

1,868

Thereafter

7,441

Total lease payments

16,140

Less: interest

(897
)
Present value of lease liabilities

$
15,243

~~NOTE 9 - INCOME TAXES~~

~~Income tax expense was as follows for:~~


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2021			2020			2021			2020			2022			2021
Income tax expense for the period	$	2,179		$	2,350		$	6,827		$	3,605		$	2,235		$	2,336
Effective tax rate		19.06	%		18.82	%		18.22	%		17.09	%		17.23	%		17.57	%

The effective tax rates differ from the statutory federal tax rate of ~~21%~~21% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ largely due to tax exempt interest income earned on certain investment securities and ~~loans and the nontaxable earnings on bank owned life insurance.~~loans.

NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS

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 sheets in other liabilities.

~~(Continued)~~

~~34.~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollars in thousands, except per share data)~~

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.

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 5. Management believed 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 was the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that were appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in the liability to other liabilities of the Company. During the quarter ended September 30, 2021, Guaranty terminated these interest rate swaps with notional amounts totaling ~~$5,000 as~~$5,000 at the time of ~~December 31, 2020,~~termination, as the risk exposure declined to acceptable levels. ~~The swaps were cancelled at an expense of $466, which is included in non-interest expense in the Consolidated Statement of Earnings.~~

~~The~~In the first quarter of 2022, the Company also ~~entered into~~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 iswas to reduce the overall cost of short-term 3-month FHLB advances that ~~will be~~were renewed consistent with the reset terms on the interest rate ~~swap and that are~~swaps. The swaps were cancelled at a net gain of $685, which is included in other non-interest income in the ~~amounts in Note 4. Interest~~Consolidated Statement of Earnings. The interest rate swaps, with notional amounts totaling ~~$40,000~~$40,000 as of ~~September 30, 2021 and~~ December 31, ~~2020~~2021, were designated as cash flow hedges of the FHLB advances.

~~The~~As of December 31, 2021, the aggregate fair value of ~~the~~these swaps iswas recorded in accrued interest and other liabilities within the Company’s ~~consolidated balance sheets~~Consolidated Balance Sheet, with changes in fair value recorded in other comprehensive income.

The information pertaining to outstanding interest rate swap agreements used to hedge floating rate debentures and FHLB advances was as follows as of:


September 30, 2021
December 31, 2021											December 31, 2021
Notional Amount	Notional Amount	Pay Rate			Receive Rate	Effective Date	Maturity in Years		Unrealized Losses		Notional Amount	Pay Rate			Receive Rate	Effective Date	Maturity in Years		Unrealized Losses (Gains)
$	15,000		0.668	%	3 month LIBOR	3/18/2020		1.47	$	93	15,000		0.668	%	3 month LIBOR	3/18/2020		1.22		8
	15,000		0.790	%	3 month LIBOR	3/18/2020		3.47		17	15,000		0.790	%	3 month LIBOR	3/18/2020		3.22		(184	)
	10,000		0.530	%	3 month LIBOR	3/23/2020		1.48		41	10,000		0.530	%	3 month LIBOR	3/23/2020		1.23		(12	)

December 31, 2020

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

5.25

$
408

3,000

7.505
%

3 month LIBOR plus 3.35%

10/30/2012

1.83

221

15,000

0.668
%

3 month LIBOR

3/18/2020

2.22

159

15,000

0.790
%

3 month LIBOR

3/18/2020

4.22

288

10,000

0.530
%

3 month LIBOR

3/23/2020

2.23

75

(Continued)

29.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Interest expense recorded on these swap transactions totaled ~~$483~~$63 and ~~$509~~$155 during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. This expense is reported as a component of interest expense on the debentures and the FHLB advances and federal funds purchased. ~~At September 30, 2021, the Company expected NaN of the unrealized loss to be reclassified as a reduction of interest expense during the remainder of 2021.~~

NOTE 11 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in its 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

~~(Continued)~~

~~35.~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollars in thousands, except per share data)~~

in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

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 considers 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 is minimal and there is 0 recorded ACL as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

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 shown in the table below. If the commitment were funded, the Company would be entitled to seek recovery from the customer. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~ 2021, 0 amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

Commitments and letters of credit outstanding were as follows as of:


	Contract or Notional Amount				Contract or Notional Amount
	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Commitments to extend credit	$	392,332	$	324,277	$	426,745	$	405,269
Letters of credit		9,922		8,488		9,421		8,357

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 ~~September 30, 2021,~~March 31, 2022, the Company had letters of credit of ~~$35,833~~$31,033 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.

(Continued)

30.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

NOTE 12 - REGULATORY MATTERS

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

~~(Continued)~~

~~36.~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollars in thousands, except per share data)~~

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 that were fully phased in on 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, that the Bank met all capital adequacy requirements to which it was subject.

The Basel III Capital Rules, among other things, have (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, (iv) expanded the scope of the deductions/adjustments as compared to existing regulations, and (v) imposed a "capital conservation buffer" of ~~2.5%~~2.5% above minimum risk-based capital requirements, below which an institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, 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, CET1, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since ~~September 30, 2021~~March 31, 2022 that management believes have changed the Company’s category.

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 securities is less than the limit of 25% of Tier 1 capital, net of goodwill, the rules permit the inclusion of ~~$10,310~~$10,310 of trust preferred securities in Tier 1 capital as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Additionally, the rules provide that trust preferred securities would no longer qualify for Tier 1 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.

(Continued)

~~37.~~31.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

A comparison of the Company’s and Bank’s actual capital amounts and ratios to required capital amounts and ratios are presented in the following tables as of:


		Actual			Minimum Required For Capital Adequacy Purposes			Minimum Required Under Basel III (Including Buffer)			To Be Well Capitalized Under Prompt Corrective Action Provisions				Actual			Minimum Required For Capital Adequacy Purposes			Minimum Required Under Basel III (Including Buffer)			To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio		Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
September 30, 2021
March 31, 2022
Total capital to risk-weighted assets:
Consolidated		$	289,390	14.13%	$	163,886	8.00%	$	215,100	10.50%	n/a				$	339,743	15.89%	$	171,045	8.00%	$	224,496	10.50%	n/a
Bank			301,528	14.71%		164,015	8.00%		215,270	10.50%	$	205,019	10.00%			324,424	15.17%		171,045	8.00%		224,496	10.50%	$	213,806	10.00%
Tier 1 capital to risk-weighted assets:
Consolidated			263,721	12.87%		122,914	6.00%		174,129	8.50%	n/a					278,653	13.03%		128,283	6.00%		181,735	8.50%	n/a
Bank			275,839	13.45%		123,011	6.00%		174,266	8.50%		164,015	8.00%			297,670	13.92%		128,283	6.00%		181,735	8.50%		171,045	8.00%
Tier 1 capital to average assets:(1)
Consolidated			263,721	9.06%		116,422	4.00%		116,422	4.00%	n/a					278,653	8.99%		123,998	4.00%		123,998	4.00%	n/a
Bank			275,839	9.48%		116,418	4.00%		116,418	4.00%		145,523	5.00%			297,670	9.60%		123,967	4.00%		123,967	4.00%		154,959	5.00%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			253,411	12.37%		92,186	4.50%		143,400	7.00%	n/a					268,343	12.55%		96,213	4.50%		149,664	7.00%	n/a
Bank			275,839	13.45%		92,259	4.50%		143,513	7.00%		133,262	6.50%			297,670	13.92%		96,213	4.50%		149,664	7.00%		138,974	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.	(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.													(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 For Capital Adequacy Purposes			Minimum Required Under Basel III (Including Buffer)			To Be Well Capitalized Under Prompt Corrective Action Provisions				Actual			Minimum Required For Capital Adequacy Purposes			Minimum Required Under Basel III (Including Buffer)			To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio		Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
December 31, 2020
December 31, 2021
Total capital to risk-weighted assets:
Consolidated		$	263,144	13.20%	$	159,496	8.00%	$	209,338	10.50%	n/a				$	297,370	14.51%	$	163,986	8.00%	$	215,232	10.50%	n/a
Bank			285,490	14.32%		159,514	8.00%		209,362	10.50%	$	199,392	10.00%			311,335	15.19%		163,936	8.00%		215,166	10.50%	$	204,920	10.00%
Tier 1 capital to risk-weighted assets:
Consolidated			238,115	11.94%		119,622	6.00%		169,464	8.50%	n/a					271,696	13.25%		122,990	6.00%		174,235	8.50%	n/a
Bank			260,459	13.06%		119,635	6.00%		169,483	8.50%		159,514	8.00%			285,661	13.94%		122,952	6.00%		174,182	8.50%		163,936	8.00%
Tier 1 capital to average assets:(1)
Consolidated			238,115	9.13%		104,293	4.00%		104,293	4.00%	n/a					271,696	9.18%		118,369	4.00%		118,369	4.00%	n/a
Bank			260,459	9.99%		104,293	4.00%		104,293	4.00%		130,366	5.00%			285,661	9.66%		118,345	4.00%		118,345	4.00%		147,931	5.00%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			227,805	11.43%		89,716	4.50%		139,559	7.00%	n/a					261,386	12.75%		92,242	4.50%		143,488	7.00%	n/a
Bank			260,459	13.06%		89,726	4.50%		139,574	7.00%		129,605	6.50%			285,661	13.94%		92,214	4.50%		143,444	7.00%		133,198	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.	(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.													(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 Guaranty 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 as 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.

(Continued)

~~38.~~32.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

NOTE 13 - FAIR VALUE

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 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 - 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.

Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Marketable Securities: The fair values for marketable securities 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). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivative Instruments: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

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).

Individually Evaluated Collateral Dependent Loans: The fair value of individually evaluated collateral dependent loans is generally based on 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).

(Continued)

~~39.~~33.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

The following tables summarize quantitative disclosures about the fair value measurements for each category of financial assets (liabilities) carried at fair value:


As of September 30, 2021	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Other Unobservable Inputs (Level 3)
Assets (liabilities) at fair value on a recurring basis:
March 31, 2022											Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets at fair value on a recurring basis:
Available for sale securities:
Treasury securities											$	0	$	0	$	0	$	0
Mortgage-backed securities	$	159,142		$	0	$	159,142		$	0		197,892		0		197,892		0
Collateralized mortgage obligations		64,623			0		64,623			0		65,035		0		65,035		0
Municipal securities												0		0		0		0
Corporate bonds		35,246			0		35,246			0		34,496		0		34,496		0
U.S. government agencies		10,059			0		10,059			0		9,281		0		9,281		0
Loans held for sale		1,903			0		0			1,903		1,166		0		0		1,166
Cash surrender value of life insurance		36,582			0		36,582			0		37,352		0		37,352		0
SBA servicing assets		808			0		0			808		1,004		0		0		1,004
Derivative instrument liabilities		(151	)		0		(151	)		0

Assets at fair value on a nonrecurring basis:
Individually evaluated collateral dependent loans		4,418			—		—			4,418		4,217		0		0		4,217


As of December 31, 2020	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Other Unobservable Inputs (Level 3)
Assets (liabilities) at fair value on a recurring basis:
December 31, 2021											Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Other Unobservable Inputs (Level 3)
Assets at fair value on a recurring basis:
Available for sale securities:
Mortgage-backed securities	$	107,164		$	0	$	107,164		$	0	$	221,308		$	0	$	221,308		$	0
Collateralized mortgage obligations		66,945			0		66,945			0		74,992			0		74,992			0
Municipal securities		175,704			0		175,704			0		0			0		0			0
Corporate bonds		30,982			0		30,982			0		35,935			0		35,935			0
U.S. government agencies												9,971			0		9,971			0
Loans held for sale		5,542			0		0			5,542		4,129			0		0			4,129
Cash surrender value of life insurance		35,510			0		35,510			0		37,141			0		37,141			0
SBA servicing assets		763			0		0			763		877			0		0			877
Derivative instrument assets		629			0		629			0		(196	)		0		(196	)		0
Derivative instrument liabilities		(1,151	)		0		(1,151	)		0		8			0		8			0

Assets at fair value on a nonrecurring basis:
Individually evaluated collateral dependent loans		8,427			0		0			8,427		4,244			0		0			4,244

There were no transfers between Level 2 and Level 3 during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or for the year ended December 31, ~~2020.~~2021.

Nonfinancial Assets and Nonfinancial Liabilities

Nonfinancial assets measured at fair value on a nonrecurring basis ~~during the nine months ended September 30, 2021 and 2020~~usually include certain foreclosed assets which, upon initial recognition, ~~were~~are remeasured and reported at fair value through a charge-off to the allowance for credit losses and certain foreclosed assets which, subsequent to their initial recognition, are remeasured at fair value through a write-down included in current earnings. The fair value of a foreclosed asset is usually estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

(Continued)

~~40.~~34.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

As of March 31, 2022 and 2021, and December 31, 2021, there were 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 presents~~0 foreclosed assets that were remeasured and recorded at fair ~~value as of:~~value.

As of March 31, 2022 and December 31, 2021, there were

September 30,
2021

December 31,
2020

September 30,
2020

Other real estate owned remeasured at initial recognition:

Carrying value of other real estate owned prior to remeasurement

$
0

$
42

$
0

Charge-offs recognized in the allowance for credit losses

0

(9
)

0

Fair value of other real estate owned remeasured at initial recognition

$
0

$
33

$
0

Other real estate owned remeasured subsequent to initial recognition:

Carrying value of other real estate owned prior to remeasurement

$
0

$
62

$
62

Write-downs included in collection and other real estate owned expense

0

(1
)

(1
)
Fair value of other real estate owned remeasured subsequent to initial recognition

$
0

$
61

$
61

~~The following table presents quantitative information about~~ nonrecurring ~~Level~~level 3 fair value measurements ~~as of:~~

September 30, 2021

Fair Value

Valuation
Technique(s)

Unobservable Input(s)

Range
(Weighted
Average)
Other real estate owned

$
40

Appraisal value of collateral

Selling costs or other normal adjustments

10%-20% (16%)

December 31, 2020

Fair Value

Valuation
Technique(s)

Unobservable Input(s)

Range
(Weighted
Average)
Other real estate owned

$
404

Appraisal value of collateral

Selling costs or other normal adjustments

10%-20% (16%)

requiring quantitative information.

The following table presents information on individually evaluated collateral dependent loans as of ~~September 30, 2021:~~March 31, 2022:


	Fair Value Measurements Using
March 31, 2022	Level 1		Level 2		Level 3		Total Fair Value
Commercial and industrial	$	—	$	—	$	475	$	475
Real estate:
Construction and development		—		—		0		0
Commercial real estate		—		—		3,742		3,742
Total	$	—	$	—	$	4,217	$	4,217

The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of March 31, 2022 and December 31, 2021, are as follows:


	Fair value measurements as of March 31, 2022 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	$	222,091	$	222,091	$	0	$	0	$	222,091
Marketable securities held to maturity		494,289		0		490,523		0		490,523
Loans, net		1,983,449		0		0		1,951,997		1,951,997
Accrued interest receivable		8,961		0		8,961		0		8,961
Nonmarketable equity securities		12,513		0		12,513		0		12,513
Financial liabilities:
Deposits	$	2,797,410	$	2,473,118	$	324,626	$	0	$	2,797,744
Securities sold under repurchase agreements		11,090		0		11,090		0		11,090
Accrued interest payable		591		0		591		0		591
Federal Home Loan Bank advances		7,500		0		7,494		0		7,494
Subordinated debt		54,146		0		52,190		0		52,190

Fair Value Measurements Using

Level 1

Level 2

Level 3

Total Fair Value

Commercial and industrial

$
—

$
—

$
79

$
79

Real estate:

Construction and development

—

—

402

402

Commercial real estate

—

—

3,937

3,937

Total

$
—

$
—

$
4,418

$
4,418


	Fair value measurements as of December 31, 2021 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	$	499,605	$	499,605	$	0	$	0	$	499,605
Marketable securities held to maturity		184,263		0		192,472		0		192,472
Loans, net		1,876,076		0		0		1,883,756		1,883,756
Accrued interest receivable		8,901		0		8,901		0		8,901
Nonmarketable equity securities		15,344		0		15,344		0		15,344
Financial liabilities:
Deposits	$	2,670,827	$	2,341,048	$	330,356	$	0	$	2,671,404
Securities sold under repurchase agreements		14,151		0		14,151		0		14,151
Accrued interest payable		481		0		481		0		481
Federal Home Loan Bank advances		47,500		0		47,501		0		47,501
Subordinated debt		19,810		0		17,833		0		17,833

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(Continued)

~~41.~~35.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

~~The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of September 30, 2021 and December 31, 2020, are as follows:~~

Fair value measurements as of
September 30, 2021 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

$
408,875

$
408,875

$
0

$
0

$
408,875

Marketable securities held to maturity

173,676

0

182,631

0

182,631

Loans, net

1,938,268

0

0

1,949,191

1,949,191

Accrued interest receivable

7,673

0

7,673

0

7,673

Nonmarketable equity securities

14,061

—

14,061

—

14,061

Financial liabilities:

Deposits

$
2,563,071

$
2,221,716

$
342,153

$
0

$
2,563,869

Securities sold under repurchase agreements

11,195

0

11,195

0

11,195

Accrued interest payable

555

0

555

0

555

Federal Home Loan Bank advances

47,500

0

47,653

0

47,653

Subordinated debentures

19,810

—

17,813

—

17,813

Fair value measurements as of
December 31, 2020 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

$
351,792

$
351,792

$
0

$
0

$
351,792

Loans, net

1,831,737

0

0

1,846,868

1,846,868

Accrued interest receivable

9,834

0

9,834

0

��
9,834

Nonmarketable equity securities

14,095

0

14,095

0

14,095

Financial liabilities:

Deposits

$
2,286,390

$
1,907,587

$
380,570

$
0

$
2,288,157

Securities sold under repurchase agreements

15,631

0

15,631

0

15,631

Accrued interest payable

804

0

804

0

804

Federal Home Loan Bank advances

109,101

0

109,381

0

109,381

Subordinated debentures

19,810

0

17,406

0

17,406

~~The methods and assumptions, not previously presented, used to estimate fair values are described as follows:~~

Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values (Level 1).

Loans, net

The fair value of fixed-rate loans and variable-rate loans that reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality (Level 3).

~~Cash Surrender Value of Life Insurance~~

~~The carrying amounts of bank-owned life insurance approximate their fair value (Level 2).~~

~~(Continued)~~

~~42.~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollars in thousands, except per share data)~~

Nonmarketable Equity Securities

It is not practical to determine the fair value of Independent Bankers Financial Corporation, Federal Home Loan Bank, Federal Reserve Bank and other stock due to restrictions placed on its transferability.

Deposits and Securities Sold Under Repurchase Agreements

The fair values disclosed for demand deposits (e.g., interest and non-interest 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).

Other Borrowings

The fair value of borrowings, consisting of lines of credit, Federal Home Loan Bank advances and ~~Subordinated debentures~~subordinated debt is estimated by discounting future cash flows using currently available rates for similar financing (Level 2).

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate their fair values (Level 2).

Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

NOTE 14 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average common shares outstanding for the period. There were no net earnings attributable to the noncontrolling interest during the quarter ended March 31, 2022. 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 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 yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

(Continued)

~~43.~~36.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share ~~data)~~amounts)

The computations of basic and diluted earnings per share for the Company were as follows for the:


	Three Months Ended September 30,				Nine Months Ended September 30,				Quarter Ended March 31,
	2021		2020		2021		2020		2022		2021
Numerator:
Net earnings (basic)	$	9,253	$	10,134	$	30,647	$	17,487	$	10,738	$	10,962
Net earnings (diluted)	$	9,253	$	10,134	$	30,647	$	17,487	$	10,738	$	10,962

Denominator:
Weighted-average shares outstanding (basic)*		12,067,769		12,113,266		12,054,426		12,271,889
Weighted-average shares outstanding (basic)										12,109,074		12,038,638
Effect of dilutive securities:
Common stock equivalent shares from stock options		143,620		—		155,058		—		151,871		139,138
Weighted-average shares outstanding (diluted)*		12,211,389		12,113,266		12,209,484		12,271,889
Weighted-average shares outstanding (diluted)										12,260,945		12,177,776

Net earnings per share
Basic	$	0.77	$	0.84	$	2.54	$	1.43	$	0.89	$	0.91
Diluted	$	0.76	$	0.84	$	2.51	$	1.43	$	0.88	$	0.90

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

(Continued)

~~44.~~37.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Report”) and any subsequent Quarterly Reports on Form 10-Q, the risk factors appearing in Item 1A of Part II of this Report, and the other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Unless the context indicates otherwise, references in this Report to “we,” “our,” “us,” and the “Company” refer to Guaranty Bancshares, Inc., a Texas corporation, and its consolidated subsidiaries. References in this Report to “Guaranty Bank & Trust” and the “Bank” refer to Guaranty Bank & Trust, N.A., a national banking association and our wholly-owned consolidated subsidiary.

General

We were incorporated in 1990 to serve as the holding company for Guaranty Bank & 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 is traded on the NASDAQ Global Select Market under the symbol “GNTY.”

We currently operate 32 banking locations in the East Texas, Dallas/Fort Worth, Central Texas and Greater 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 reference into this filing or any other report.

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 State of Texas.

~~Impact of COVID-19 and~~ Quarterly Highlights

In March 2020, the outbreak of the novel coronavirus disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. Global health concerns relating to COVID-19 and variants of the virus, have had, and will likely continue to have, a severe impact on the macroeconomic environment, leading to lower interest rates, depressed equity market valuations, heightened financial market volatility and significant disruption in banking and other financial activity in the areas we serve. Since March 2020, governmental responses to the pandemic included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary or permanent closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, material decreases in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. Despite the wide availability of vaccines in early 2021, these risks and uncertainties remain as the extent to which the

~~(Continued)~~

~~45.~~

~~American public is willing to receive the vaccines remains unknown, and more contagious strains of the virus mutate both in the US and abroad.~~

The financial performance of the Company generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Company offers and whose success it relies on to drive growth, are highly dependent upon the business environment in the primary markets in which we operate and in the United States as a whole. Unfavorable market conditions and uncertainty due to the COVID-19 pandemic may result in a deterioration in the credit quality of borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values of the collateral securing loans and an overall material adverse effect on the quality of the loan portfolio.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program ("PPP"), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. PPP loans were intended to provide eligible businesses with funding for payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. PPP loans are forgivable to the extent that the borrower can demonstrate that the funds were used for such costs. Any amounts not forgiven will bear interest at 1% and be repayable over a term of 24 to 60 months from origination. PPP has been subject to amendments to increase the size of the program, extend the period in which loans could be made, extend the period for which costs could be forgiven and to provide additional flexibility to borrowers. In December 2020, several portions of the CARES Act were extended as part of the Consolidated Appropriations Act, including additional stimulus payments to consumers and a second round of PPP loans for small businesses.

Significant uncertainties as to future economic conditions exist, and we have taken measured actions during the pandemic, to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and reserves supported by a strong capital position. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from government stimulus and relief programs; however, the extent to which the COVID-19 pandemic will continue to impact our operations and financial results, as well as timing of economic recovery, remains uncertain.

Quarterly highlights of the Company include:

•

~~Solid Net Earnings and Core Earnings.~~ ~~Net earnings have remained solid for the past four quarters. Net core earnings~~†, which exclude provisions for credit losses and income tax, net PPP income, and interest on PPP-related borrowings, have also remained strong over the last four quarters, demonstrating consistent core earnings stream. Net core earnings†Strong Loan Growth. ~~were $9.7 million for the third quarter, compared to $9.8 million for the second~~The first quarter of ~~2021, and $11.1~~2022 saw strong organic loan growth, increasing $106.0 million, or 5.6%, during the ~~third quarter of 2020.~~



~~Producing Loan Pipeline.~~ ~~During 2020 and early 2021, we added new loan producers throughout our footprint and continued to experience strong loan demand within our loan pipeline.~~quarter. Excluding PPP ~~loans,~~and warehouse lending changes, our loans grew ~~$132.8~~$156.8 million, or ~~7.5%~~8.6%, during the ~~third quarter and have grown $168.6 million, or 9.8%, since December 31, 2020.~~quarter. Our loan growth is a result of internally generated sources and is not from loan purchases from other originators.

•

Solid Net Earnings and Core Earnings. Net earnings have remained consistent quarter-over-quarter. Net core earnings†, which exclude provisions for credit losses and income tax, and net PPP income, have trended upwards, demonstrating a consistent core earnings stream. Net core earnings† were $10.9 million for the first quarter, compared to $10.1 million for the fourth quarter of 2021, and $9.4 million during the first quarter of 2021.

(Continued)

38.

•

Strong Credit Quality. Non-performing assets as a percentage of total assets were ~~0.11%~~0.08% at ~~September 30, 2021,~~March 31, 2022, compared to 0.09% at December 31, 2021 and 0.13% at ~~June 30, 2021 and 0.53% at September 30, 2020.~~March 31, 2021. Net charge-offs to average loans (annualized) were ~~0.05%~~0.02% for the quarter ended ~~September 30, 2021,~~March 31, 2022, compared to ~~0.05%~~0.04% for the quarter ended ~~June 30,~~December 31, 2021, and ~~0.01%~~0.18% for the quarter ended ~~September 30, 2020. The decrease~~March 31, 2021.

•

Favorable Asset and Liability Management. Our Bank is slightly asset-sensitive and should see benefits from expected rate increases by the Federal Reserve. During the quarter, we terminated interest rate swaps that hedged $40.0 million of 3-month FHLB advances, resulting in ~~non-performing assets~~an extraordinary gain of $685,000, and we paid off the FHLB advances. Also during the ~~third~~first quarter of ~~2021 compared~~2022, we deployed excess cash of $270.0 million to purchase short term U.S. treasuries, maturing from August 2022 through March 2024, to take advantage of higher short term yields. As of March 31, 2022, we have $1.29 billion, or 65.0%, or our loan portfolio in variable rate loans. If rates increase as predicted by 50 bps at each of the ~~same period~~May and June FOMC meetings, as well as 25 bps in the remaining meetings during 2022, approximately $346.2 million, or 26.7%, of ~~2020 resulted primarily from~~ the ~~resolution of three problem~~variable rates loans ~~made to two borrowers, with outstanding combined book balances of $8.7 million at~~will reprice by December 31, ~~2020, that were acquired~~2022. We are maintaining a conservative stance on our cost of total deposits, given our excess liquidity position, and as of March 31, 2022, 38.1% of our total deposits are non-interest bearing. Anticipating increases in interest rates, on March 4, 2022, we issued $35.0 million in 10-year subordinated notes, at a fixed rate of 3.625% through April 1, 2027 and converting to a floating rate based on three-year term SOFR, reset quarterly, plus a spread of 192 basis points for the final five years. Finally, we repurchased 56,237 shares of Company stock during the ~~Westbound acquisition and which were fully reserved prior to the onset~~quarter at an average purchase price per share of ~~COVID-19.~~$35.44.



~~Paycheck Protection Program.~~ As of September 30, 2021, there are outstanding PPP2 balances of $71.4 million to 664 borrowers, down from the $100.8 million to 1,349 borrowers originally extended loans under the PPP2 program during 2021. Those PPP2 loans have resulted in recognition of $3.7 million of net origination fees for the nine months ended September 30, 2021. The Bank also recognized $2.1 million in PPP1 deferred origination fees for the nine months ended September 30, 2021 through both amortization and forgiveness of the related PPP1 loans. As of September 30, 2021, there are outstanding PPP1

~~(Continued)~~

~~46.~~

balances of $4.0 million to 109 borrowers, down from the $209.6 million to 1,944 borrowers that was originated under the PPP1 program. Net deferred origination fees remaining as of September 30, 2021 are $47,000 and $1.8 million for PPP1 and PPP2, respectively.

† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in subsequent sections of this MD&A.

~~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, is 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.

~~Loans and Allowance for Credit Losses (ACL)~~

Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for credit losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Fees associated with the origination 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.

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 collectible. If collectability is questionable, then cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured in accordance with the terms of the loan agreement.

The allowance for credit losses is a 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 uncollectibility of a loan balance is confirmed. Recoveries will not exceed the aggregate of loan amounts previously charged-off and expected to be charged-off.

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 in a pool or segment of our loan portfolio 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 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. In early 2020, to address the uncertainties resulting from COVID-19, an additional qualitative factor was added to specifically address COVID-related economic factors and potential credit losses, in addition to our standard qualitative factors.

The allowance for credit losses is measured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan portfolio segments include both regulatory call report codes and internally identified risk ratings for our

~~(Continued)~~

~~47.~~

commercial loan segments and delinquency status for our consumer loan segments. We also have separate segments for our warehouse lines of credit, for our internally originated SBA loans, for our SBA loans acquired from Westbound Bank, and for loans originated under the PPP program.

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 loan 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 impacts 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.

Loans with unique risk characteristics are evaluated on an individual basis. Loans evaluated individually are excluded from 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.

For off-balance sheet credit exposures, we estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable 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 likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

From time to time, we modify our loan agreement with a borrower. A modified loan is considered a troubled debt restructuring (TDR) when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by us that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. We review each troubled debt restructured loan and determine on a case by case basis if the loan can be grouped with its like segment for allowance consideration or whether it should be individually evaluated for a specific allowance for credit loss allocation. If individually evaluated, an 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. Most modifications made as a direct result of COVID-19 were not TDRs pursuant to the CARES Act and the April 7, 2020 Interagency guidance and GAAP.

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 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

~~(Continued)~~

~~48.~~

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.

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 minimizes risk.

~~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 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 unrealized holding gains at the date of transfer are retained in other comprehensive income and in the carrying value of the held to maturity securities and are amortized over the remaining life of the security. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income on our balance sheet totaled $9.7 million at September 30, 2021. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.

Management evaluates securities for an allowance for credit losses based on whether they are classified as held to maturity or available for sale. For held to maturity securities, management measures expected credit losses on a collective 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 income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

~~Fair Values of Financial Instruments~~

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence 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 and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.

~~Emerging Growth Company~~

The Jumpstart our Business Startups Act of 2012 (“JOBS Act”) permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public

~~(Continued)~~

~~49.~~

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 out of the extended transition period under the JOBS Act is irrevocable.

~~(Continued)~~

~~50.~~

Discussion and Analysis of Results of Operations for the ~~Nine Months~~ Quarter Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

Results of Operations

The following discussion and analysis compares our results of operations for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 with the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. The results of operations for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2021.~~2022.

Net earnings were ~~$30.6~~$10.7 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, as compared to ~~$17.5~~$11.0 million for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. The following table presents key earnings data for the periods indicated:


		For the Nine Months Ended September 30,							Quarter Ended March 31,
(dollars in thousands, except per share data)		2021			2020				2022			2021
Net earnings		$	30,647		$	17,487			$	10,738		$	10,962
Net earnings per common share*
Net earnings per common share
-basic			2.54			1.43				0.89			0.91
-diluted			2.51			1.43				0.88			0.90
Net interest margin(1)			3.52	%		3.72	%			3.33	%		3.81	%
Net interest rate spread(2)			3.35	%		3.41	%			3.18	%		3.63	%
Return on average assets			1.42	%		0.92	%			1.38	%		1.60	%
Return on average equity			14.32	%		8.94	%			14.44	%		16.01	%
Average equity to average total assets			9.90	%		10.28	%			9.59	%		10.00	%
Cash dividend payout ratio*			23.62	%		36.94	%
Cash dividend payout ratio										24.72	%		21.98	%

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
(1) Net interest margin is equal to net interest income divided by average interest-earning assets.	(1) Net interest margin is equal to net interest income divided by average interest-earning assets.							(1) Net interest margin is equal to net interest income divided by average interest-earning assets.
(2) Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.	(2) Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.							(2) Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

Large ~~provisions~~changes in the provision for credit losses, ~~in the prior period,~~ resulting from effects of COVID-19, and participation in the PPP program, have created temporary extraordinary results in the calculation of net earnings and related performance ratios. The following table illustrates net earnings and net core earnings per share, which are pre-tax, pre-provision and pre-extraordinary PPP income, as well as net core performance ratios for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

(Continued)

~~51.~~39.

For the Nine Months Ended September 30,

(dollars in thousands, except per share data)

2021

2020

Net earnings

$
30,647

$
17,487

Adjustments:

Provision for credit losses

(1,700
)

13,200

Income tax provision

6,827

3,605

PPP interest income, including fees

(6,864
)

(3,616
)
Net interest expense on PPP-related borrowings

—

34

Net core earnings†

$
28,910

$
30,710

Total average assets

$
2,889,882

$
2,541,214

Adjustments:

PPP loans average balance

(133,309
)

(124,541
)
Excess fed funds sold due to PPP-related borrowings

—

(30,657
)
Total average assets, adjusted†

$
2,756,573

$
2,386,016

Total average equity

286,228

261,205

PERFORMANCE RATIOS

Net earnings to average assets (annualized)

1.42
%

0.92
%
Net earnings to average equity (annualized)

14.32

8.94

Net core earnings to average assets, as adjusted (annualized)†

1.40

1.72

Net core earnings to average equity (annualized)†

13.50

15.70

PER COMMON SHARE DATA

Weighted-average common shares outstanding, basic*

12,054,426

12,271,889

Earnings per common share, basic*

$
2.54

$
1.43

Net core earnings per common share, basic*†

2.40

2.50

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in "—Non-GAAP Financial Measures".

~~(Continued)~~

~~52.~~


	Quarter Ended March 31,
(dollars in thousands, except per share data)	2022			2021
Net earnings	$	10,738		$	10,962
Adjustments:
Reversal of provision for credit losses		(1,250	)		—
Income tax provision		2,235			2,336
PPP interest income, including fees		(783	)		(3,513	)
Net core earnings†	$	10,940		$	9,785

Total average assets	$	3,146,339		$	2,775,567
Adjustments:
PPP loans average balance		(36,720	)		(137,251	)
Total average assets, adjusted†	$	3,109,619		$	2,638,316
Total average equity	$	301,579		$	277,612

PERFORMANCE RATIOS
Net earnings to average assets (annualized)		1.38	%		1.60	%
Net earnings to average equity (annualized)	$	14.44		$	16.01
Net core earnings to average assets, as adjusted (annualized)†		1.43			1.50
Net core earnings to average equity (annualized)†		14.71			14.29

PER COMMON SHARE DATA
Weighted-average common shares outstanding, basic		12,109,074			12,038,638
Earnings per common share, basic	$	0.89		$	0.91
Net core earnings per common share, basic†		0.90			0.81

† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in "—Non-GAAP Financial Measures".

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 ~~reverse~~reversal of the provision for credit losses, was ~~$71.5~~$24.3 million compared to ~~$66.0~~$24.5 million for the ~~nine~~three months ended ~~September 30, 2020, an increase~~March 31, 2021, a decrease of ~~$5.5 million,~~$168,000, or ~~8.3%~~0.7%. The ~~increase~~slight decline in net interest income ~~before the provision (or reverse provision) for credit losses~~ resulted ~~primarily~~ from a ~~$5.3 million, or 48.9%,~~ decrease in interest ~~expense. Although there~~income of $620,000, or 2.3%, which was partially offset by a ~~$55.8~~decrease in interest expense of $452,000, or 22.4%, quarter over quarter. Interest and fee income from PPP loans decreased $2.7 million, or ~~3.0%~~77.7%, ~~increase in average loans outstanding for~~while all other loan interest income increased $1.2 million, or 5.9%, during the ~~nine months ended September 30, 2021,~~current quarter, compared to the ~~nine~~prior year quarter. In addition, interest income from investment securities increased $1.0 million, of 48.0%, from the same quarter in the prior year.

Average loans outstanding, excluding PPP loans, for the three months ended ~~September 30, 2020, that~~March 31, 2022 was $1.90 billion, compared to $1.75 billion for the same period in 2021, an increase ~~was offset by a 12 basis point decrease in the average yield on total loans driven by lower rates on PPP loans and new and variable rate loans, partially offset by recognition~~ of ~~PPP origination fees, which are described in more detail in a table below.~~

$150.7 million, or 8.6%. The increase in average loans outstanding was primarily due to organic growth from the same quarter in the prior year. ~~Excluding PPP loans, the average loans outstanding for the nine months ending September 30, 2021 increased $47.0 million, or 2.7%, from the same period in the prior year.~~ The ~~$5.3 million~~$452,000 decrease in interest expense for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was primarily related to a decrease in the cost of interest-bearing deposits of 5213 basis points, ~~despite~~partially offset by a ~~$126.4~~$150.3 million, or ~~8.6%~~9.6%, increase in average interest-bearing deposits over the same period in ~~2020.~~2021. The average deposit balance increase is also the result of ~~continued reductions in interest rates for interest-bearing deposits as markets have allowed and general~~organic growth, apparent changes in consumer and business spending ~~habits.~~habits, and lack of stable investment alternatives for some depositors.

For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, net interest margin on a taxable equivalent basis and net interest spread were ~~3.56%~~3.37% and ~~3.35%~~3.18%, respectively, compared to ~~3.75%~~3.85% and ~~3.41%~~3.63% for the same period in ~~2020,~~2021, which reflects a 5358 basis point decrease in on interest-earning assets, and was partially offset by a 4713 basis point decrease on interest-bearing liabilities from the prior period.

(Continued)

40.

Average Balance Sheet Amounts, Interest Earned and Yield Analysis

The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for all major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rates 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 ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ 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.

~~(Continued)~~

~~53.~~


		For the Nine Months Ended September 30,																	Quarter Ended March 31,
		2021								2020									2022								2021
(dollars in thousands)		Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate				Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
ASSETS
Interest-earning assets:
Total loans(1)		$	1,906,989		$	69,664		4.88	%	$	1,851,209		$	69,337		5.00	%		$	1,937,000		$	22,272		4.66	%	$	1,886,863		$	24,195		5.20	%
Securities available for sale			372,707			5,481		1.97			326,472			5,711		2.34				328,737			1,618		2.00			378,076			2,091		2.24
Securities held to maturity			39,269			1,054		3.59			48,001			956		2.66				347,188			1,485		1.73			—			—		—
Nonmarketable equity securities			10,042			612		8.15			11,145			333		3.99				15,234			408		10.86			10,031			101		4.08
Interest-bearing deposits in other banks			391,096			221		0.08			136,684			452		0.44				334,871			110		0.13			334,329			126		0.15
Total interest-earning assets			2,720,103			77,032		3.79			2,373,511			76,789		4.32				2,963,030			25,893		3.54			2,609,299			26,513		4.12
Allowance for credit losses			(32,338	)							(27,552	)								(30,205	)							(33,242	)
Noninterest-earning assets			202,117								195,255									213,514								199,510
Total assets		$	2,889,882							$	2,541,214								$	3,146,339							$	2,775,567
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Interest-bearing deposits		$	1,594,219		$	4,444		0.37	%	$	1,467,838		$	9,746		0.89	%		$	1,710,157		$	1,242		0.29	%	$	1,559,865		$	1,603		0.42	%
Advances from FHLB and fed funds purchased			49,581			308		0.83			79,166			346		0.58				37,722			46		0.49			51,098			99		0.79
Line of credit			6,506			174		3.58			5,394			119		2.95				3,778			34		3.65			14,633			128		3.55
Subordinated debentures			19,810			558		3.77			16,261			511		4.20
Subordinated debt																				30,492			246		3.27			19,810			188		3.85
Securities sold under agreements to repurchase			16,044			10		0.08			17,179			37		0.29				10,916			2		0.07			21,173			4		0.08
Total interest-bearing liabilities			1,686,160			5,494		0.44			1,585,838			10,759		0.91				1,793,065			1,570		0.36			1,666,579			2,022		0.49
Noninterest-bearing liabilities:
Noninterest-bearing deposits			892,260								670,947									1,027,429								808,007
Accrued interest and other liabilities			25,234								23,224									24,266								23,369
Total noninterest-bearing liabilities			917,494								694,171									1,051,695								831,376
Shareholders’ equity			286,228								261,205
Total liabilities and shareholders’ equity		$	2,889,882							$	2,541,214
Equity																				301,579								277,612
Total liabilities and equity																			$	3,146,339							$	2,775,567
Net interest rate spread(2)								3.35	%							3.41	%								3.18	%							3.63	%
Net interest income					$	71,538							$	66,030								$	24,323							$	24,491
Net interest margin(3)								3.52	%							3.72	%								3.33	%							3.81	%
Net interest margin, fully taxable equivalent(4)								3.56	%							3.75	%								3.37	%							3.85	%

(1) Includes average outstanding balances of loans held for sale of $3.7 million and $6.1 million for the nine months ended September 30, 2021 and 2020, respectively.
(1) Includes average outstanding balances of loans held for sale of $3.2 million and $4.2 million for the three months ended March 31, 2022 and 2021, respectively.																		(1) Includes average outstanding balances of loans held for sale of $3.2 million and $4.2 million for the three months ended March 31, 2022 and 2021, respectively.
(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.	(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.																	(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, annualized.	(3) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.																	(3) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(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, annualized, using a marginal tax rate of 21%.	(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, annualized, using a marginal tax rate of 21%.																	(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, annualized, using a marginal tax rate of 21%.

(Continued)

~~54.~~41.

The Bank’s participation in the PPP program created temporary extraordinary results in the calculation of net interest margin. To illustrate ~~core~~the impact of the PPP program on net interest margin, ~~fully taxable equivalent, and remove the extraordinary impacts resulting from the PPP program,~~ the table below excludes PPP loans and their associated fees and costs for the ~~nine months~~quarters ended ~~September 30,~~March 31, 2022 and 2021:


		For the Nine Months Ended September 30, 2021										Quarter Ended March 31, 2022									Quarter Ended March 31, 2021
(dollars in thousands)		Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate				Average Outstanding Balance			Interest Earned			Average Yield			Average Outstanding Balance			Interest Earned			Average Yield
Total interest-earning assets		$	2,720,103		$	77,032			3.79	%		$	2,963,030		$	25,893			3.54	%	$	2,609,299		$	26,513			4.12	%

Total loans			1,906,989			69,664			4.88				1,937,000			22,272			4.66			1,886,863			24,195			5.20
Adjustments:
PPP loans average balance and net fees(1)			(133,309	)		(6,265	)		6.28				(36,720	)		(783	)		8.65			(137,251	)		(3,513	)		10.38
Total loans, net of PPP effects		$	1,773,680		$	63,399			4.78	%		$	1,900,280		$	21,489			4.59	%	$	1,749,612		$	20,682			4.79	%

Total interest-earning assets, net of PPP effects†		$	2,586,794		$	70,767			3.66	%		$	2,926,310		$	25,110			3.48	%	$	2,472,048		$	23,000			3.77	%

Net interest income, fully taxable equivalent ("FTE")					$	72,336									$	24,624								$	24,741
Net interest margin, FTE									3.56	%									3.37	%								3.85	%
Net interest income, net of PPP effects†						66,071										23,841									20,978
Net interest margin, FTE, net of PPP effects†									3.41	%									3.30	%								3.48	%

† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in "—Non-GAAP Financial Measures"	† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in "—Non-GAAP Financial Measures"										† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in "—Non-GAAP Financial Measures"
(1) Interest earned consists of interest income of $990,000 and net origination fees recognized in earnings of $5.3 million for the nine months ended September 30, 2021.
(1) Interest earned consists of interest income of $89,000 and net origination fees recognized in earnings of $694,000 for the quarter ended March 31, 2022.											(1) Interest earned consists of interest income of $89,000 and net origination fees recognized in earnings of $694,000 for the quarter ended March 31, 2022.

The following table presents the change in interest income and interest expense for the periods indicated for all major components of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.


	For the Nine Months Ended September 30, 2021 vs. 2020									For the Quarter Ended March 31, 2022 vs. 2021
	Increase (Decrease)									Increase (Decrease)
	Due to Change in						Total Increase			Due to Change in						Total Increase
(in thousands)	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
Interest-earning assets:
Total loans	$	2,092		$	(1,765	)	$	327		$	652		$	(2,575	)	$	(1,923	)
Securities available for sale		811			(1,041	)		(230	)		(273	)		(200	)		(473	)
Securities held to maturity		(174	)		272			98			1,485			—			1,485
Nonmarketable equity securities		(33	)		312			279			52			255			307
Interest-earning deposits in other banks		840			(1,071	)		(231	)		—			(16	)		(16	)
Total increase (decrease) in interest income	$	3,536		$	(3,293	)	$	243		$	1,916		$	(2,536	)	$	(620	)

Interest-bearing liabilities:
Interest-bearing deposits	$	844		$	(6,146	)	$	(5,302	)	$	156		$	(517	)	$	(361	)
Advances from FHLB and fed funds purchased		(129	)		91			(38	)		(26	)		(27	)		(53	)
Line of credit		25			30			55			(95	)		1			(94	)
Subordinated debentures		112			(65	)		47
Subordinated debt											101			(43	)		58
Securities sold under agreements to repurchase		(2	)		(25	)		(27	)		(2	)		—			(2	)
Total increase (decrease) in interest expense		850			(6,115	)		(5,265	)		134			(586	)		(452	)
Increase in net interest income	$	2,686		$	2,822		$	5,508
Increase (decrease) in net interest income										$	1,782		$	(1,950	)	$	(168	)

Provision for Credit Losses

The provision for credit losses is a charge to income in order to bring our allowance for credit losses to a level deemed appropriate by 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 ~~loan~~credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.

A reverse provision of $1.7 million was recorded for the nine months ended September 30, 2021 in order to capture the improvements that have occurred to macroeconomic factors evaluated at the onset of the COVID-19 pandemic, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model, and were offset by growth in our overall loan portfolio.

(Continued)

~~55.~~42.

~~For~~A reversal of the provision for credit losses of $1.25 million was recorded in the current quarter, versus no provision in prior year ~~ended December 31,~~quarter. During 2020, a total allowance for credit losses provision of $13.2 million was recorded primarily to account for the estimated impact of COVID-19 on credit quality and resulted largely from changes to individual loan risk ratings, as well as a COVID-specific qualitative ~~factors primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all~~factor of ~~which were impacted by the effects of COVID-19. These COVID-specific qualitative factors, established during 2020, were reduced during the first three quarters of 2021 from~~ 55 basis points that was applied across the loan ~~portfolio~~portfolio. As economic conditions improved during 2021, the COVID-specific qualitative factor was reduced to 14.75 basis points ~~across~~by December 31, 2021 and resulted in a reverse provision during 2021 of $1.7 million. The remaining COVID-specific qualitative factor was fully unwound in the first quarter of 2022 due to significant improvements in COVID-related health statistics and economic impacts. The reverse provision of $1.25 million for the quarter ended March 31, 2022, was primarily the result of this unwinding, but was partially offset by growth in our loan portfolio and by adjustments to other standard qualitative factors in order to ~~conservatively~~ capture increased concerns related to the ~~improvements~~current environment of very high inflation, likely negative impacts of rising rates on the economy and geopolitical uncertainly that ~~have occurred~~exists.

As of March 31, 2022, there were $13.1 million in loan balances past due 30 or more days, including $2.7 million in loan balances for nonperforming (nonaccrual) loans, compared to ~~macroeconomic factors mentioned. Although management is cautiously optimistic about improving vaccination~~$5.1 million and ~~hospitalization rates and economic trends, it is very likely that~~$3.4 million, respectively, for the ~~economic effects of the pandemic will continue into 2022.~~three months ended March 31, 2021.

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 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.

The following table presents components of noninterest income for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ and the period-over-period variations in the categories of noninterest income:


	For The Nine Months Ended September 30,				Increase (Decrease)			Quarter Ended March 31,				Increase (Decrease)
(in thousands)	2021		2020		2021 vs. 2020			2022		2021		2022 vs. 2021
Noninterest income:
Service charges	$	2,687	$	2,196	$	491		$	976	$	829	$	147
Gain on sale of loans		4,401		4,811		(410	)		905		1,398		(493	)
Fiduciary and custodial income		1,718		1,499		219			642		549		93
Bank-owned life insurance income		633		633		—			211		212		(1	)
Merchant and debit card fees		5,048		4,119		929			1,611		1,506		105
Loan processing fee income		481		461		20			187		153		34
Warehouse lending fees		648		695		(47	)		116		241		(125	)
Mortgage fee income		479		574		(95	)		131		177		(46	)
Other noninterest income		2,443		1,623		820			1,700		1,054		646
Total noninterest income	$	18,538	$	16,611	$	1,927		$	6,479	$	6,119	$	360

Total noninterest income increased ~~$1.9 million,~~$360,000, or ~~11.6%~~5.9%, for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period in ~~2020.~~2021. Material changes in the components of noninterest income are discussed below.

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 our non-interest income. Service fee income was ~~$2.7 million~~$976,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$2.2 million~~$829,000 for the same period in ~~2020,~~2021, an increase of ~~$491,000,~~$147,000, or ~~22.4%~~17.7%, resulting from an increase in the ~~expiration~~number of ~~COVID-related fee waivers~~demand deposit accounts from 50,952 as of March 31, 2021 to 53,479 as of March 31, 2022, an increase of 2,527 accounts, and from consumer spending activity and habits returning to more normal, pre-pandemic, levels.

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 ~~402~~108 mortgage loans for ~~$93.0~~$28.2 million during the ~~nine months~~quarter ended ~~September 30, 2021~~March 31, 2022 compared to ~~514~~154 mortgage loans for ~~$119.7~~$35.1 million for the ~~nine months~~quarter ended ~~September 30, 2020.~~March 31, 2021. Gain on sale of loans was ~~$4.4~~$905,000 for the quarter ended March 31, 2022, a decrease of $493,000, or 35.3%, compared to $1.4 million for the ~~nine months~~quarter ended ~~September 30, 2021, a decrease of $410,000, or 8.5%, compared to $4.8 million for the same period in 2020. $3.7 million~~March 31, 2021. $740,000 and ~~$706,000~~$165,000 of the gain in the current year was attributable to the sales of mortgage loans and SBA 7(a) loans, respectively, while the gain during the ~~nine month period of the~~ prior year consisted of ~~$4.2~~$1.4 million in mortgage loan sales and ~~$629,000 in~~no SBA 7(a) loan sales.

(Continued)

43.

Fiduciary and Custodial Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was ~~$1.7 million~~$642,000 and ~~$1.5 million~~$549,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively, an increase of ~~$219,000,~~$93,000, or ~~14.6%~~16.9%. The revenue increase resulted primarily from 2820 new accounts that opened during the first ~~nine~~three months of ~~2021,~~2022, which have generated additional income. Furthermore, revenue for our services fluctuates by month with the market value for all publicly-traded assets, which are

~~(Continued)~~

~~56.~~

primarily held in irrevocable trusts and investment management accounts that carry higher fees. Additionally, our custody-only assets are carried in a tiered percentage rate fee schedule charged against market value.

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 ~~$5.0~~$1.6 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~$4.1~~$1.5 million for the same period in ~~2020,~~2021, an increase of ~~$929,000,~~$105,000, or ~~22.6%~~7.0%. The increase was primarily due to ~~a change in contract terms, an annual earnings credit received from our debit card vendor and~~ growth in the number of DDAs and debit card usage volume during ~~2021.~~2022. The total number of DDAs increased by ~~2,897~~2,527 accounts, from ~~49,427~~50,952 as of ~~September 30, 2020~~March 31, 2021 to ~~52,457~~53,479 as of ~~September 30, 2021.~~March 31, 2022.

Loan Processing Fee Income. Revenue earned from collection of loan processing fees was $187,000 for the three months ended March 31, 2022, compared to $153,000 for the same period in 2021, an increase of $34,000, or 22.2%. The increase in loan processing fee income is primarily attributable to an increase in the volume of newly originated, renewed or extended loans during the period.

Warehouse Lending Fees. A portion of our lending involves the origination of mortgage warehouse lines of credit.
The decrease in warehouse lending fees of $125,000, or 51.9%, results from a decrease in overall warehouse lending activity in 2022. The average balance of mortgage warehouse lines decreased from $84.9 million for the three months ended March 31, 2021, to $53.0 million for the three months ended March 31, 2022, a $31.9 million, or 37.6%, decrease.

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
market. The decrease of $46,000, or 26.0%, from March 31, 2021 was primarily due to a lower volume of mortgage purchases and refinances due primarily to increased mortgage loan rates during the period in 2022.

Other. This category includes a variety of other income producing activities, including ~~mortgage~~ loan origination fees, wire transfer fees, loan administration fees, and other fee income. Other noninterest income increased ~~$820,000,~~$646,000, or ~~50.5%~~61.3%, for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to the same period in ~~2020 due~~2021 resulting primarily tofrom a net gain of ~~$277,000 on bank-owned life insurance proceeds resulting~~$685,000 from the ~~death~~termination of ~~a former bank officer, as well as~~three interest rate swaps during the ~~write-off~~first quarter of ~~repossessed assets of $356,000 in the prior year that was not present in the current year.~~2022.

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.

(Continued)

44.

For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, noninterest expense totaled ~~$54.3~~$19.1 million, an increase of ~~$6.0~~$1.8 million, or ~~12.3%~~10.2%, compared to ~~$48.3~~$17.3 million for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. The following table presents, for the periods indicated, the major categories of noninterest expense:


	For The Nine Months Ended September 30,				Increase (Decrease)			Quarter Ended March 31,				Increase (Decrease)
(in thousands)	2021		2020		2021 vs. 2020			2022		2021		2022 vs. 2021
Employee compensation and benefits	$	31,145	$	26,982	$	4,163		$	11,532	$	9,943	$	1,589
Non-staff expenses:
Occupancy expenses		8,258		7,624		634			2,711		2,687		24
Legal and professional fees		1,995		1,682		313			770		604		166
Software and technology		3,427		2,977		450			1,209		1,114		95
Amortization		932		1,009		(77	)		219		343		(124	)
Director and committee fees		619		595		24			205		255		(50	)
Advertising and promotions		1,288		1,142		146			407		455		(48	)
ATM and debit card expense		1,802		1,406		396			578		540		38
Telecommunication expense		611		620		(9	)		186		234		(48	)
FDIC insurance assessment fees		551		569		(18	)		233		169		64
Other noninterest expense		3,674		3,743		(69	)		1,029		968		61
Total noninterest expense	$	54,302	$	48,349	$	5,953		$	19,079	$	17,312	$	1,767

Material changes in the components of noninterest expense are discussed below.

Employee Compensation and Benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were ~~$31.1~~$11.5 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, an increase of ~~$4.2~~$1.6 million, or ~~15.4%~~16.0%, compared to ~~$27.0~~$9.9 million for the same period in ~~2020.~~2021. Employee compensation and benefits expense increased due to higher salaries and higher insurance expense accruals due to increased claims experience, higher payroll tax expense due to bonuses paid in July and bonus accruals. The bonus accrual in the prior year was lower during the first nine months of 2020 because of lower net income resulting from the effects of the COVID-19 pandemic.experience.

~~Occupancy Expenses.~~ ~~Occupancy expenses are mainly comprised of depreciation expense on fixed assets, and lease expense related to ASC 842 accounting. Occupancy expenses increased $634,000, or 8.3%, for the nine months~~

~~(Continued)~~

~~57.~~

~~ended September 30, 2021 compared to the same period of the prior year. Depreciation expense and ASC 842 lease expense increased $249,000 and $299,000, respectively, compared to the prior year period.~~

Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were ~~$2.0 million~~$770,000 and ~~$1.7 million~~$604,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively, an increase of ~~$313,000,~~$166,000, or ~~18.6%~~27.5%. The increase was primarily the result of professional recruiting fees paid during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 that were not paid during the same period of ~~2020.~~2021.

Software and Technology. Software and technology expenses increased ~~$450,000,~~$95,000, or ~~15.1%~~8.5%, from ~~$3.0~~$1.1 million for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 to ~~$3.4~~$1.2 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The increase is attributable primarily to new software investments to ~~improve online deposit account opening, further~~ enhance treasury management capabilities, improve cybersecurity monitoring and tools, and improve connectivity to support remote working and other technology capabilities.

~~ATM~~Amortization. Amortization costs include amortization of software and ~~Debit Card Expense.~~ ~~We pay processing fees related to the activity of our customers’ ATM and debit card usage. ATM and debit card expenses~~core deposit premiums. Amortization costs were ~~$1.8 million~~$219,000 for the ~~nine~~three months ended ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$396,000,~~$124,000, or ~~28.2%~~36.2%, compared to ~~$1.4 million~~$343,000 for the same period in ~~2020~~2021. The primary reason for the decrease in amortization was due to a decline in amortization expense on core deposit premiums from $213,000 to $113,000 during the three months ended March 31, 2021 and 2022, respectively.

Director and Committee Fees. Director and committee fees were $205,000 for the three months ended March 31, 2022, compared to $255,000 for the same period in 2021. The decrease of $50,000, or 19.6%, was primarily due to having fewer special meetings during the three months ended March 31, 2022 as compared to the same period in 2021.

Advertising and Promotions. Advertising and promotion-related expenses were $407,000 for the three months ended March 31, 2022 compared to $455,000 for the three months ended March 31, 2021, a ~~result~~decrease of ~~increased ATM~~$48,000, or 10.5%. The decrease was primarily due to fewer Bank-sponsored promotional events and ~~debit card usage by our customers.~~advertising campaigns during the current quarter compared to the prior year quarter.

Telecommunications Expense. Telecommunications-related expenses were $186,000 for the three months ended March 31, 2022, compared to $234,000 for the same period in 2021. The decrease of $48,000, or 20.5%, was mainly attributable to the conclusion of variable overhead expenses related to an ongoing project to aggregate utility expenses for the purpose of cost control through bundled contracts and negotiated rates. Additionally, during the first quarter of 2021, the Company had additional expense to allow certain employees the ability to work remotely, which we did not have during the first quarter of 2022.

(Continued)

45.

FDIC Insurance Assessment Fees. FDIC insurance assessment fees were $233,000 for the three months ended March 31, 2022, compared to $169,000 for the same period in 2021. The increase of $64,000, or 37.9%, was primarily due to an increase in the assessment rate resulting from changes in overall loan type composition.

Other. This category includes operating and administrative expenses, such as stock option expense, expenses ~~and losses~~ related to repossession of 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 with the prior year and ~~decreased~~increased only ~~$69,000,~~$61,000, or ~~1.8%~~6.3%, from ~~$3.7~~$968,000 for the three months ended March 31, 2021 to $1.0 million for the ~~nine~~three months ended ~~September 30, 2020 to $3.7 million for the nine months ended September 30, 2021.~~March 31, 2022.

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 ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ income tax expense totaled ~~$6.8~~$2.2 million and ~~$3.6~~$2.3 million, respectively. The ~~increase~~decrease in income tax expense was primarily due to ~~an increase~~a decrease in net earnings before taxes of ~~$16.4 million.~~$325,000. Our ~~effective tax rates for the nine months ended 2021 and 2020 were 18.22% and 17.09%, respectively.~~

~~Discussion and Analysis of Results of Operations for the Three Months Ended September 30, 2021 and 2020~~

~~Results of Operations~~

The following discussion and analysis of our results of operations compares our results of operations for the three months ended September 30, 2021 with the three months ended September 30, 2020. The results of operations for the three months ended September 30, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.

Net earnings were $9.3 million for the three months ended September 30, 2021, as compared to $10.1 million for the three months ended September 30, 2020. Basic earnings per share were $0.77 for the three months ended September 30, 2021 compared to $0.84 during the same period in 2020.

~~(Continued)~~

~~58.~~

~~The following table presents key earnings data for the periods indicated:~~

For the Three Months Ended September 30,

(dollars in thousands, except per share data)

2021

2020

Net earnings

$
9,253

$
10,134

Net earnings per common share*

-basic

0.77

0.84

-diluted

0.76

0.84

Net interest margin(1)

3.36
%

3.57
%
Net interest rate spread(2)

3.21
%

3.32
%
Return on average assets

1.24
%

1.53
%
Return on average equity

12.44
%

15.21
%
Average equity to average total assets

9.99
%

10.04
%
Cash dividend payout ratio*

25.97
%

21.74
%

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

(1) Net interest margin is equal to net interest income divided by average interest-earning assets.

(2) Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

The following table illustrates net earnings and net core earnings results, which are pre-tax, pre-provision and pre-extraordinary PPP income, as well as performance ratios for the three months ended September 30, 2021 and 2020:

For the Three Months Ended September 30,

2021

2020

Net earnings

$
9,253

$
10,134

Adjustments:

Provision for credit losses

(700
)

(300
)
Income tax provision

2,179

2,350

PPP loans, including fees

(1,005
)

(1,076
)
Net interest expense on PPP-related borrowings

—

3

Net core earnings†

$
9,727

$
11,111

Total average assets

$
2,953,181

$
2,639,335

Adjustments:

PPP loans average balance

(107,931
)

(209,506
)
Excess fed funds sold due to PPP-related borrowings

—

(8,152
)
Total average assets, adjusted†

$
2,845,250

$
2,421,677

Total average equity

$
295,076

$
265,027

PERFORMANCE RATIOS

Net earnings to average assets (annualized)

1.24
%

1.53
%
Net earnings to average equity (annualized)

12.44

15.21

Net core earnings to average assets, as adjusted (annualized)†

1.36

1.83

Net core earnings to average equity (annualized)†

13.08

16.68

PER COMMON SHARE DATA

Weighted-average common shares outstanding, basic*

12,067,769

12,113,266

Earnings per common share, basic*

$
0.77

$
0.84

Net core earnings per common share, basic*†

0.81

0.92

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in "—Non-GAAP Financial Measures".

~~Net Interest Income~~

Net interest income, before the provision for credit losses, for the third quarter of 2021 and 2020 was $23.6 million and $22.3 million, respectively, an increase of $1.3 million, or 5.8%, resulting primarily from a decrease in deposit-related interest expense of $937,000, or 41.0%, compared to the same quarter of the prior year.

~~(Continued)~~

~~59.~~

Loan yield increased from 4.59% for the third quarter of 2020 to 4.67% for the third quarter of 2021, a change of eight basis points, while the cost of interest-bearing deposits decreased from 0.63% to 0.33% during the same period, a change of 30 basis points. The increase in loan yield was primarily due to increased origination fee income recognized during the current quarter.

For the three months ended September 30, 2021, net interest margin on a taxable equivalent basis and net interest spread were 3.40% and 3.21%, respectively, compared to 3.61% and 3.32% for the same period in 2020. The decrease in net interest margin was due to a decrease in the average yield on interest-bearing deposits in other banks, which consists primarily of fed funds sold, from 0.12% in the third quarter of 2020 to 0.10% in the current quarter, while the average balance increased 228.3%, or $286,500, from the prior year average balance. The decrease in average deposit rate was primarily due to continued reductions in interest rates for interest-bearing deposits as market conditions have allowed.

~~Average Balance Sheet Amounts, Interest Earned and Yield Analysis~~

The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate 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 three months ended September 30, 2021 and 2020, 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.

~~(Continued)~~

~~60.~~

For the Three Months Ended September 30,

2021

2020

(dollars in thousands)

Average
Outstanding
Balance

Interest
Earned/
Interest
Paid

Average
Yield/ Rate

Average
Outstanding
Balance

Interest
Earned/
Interest
Paid

Average
Yield/ Rate

ASSETS

Interest-earning assets:

Total loans(1)

$
1,921,005

$
22,605

4.67
%

$
1,964,894

$
22,681

4.59
%
Securities available for sale

320,476

1,199

1.48

378,735

2,125

2.23

Securities held to maturity

116,527

1,054

3.59

—

—

—

Nonmarketable equity securities

10,040

268

10.59

12,332

111

3.58

Interest-bearing deposits in other banks

412,033

109

0.10

125,492

39

0.12

Total interest-earning assets

2,780,081

25,235

3.60

2,481,453

24,956

4.00

Allowance for credit losses

(31,133
)

(34,083
)

Noninterest-earning assets

204,233

191,965

Total assets

$
2,953,181

$
2,639,335

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:

Interest-bearing deposits

$
1,599,012

$
1,348

0.33
%

$
1,448,117

$
2,285

0.63
%
Advances from FHLB and fed funds purchased

48,609

107

0.87

79,580

141

0.70

Line of credit

2,641

25

3.76

4,989

44

3.51

Subordinated debentures

19,810

182

3.64

20,310

192

3.76

Securities sold under agreements to repurchase

12,171

3

0.10

20,568

15

0.29

Total interest-bearing liabilities

1,682,243

1,665

0.39

1,573,564

2,677

0.68

Noninterest-bearing liabilities:

Noninterest-bearing deposits

950,574

775,341

Accrued interest and other liabilities

25,288

25,403

Total noninterest-bearing liabilities

975,862

800,744

Shareholders’ equity

295,076

265,027

Total liabilities and shareholders’ equity

$
2,953,181

$
2,639,335

Net interest rate spread(2)

3.21
%

3.32
%
Net interest income

$
23,570

$
22,279

Net interest margin(3)

3.36
%

3.57
%
Net interest margin, fully taxable equivalent(4)

3.40
%

3.61
%

(1) Includes average outstanding balances of loans held for sale of $3.7 million and $9.3 million for the three months ended September 30, 2021 and 2020, 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, annualized.

(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, annualized, using a marginal tax rate of 21%.

~~(Continued)~~

~~61.~~

To illustrate core net interest margin and remove the extraordinary impacts resulting from the PPP program, the table below excludes PPP loans and their associated fees and costs for the three months ended September 30, 2021:

For the Three Months Ended September 30, 2021

(dollars in thousands)

Average
Outstanding
Balance

Interest
Earned/
Interest
Paid

Average
Yield/ Rate

Total interest-earning assets

$
2,780,081

$
25,235

3.60
%

Total loans

1,921,005

22,605

4.67

Adjustments:

PPP loans average balance and net fees(1)

(107,931
)

(1,005
)

3.69

Total loans, net of PPP effects

$
1,813,074

$
21,600

4.73
%

Total interest-earning assets, net of PPP effects†

$
2,672,150

$
24,230

3.60
%

Net interest income, fully taxable equivalent ("FTE")

$
23,848

Net interest margin, FTE

3.40
%
Net interest income, net of PPP effects†

22,843

Net interest margin, FTE, net of PPP effects†

3.39
%

† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in "—Non-GAAP Financial Measures"

(1) Interest earned consists of interest income of $270,000 and net origination fees recognized in earnings of $735,000 million for the three months ended September 30, 2021.

The following table presents the change in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

For the Three Months Ended
September 30, 2021 vs. 2020

Increase (Decrease)

Due to Change in

Total Increase

(in thousands)

Volume

Rate

(Decrease)

Interest-earning assets:

Total loans

$
(504
)

$
428

$
(76
)
Securities available for sale

(325
)

(601
)

(926
)
Securities held to maturity

—

1,054

1,054

Nonmarketable equity securities

(21
)

178

157

Interest-earning deposits in other banks

86

(16
)

70

Total (decrease) increase in interest income

$
(764
)

$
1,043

$
279

Interest-bearing liabilities:

Interest-bearing deposits

$
238

$
(1,175
)

$
(937
)
Advances from FHLB and fed funds purchased

(54
)

20

(34
)
Line of credit

(21
)

2

(19
)
Subordinated debentures

(5
)

(5
)

(10
)
Securities sold under agreements to repurchase

(6
)

(6
)

(12
)
Total increase (decrease) in interest expense

152

(1,164
)

(1,012
)
(Decrease) increase in net interest income

$
(916
)

$
2,207

$
1,291

~~Provision for Credit Losses~~

There was a reverse provision for credit losses of $700,000 for the three months ended September 30, 2021, compared to a provision expense of $300,000 for the three months ended September 30, 2020. During the second quarter of 2020, a COVID-specific qualitative factor was added to the CECL model, primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were impacted by the effects of COVID-19. The COVID-19 qualitative factor was reduced during the current year quarter by 12.75 basis points to reflect the continued improvement of those macroeconomic factors used to establish the initial COVID-specific qualitative factor at the onset of the pandemic. The reduction in the COVID-specific qualitative factor, along with risk grade improvements on specific loans, resulted in the reverse provision during the current quarter.

~~(Continued)~~

~~62.~~

~~Noninterest Income~~

~~The following table presents components of noninterest income for the three months ended September 30, 2021 and 2020 and the period-over-period variations in the categories of noninterest income:~~

For The Three Months Ended
September 30,

Increase
(Decrease)

(in thousands)

2021

2020

2021 vs. 2020

Noninterest income:

Service charges

$
1,003

$
717

$
286

Gain on sale of loans

1,759

2,114

(355
)
Fiduciary and custodial income

599

511

88

Bank-owned life insurance income

215

208

7

Merchant and debit card fees

1,620

1,654

(34
)
Loan processing fee income

164

181

(17
)
Warehouse lending fees

196

288

(92
)
Mortgage fee income

145

272

(127
)
Other noninterest income

748

718

30

Total noninterest income

$
6,449

$
6,663

$
(214
)

Total noninterest income decreased $214,000, or 3.2%, for the three months ended September 30, 2021 compared to the same period in 2020. Material changes in the components of noninterest income are discussed below.

~~Service Charges on Deposit Accounts.~~ Service fee income was $1.0 million for the three months ended September 30, 2021 compared to $717,000 for the same period in 2020, an increase of $286,000, or 39.9%. The increase was primarily due to the expiration of COVID-related fee waivers and increases in customer spending activity during the current year quarter.

~~Gain on Sale of Loans.~~ We sold 123 mortgage loans for $29.6 million for the three months ended September 30, 2021 compared to 227 mortgage loans for $52.6 million for the three months ended September 30, 2020. Gain on sale of loans was $1.8 million for the three months ended September 30, 2021, a decrease of $355,000, or 16.8%, compared to $2.1 million for the same period in 2020. The total gain on loans sold during the quarter ended September 30, 2021 consisted of $1.2 million in mortgage loans and $541,000 in SBA 7(a) loans sold during the quarter ended September 30, 2021 compared to $1.9 million and $210,000 for mortgage and SBA loans sold, respectively, during the quarter ended September 31, 2020.

~~Fiduciary and Custodial Income.~~ We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $599,000 and $511,000 for the three months ended September 30, 2021 and 2020, respectively, an increase of $88,000, or 17.2%. The revenue increase resulted primarily from 12 new accounts that opened during the quarter, which have generated additional income.

~~Warehouse Lending Fees.~~ A portion of our lending involves the origination of mortgage warehouse lines of credit.

The decrease in warehouse lending fees of $92,000, or 31.9%, results from a decrease in overall warehouse lending activity in current quarter compared to prior year quarter. The average quarterly balance of mortgage warehouse lines decreased from $99.1 million for the quarter ended September 30, 2020, to $57.5 million for the same quarter in 2021, a decrease of $41.6 million or 42.0%.

~~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

market. The decrease of $127,000, or 46.7%, from September 30, 2020 was primarily due to a lower volume of mortgage purchases and refinances due primarily to increased mortgage loan rates in the current quarter.

~~(Continued)~~

~~63.~~

~~Noninterest Expense~~

For the three months ended September 30, 2021, noninterest expense totaled $19.3 million, an increase of $2.5 million, or 15.1%, compared to $16.8 million for the three months ended September 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest expense:

For The Three Months Ended
September 30,

Increase
(Decrease)

(in thousands)

2021

2020

2021 vs. 2020

Employee compensation and benefits

$
10,998

$
9,439

$
1,559

Non-staff expenses:

Occupancy expenses

2,738

2,597

141

Legal and professional fees

644

574

70

Software and technology

1,258

1,093

165

Amortization

253

338

(85
)
Director and committee fees

197

211

(14
)
Advertising and promotions

495

301

194

ATM and debit card expense

646

509

137

Telecommunication expense

197

231

(34
)
FDIC insurance assessment fees

214

252

(38
)
Other noninterest expense

1,647

1,213

434

Total noninterest expense

$
19,287

$
16,758

$
2,529

~~Material changes in the components of noninterest expense are discussed below.~~

~~Employee Compensation and Benefits~~. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $11.0 million for the three months ended September 30, 2021, an increase of $1.6 million, or 16.5%, compared to $9.4 million for the same period in 2020. The increase resulted from higher salary expense, higher insurance expense accruals due to increased claims experience, higher payroll tax expense due to larger bonuses paid in July and bonus accruals. The bonus accrual in the prior year was lower due to lower net income.

~~Occupancy Expenses.~~ ~~Occupancy expenses increased $141,000, or 5.4% during the third quarter of 2021 compared to the same period of the prior year primarily due to new leases entered into during 2021.~~

~~Legal and Professional Fees.~~ Legal and professional fees, which include audit, loan review and regulatory assessments, were $644,000 for the three months ended September 30, 2021, an increase of $70,000, or 12.2%, compared to $574,000 for the same period in 2020. The increase was primarily the result of professional recruiting fees paid during the three months ended September 30, 2021, that were not paid during the same period of the prior year.

~~Software and Technology Fees.~~ Software and technology fees consist of fees paid to third parties for support of software and technology products. Software support fee expense was $1.3 million for the three months ended September 30, 2021, compared to $1.1 million for the same period in 2020, an increase of $165,000, or 15.1%. The increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities, upgrade cybersecurity monitoring and tools, and improve connectivity to support remote working and other technology capabilities.

~~Advertising and Promotions.~~ Advertising and promotion-related expenses increased $194,000, or 64.5%, during the three months ended September 30, 2021 compared to the same period in 2020, primarily due to the the resumption of Bank-sponsored promotional events and advertising campaigns that were halted or delayed during the prior year due to the pandemic.

~~ATM and Debit Card Expense.~~ ATM and debit card expenses were $646,000 for the three months ended September 30, 2021, an increase of $137,000, or 26.9%, compared to $509,000 for the same period in 2020 as a result of increased ATM and debit card usage by our customers.

~~(Continued)~~

~~64.~~

~~Other~~. Other noninterest expense increased $434,000, or 35.8%, from $1.2 million for the three months ended September 30, 2020 to $1.6 million for the three months ended September 30, 2021. The increase was primarily due to a one-time expense of $434,000 to terminate two swap agreements associated with our trust preferred securities.

~~Income Tax Expense~~

~~For the three months ended September 30, 2021, income tax expense totaled $2.2 million, in contrast to a tax benefit of $2.4 million received in the same period of 2020. The~~ effective tax rates for the three months ended ~~September 30,~~2022 and 2021 were 17.23% and ~~2020 were 19.06% and 18.82%~~17.57%, respectively. The effective tax rates differ from the statutory federal tax rate of 21% for the three months ended September 30, 2021 and 2020, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank-owned life insurance.

~~(Continued)~~

~~65.~~

Discussion and Analysis of Financial Condition as of ~~September 30, 2021~~March 31, 2022

Assets

Our total assets increased ~~$227.4~~$103.8 million, or ~~8.3%~~3.4%, from ~~$2.74~~$3.09 billion as of December 31, ~~2020~~2021 to ~~$2.97~~$3.19 billion as of ~~September 30, 2021.~~March 31, 2022. Our asset growth was primarily due to ~~increases~~an increase in gross loans of $106.0 million. Our cash and cash equivalents ~~of $57.1~~decreased by $277.5 million as we deployed excess cash during the quarter into investment securities, resulting in an increase in total securities of ~~$62.0 million and gross loans of $104.1~~$274.5 million. The increase in cash and cash equivalents is due to a $127.7 million increase in federal funds sold, partially offset by decreases in interest-bearing cash deposits and due from balances of $57.5 million and $13.1 million, respectively. The increase in loans resulted ~~largely~~ from organic growth. Excluding PPP and mortgage warehouse loan balances, our ~~participation in~~loans grew $156.8, or 8.6%, during the PPP2 loan program, as well as organic loan growth, and the increase in cash and cash equivalents resulted largely from increases in deposit balances that resulted from government stimulus payments, PPP2 loan proceeds and general changes in consumer spending and saving habits.quarter.

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.

Our loan portfolio is the largest category of our earning assets. As of ~~September 30, 2021,~~March 31, 2022, total loans held for investment were ~~$1.97~~$2.01 billion, an increase of ~~$104.1~~$106.0 million, or 5.6%, from the December 31, ~~2020~~2021 balance of ~~$1.87~~$1.91 billion. In addition to these amounts, ~~$1.9~~$1.2 million and ~~$5.5~~$4.1 million in loans were classified as held for sale as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

The increase in gross loans during the period included outstanding PPP loan balances of ~~$75.3~~$19.3 million, to ~~773~~226 borrowers, as of ~~September 30, 2021.~~March 31, 2022. Excluding the outstanding balance of PPP loans, gross loans increased ~~9.8%~~7.4%, or ~~$168.6~~$137.3 million, from December 31, ~~2020,~~2021, primarily the result of organic growth and period-end increases in commercial real estate, farmland and multi-family residential portfolios.

(Continued)

46.

Total loans, excluding those held for sale, as a percentage of deposits, were ~~76.9%~~72.0% and ~~81.6%~~71.4% as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Total loans, excluding those held for sale, as a percentage of total assets, were ~~66.4%~~63.1% and ~~68.1%~~61.8% as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

The following table summarizes our loan portfolio by type of loan and dollar change and percentage change from December 31, ~~2020~~2021 to ~~September 30, 2021:~~March 31, 2022:


(in thousands)	As of September 30, 2021		As of December 31, 2020		Increase (Decrease)			Percent Change			As of March 31, 2022		As of December 31, 2021		Increase (Decrease)			Percent Change
Commercial and industrial	$	380,470	$	445,771	$	(65,301	)		(14.65	%)	$	294,334	$	324,289	$	(29,955	)		(9.24	%)
Real estate:
Construction and development		309,746		270,407		39,339			14.55	%		318,035		307,797		10,238			3.33	%
Commercial real estate		633,353		594,216		39,137			6.59	%		674,558		622,842		51,716			8.30	%
Farmland		135,413		78,508		56,905			72.48	%		186,982		145,501		41,481			28.51	%
1-4 family residential		403,403		389,096		14,307			3.68	%		430,755		410,673		20,082			4.89	%
Multi-family residential		40,810		21,701		19,109			88.06	%		42,021		30,971		11,050			35.68	%
Consumer and overdrafts		53,487		51,386		2,101			4.09	%		52,973		51,328		1,645			3.20	%
Agricultural		14,199		15,734		(1,535	)		(9.76	%)		14,403		14,639		(236	)		(1.61	%)
Total loans held for investment	$	1,970,881	$	1,866,819	$	104,062			5.57	%	$	2,014,061	$	1,908,040	$	106,021			5.56	%

Total loans held for sale	$	1,903	$	5,542	$	(3,639	)		(65.66	%)	$	1,166	$	4,129	$	(2,963	)		(71.76	%)

The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of March 31, 2022 are summarized in the following table:


	As of March 31, 2022
(in thousands)	One Year or Less		After One Through Five Years		After Five Through Fifteen Years		After Fifteen Years		Total
Commercial and industrial	$	116,323	$	117,060	$	51,463	$	9,488	$	294,334
Real estate:
Construction and development		126,161		94,621		61,882		35,371		318,035
Commercial real estate		30,229		165,409		230,487		248,433		674,558
Farmland		19,700		84,144		51,046		32,092		186,982
1-4 family residential		28,373		26,663		170,334		205,385		430,755
Multi-family residential		302		17,181		18,506		6,032		42,021
Consumer		13,069		36,465		1,484		1,955		52,973
Agricultural		9,328		4,788		287		—		14,403
Total loans	$	343,485	$	546,331	$	585,489	$	538,756	$	2,014,061
Amounts with fixed rates	$	216,186	$	416,348	$	48,603	$	38,102	$	719,239
Amounts with floating rates	$	127,299	$	129,983	$	536,886	$	500,654	$	1,294,822

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

~~(Continued)~~

~~66.~~

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.

(Continued)

47.

Nonperforming assets as a percentage of total loans were ~~0.16%~~0.13% at ~~September 30, 2021,~~March 31, 2022, compared to ~~0.70%~~0.15% at December 31, ~~2020.~~2021. The Bank’s nonperforming assets consist primarily of nonaccrual loans. During 2020, nonperforming

assets included three SBA 7(a), partially guaranteed (75%) loans that were acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of September 30, 2020. During the first quarter of 2021, one of these loans was resolved when the underlying collateral, a hotel, was sold to a third party. The bank charged off $475,000 in connection with the sale, all of which had previously been specifically reserved within the allowance for credit losses, or ACL. The other two loans, both to one borrower and collateralized by the same hotel, were resolved through a bankruptcy judgment during the first quarter of 2021 that allows the borrower to adequately service their debt coverage. The bankruptcy order resulted in a charge-off of $270,000, which had previously been fully reserved in the ACL. These loans were internally identified as problem assets prior to COVID-19 and were properly reserved.

The following table presents information regarding nonperforming assets and loans as of:


(dollars in thousands)	September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
Nonaccrual loans(1)	$	3,135		$	12,705			$	2,682		$	2,831
Accruing loans 90 or more days past due		—			—				—			—
Total nonperforming loans		3,135			12,705				2,682			2,831
Other real estate owned:
Residential real estate		40			404				—			—
Total other real estate owned		40			404				—			—
Repossessed assets owned		63			6				7			14
Total other assets owned		103			410				7			14
Total nonperforming assets	$	3,238		$	13,115			$	2,689		$	2,845
TDR loans - nonaccrual(1)	$	84		$	90			$	98		$	103
TDR loans - accruing	$	9,522		$	9,626			$	9,418		$	9,466
Ratio of nonperforming loans to total loans(1)(2)		0.16	%		0.68	%
Ratio of nonperforming assets to total loans(1)(2)		0.16	%		0.70	%
Ratio of nonaccrual loans to total loans(2)									0.13	%		0.15	%
Ratio of nonperforming loans to total loans(2)									0.13	%		0.15	%
Ratio of nonperforming assets to total loans(2)									0.13	%		0.15	%
Ratio of nonperforming assets to total assets		0.11	%		0.48	%			0.08	%		0.09	%

(1) Excludes loans held for sale of $1.9 million and $5.5 million as of September 30, 2021 and December 31, 2020, respectively.
(2) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.
(1) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.							(1) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.
(2) Excludes loans held for sale of $1.2 million and $4.1 million as of March 31, 2022 and December 31, 2021, respectively.							(2) Excludes loans held for sale of $1.2 million and $4.1 million as of March 31, 2022 and December 31, 2021, respectively.

The following table presents nonaccrual loans by category as of:

(in thousands)

September 30, 2021

December 31, 2020

Commercial and industrial

$
39

$
27

Real estate:

Construction and development

230

—

Commercial real estate

387

10,604

Farmland

137

115

1-4 family residential

2,165

1,667

Consumer and overdrafts

145

212

Agricultural

32

80

Total

$
3,135

$
12,705

~~(Continued)~~

~~67.~~


(in thousands)	March 31, 2022		December 31, 2021
Commercial and industrial	$	139	$	148
Real estate:
Construction and development		—		—
Commercial real estate		505		642
Farmland		298		298
1-4 family residential		1,565		1,535
Consumer and overdrafts		116		160
Agricultural		59		48
Total	$	2,682	$	2,831

Potential Problem Loans

From a credit risk standpoint, we classify loans in one of five risk ratings: pass, special mention, substandard, doubtful or loss. Within the pass rating, we classify loans into one of the following five subcategories based on perceived credit risk, including repayment capacity and collateral security: superior, excellent, good, acceptable and 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 ACL 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).

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.

(Continued)

48.

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.

Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.

Loans that were modified for reasons related to the COVID-19 pandemic that avoided TDR status have all returned to contractual payment schedules are are monitoring for risk rating classification consistent with all other loans.

The following tables summarize the internal ratings of our performing, classified and nonaccrual (as well as substandard) loans, by category, as of:


	September 30, 2021														March 31, 2022
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total		Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total
Commercial and industrial	$	379,732	$	117	$	582	$	—	$	—	$	39	$	380,470	$	292,868	$	156	$	1,171	$	—	$	—	$	139	$	294,334
Real estate:
Construction and development		307,239		1,665		612		—		—		230		309,746		316,288		1,746		1		—		—		—		318,035
Commercial real estate		579,903		9,057		44,006		—		—		387		633,353		633,277		22,327		18,449		—		—		505		674,558
Farmland		135,130		28		118		—		—		137		135,413		186,614		—		70		—		—		298		186,982
1-4 family residential		401,181		57		—		—		—		2,165		403,403		428,896		294		—		—		—		1,565		430,755
Multi-family residential		40,135		—		675		—		—		—		40,810		42,021		—		—		—		—		—		42,021
Consumer and overdrafts		53,332		10		—		—		—		145		53,487		52,579		278		—		—		—		116		52,973
Agricultural		14,059		20		88		—		—		32		14,199		14,275		6		63		—		—		59		14,403
Total	$	1,910,711	$	10,954	$	46,081	$	—	$	—	$	3,135	$	1,970,881	$	1,966,818	$	24,807	$	19,754	$	—	$	—	$	2,682	$	2,014,061

~~(Continued)~~

~~68.~~


	December 31, 2020														December 31, 2021
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total		Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total
Commercial and industrial	$	438,975	$	5,829	$	940	$	—	$	—	$	27	$	445,771	$	323,479	$	102	$	560	$	—	$	—	$	148	$	324,289
Real estate:
Construction and development		267,767		1,346		1,294		—		—		—		270,407		306,242		944		611		—		—		—		307,797
Commercial real estate		550,724		13,280		19,608		—		—		10,604		594,216		573,535		6,103		42,562		—		—		642		622,842
Farmland		78,229		35		129		—		—		115		78,508		145,105		26		72		—		—		298		145,501
1-4 family residential		387,261		168		—		—		—		1,667		389,096		409,120		18		—		—		—		1,535		410,673
Multi-family residential		21,701		—		—		—		—		—		21,701		30,971		—		—		—		—		—		30,971
Consumer and overdrafts		51,059		115		—		—		—		212		51,386		51,087		81		—		—		—		160		51,328
Agricultural		15,577		36		41		—		—		80		15,734		14,506		13		72		—		—		48		14,639
Total	$	1,811,293	$	20,809	$	22,012	$	—	$	—	$	12,705	$	1,866,819	$	1,854,045	$	7,287	$	43,877	$	—	$	—	$	2,831	$	1,908,040

Allowance for Credit Losses

We maintain an allowance for credit losses (“ACL”) that represents management’s best estimate of the appropriate level of losses and risks inherent in our applicable financial assets under the current expected credit loss model. The amount of the allowance for credit 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.

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. Any impairment that is not credit related is recognized in other comprehensive 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 ~~September 30, 2021,~~March 31, 2022, 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 ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

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

(Continued)

49.

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 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 ~~September 30, 2021,~~March 31, 2022, the Company determined there were no credit related concerns that warrant an ACL for the held to maturity portfolio.

In determining the ACL for loans held for investment, we primarily estimate losses on segments of loans with similar risk characteristics and where the potential 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 warehouse mortgage loans, SBA loans acquired from Westbound Bank, SBA loans originated by us and SBA PPP loans. The segments are further disaggregated by internally assigned risk rating classifications. The balance of the ACL is determined using the current expected credit loss model, 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 impact of future economic conditions on loan loss rates. Please see “Critical Accounting Policies - Allowance for Credit Losses.”

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:

•

for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial

~~(Continued)~~

~~69.~~

or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

•

for commercial mortgage loans and multifamily residential loans, the debt service coverage ratio, operating results of the owner in the case of owner occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;

•

for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and

•

for construction and development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio.

As of ~~September 30, 2021,~~March 31, 2022, the allowance for credit losses totaled ~~$30.6~~$29.1 million, or ~~1.55%~~1.44%, of total loans, excluding those held for sale, and totaled ~~1.62%~~1.46%, excluding PPP loans and loans held for sale. As of December 31, ~~2020,~~2021, the allowance for ~~loan~~credit losses totaled ~~$33.6~~$30.4 million, or ~~1.80%~~1.59%, of total loans, excluding those held for sale, and totaled 1.95%, excluding PPP loans and loans held for sale. The decrease in the ACL of ~~$3.0~~$1.3 million, or ~~8.9%~~4.4%, is ~~due to~~partially the result of fully unwinding the COVID-specific qualitative ~~factors established during 2020 that were reduced~~factor during the first ~~three quarters~~quarter of ~~2021 from 55 basis points across~~2022 that was established during 2020. This specific factor was fully unwound due to significant improvements in COVID-related health statistics and economic impacts. The effects of unwinding the loan portfolio to 14.75 basis points in order to conservatively capture some of the improvements that have occurred to macroeconomic factors evaluated at the onset of the pandemic as part of the aforementioned COVID-specific qualitative ~~factors, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model,~~factor was partially offset by growth in ~~our overall~~the loan ~~portfolio. Although management is cautiously optimistic about improving vaccination~~portfolio and ~~hospitalization~~by adjustments to standard qualitative factors in order to capture increased concerns related to high inflation, likely negative impacts of rising rates on the economy and ~~economic trends, it is very likely~~geopolitical uncertainty that ~~the economic effects of the pandemic will continue into 2022.~~exists.

(Continued)

~~70.~~50.

The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:


	As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,				As Of and For The Three Months Ended March 31,						As Of and For The Year Ended December 31,
(dollars in thousands)	2021			2020			2020				2022			2021			2021
Average loans outstanding(1)	$	1,906,989		$	1,851,209		$	1,872,914			$	1,937,000		$	1,886,863		$	1,911,540
Gross loans outstanding at end of period(2)		1,970,881			1,958,634			1,866,819				2,014,061			1,912,367			1,908,040
Allowance for credit losses at beginning of the period		33,619			16,202			16,202				30,433			33,619			33,619
Impact of adopting ASC 326		—			4,548			4,548
Provision for credit losses		(1,700	)		13,200			13,200
Reversal of provision for credit losses												(1,250	)		—			(1,700	)
Charge offs:
Commercial and industrial		300			43			68				119			7			411
Real estate:
Commercial real estate		816			—			—				—			758			816
1-4 family residential		—			59			68
Consumer		113			136			155				17			61			151
Agriculture		—			18			18
Overdrafts		173			128			234				67			49			263
Total charge-offs		1,402			384			543				203			875			1,641
Recoveries:
Commercial and industrial		15			93			101				39			7			21
Real estate:
Construction and development		1			—			—				—			1			1
Commercial real estate		11			1			1				1			—			30
1-4 family residential		—			2			2				30			—			—
Consumer		32			30			37				16			4			35
Agriculture		—			20			20				—			—			8
Overdrafts		45			45			51				30			14			60
Total recoveries		104			191			212				116			26			155
Net charge-offs (recoveries)		1,298			193			331				87			849			1,486
Allowance for credit losses at end of period	$	30,621		$	33,757		$	33,619			$	29,096		$	32,770		$	30,433
Ratio of allowance to end of period loans(2)		1.55	%		1.72	%		1.80	%			1.44	%		1.71	%		1.59	%
Ratio of net charge-offs (recoveries) to average loans(1)		0.07	%		0.01	%		0.02	%			0.00	%		0.04	%		0.08	%

(1) Includes average outstanding balances of loans held for sale of $3.7 million, $6.1 million and $6.0 million for the nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
(2) Excludes loans held for sale of $1.9 million, $9.1 million and $5.5 million for the nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
Total nonaccrual loans											$	2,682		$	3,383		$	2,831
Ratio of allowance to nonaccrual loans												1084.9	%		968.7	%		1075.0	%

(1) Includes average outstanding balances of loans held for sale of $3.2 million, $4.2 million and $3.4 million for the three months ended March 31, 2022 and 2021, and for the year ended December 31, 2021, respectively.										(1) Includes average outstanding balances of loans held for sale of $3.2 million, $4.2 million and $3.4 million for the three months ended March 31, 2022 and 2021, and for the year ended December 31, 2021, respectively.
(2) Excludes loans held for sale of $1.2 million, $4.7 million and $4.1 million for the three months ended March 31, 2022 and 2021, and for the year ended December 31, 2021, respectively.										(2) Excludes loans held for sale of $1.2 million, $4.7 million and $4.1 million for the three months ended March 31, 2022 and 2021, and for the year ended December 31, 2021, respectively.

The ratio of allowance for credit losses to non-performing loans increased from ~~264.6%~~1075.0% at December 31, ~~2020~~2021 to ~~976.7%~~1084.9% at ~~September 30, 2021.~~March 31, 2022. Non-performing loans decreased to ~~$3.1~~$2.7 million at ~~September 30, 2021,~~March 31, 2022, compared to ~~$12.7~~$2.8 million at December 31, 2020 due to the resolution of three Small Business Administration ("SBA") 7(a) partially guaranteed (75%) problem loans that were acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of December 31, 2020.2021.

The following table shows the ratio of net charge-offs (recoveries) to average loans outstanding by loan category for the dates indicated:


	Quarter Ended March 31,
	2022			2021
Commercial and industrial		0.03	%		—
Real estate:
Construction and development		—			(0.00	%)
Commercial real estate		(0.00	%)		0.12	%
Farmland		—			—
1-4 family residential		(0.01	%)		—
Multi-family residential		—			—
Consumer		0.00	%		0.11	%
Agricultural		—			—
Overdrafts		8.26	%		7.34	%
Net charge-offs (recoveries) to total loans		0.00	%		0.04	%

Although we believe that we have established our allowance for credit losses in accordance with GAAP and that the allowance for credit losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for credit losses will be subject to ongoing evaluations of the risks in our loan portfolio. If our primary

(Continued)

51.

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 credit losses could be required.

~~(Continued)~~

~~71.~~

The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.


	As of September 30, 2021					As of December 31, 2020					As of March 31, 2022					As of December 31, 2021
(in thousands)	Amount		Percent to Total Loans			Amount		Percent to Total Loans			Amount		Percent to Total Loans			Amount		Percent to Total Loans
Commercial and industrial	$	3,480		11.36	%	$	4,033		12.00	%	$	3,750		12.89	%	$	3,600		11.83	%
Real estate:
Construction and development		3,962		12.94	%		4,735		14.08	%		3,898		13.40	%		4,221		13.87	%
Commercial real estate		14,305		46.72	%		15,780		46.94	%		12,197		41.92	%		13,765		45.23	%
Farmland		1,585		5.18	%		1,220		3.63	%		2,000		6.87	%		1,698		5.58	%
1-4 family residential		5,754		18.79	%		6,313		18.78	%		5,729		19.69	%		5,818		19.12	%
Multi-family residential		576		1.88	%		363		1.08	%		456		1.57	%		396		1.30	%
Total real estate		26,182		85.51	%		28,411		84.51	%		24,280		83.45	%		25,898		85.10	%
Consumer and overdrafts		793		2.59	%		936		2.78	%		910		3.12	%		766		2.51	%
Agricultural		166		0.54	%		239		0.71	%		156		0.54	%		169		0.56	%
Total allowance for credit losses	$	30,621		100.00	%	$	33,619		100.00	%	$	29,096		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 ~~September 30, 2021,~~March 31, 2022, the carrying amount of our investment securities totaled ~~$442.7~~$801.0 million, an increase of ~~$62.0~~$274.5 million, or ~~16.3%~~52.1%, compared to ~~$380.8~~$526.5 million as of December 31, ~~2020.~~2021. Investment securities represented ~~14.9%~~25.1% and ~~13.9%~~17.1% of total assets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

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 income in ~~shareholders’~~ equity. As of ~~September 30, 2021,~~March 31, 2022, 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 ~~September 30, 2021.~~March 31, 2022.

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 at the date of transfer are retained in accumulated other comprehensive (loss) income and in the carrying value of the held to maturity securities and are amortized over the remaining life of the security. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive (loss) income on our balance sheet totaled ~~$9.7~~$8.1 million at ~~September 30, 2021.~~March 31, 2022. This amount will be amortized out of accumulated other comprehensive (loss) income over the remaining life of the underlying securities as an adjustment of the yield on those securities.

The following tables summarize the amortized cost and estimated fair value of our investment securities:


	As of September 30, 2021								As of March 31, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies	$	10,013	$	46	$	—	$	10,059
U.S. government agencies									$	10,012	$	—	$	731	$	9,281
Treasury securities										—		—		—		—
Corporate bonds		34,105		1,233		92		35,246		35,055		86		645		34,496
Municipal securities		170,634		9,139		147		179,626		190,904		1,997		3,060		189,841
Mortgage-backed securities		160,888		2,143		884		162,147		244,776		131		16,262		228,645
Collateralized mortgage obligations		63,272		1,405		54		64,623		69,090		62		4,117		65,035
Total	$	438,912	$	13,966	$	1,177	$	451,701	$	549,837	$	2,276	$	24,815	$	527,298

(Continued)

~~72.~~52.


	As of December 31, 2020								As of December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agencies									$	10,013	$	—	$	42	$	9,971
Corporate bonds	$	29,608	$	1,382	$	8	$	30,982		35,080		940		85		35,935
Municipal securities		164,668		11,036		—		175,704		181,310		8,364		118		189,556
Mortgage-backed securities		104,210		3,041		87		107,164		224,563		1,477		1,816		224,224
Collateralized mortgage obligations		64,611		2,335		1		66,945		74,925		971		904		74,992
Total	$	363,097	$	17,794	$	96	$	380,795	$	515,878	$	11,752	$	2,923	$	524,707

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, 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.

The following tables set forth the fair value of available for sale securities and the amortized cost of held to maturity securities, and 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 September 30, 2021															As of March 31, 2022
	Within One Year			After One Year but Within Five Years			After Five Years but Within Ten Years			After Ten Years			Total			Within One Year			After One Year but Within Five Years			After Five Years but Within Ten Years			After Ten Years			Total
(dollars in thousands)	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total		Yield
U.S. government agencies	$	—	—	$	—	—	$	10,059	1.35%	$	—	—	$	10,059	1.35%	$	—	—	$	—	—	$	9,281	1.35%	$	—	—	$	9,281	1.35%
Treasury securities																	221,502	0.69%		49,596	1.71%		—	—		—	—		271,098	0.87%
Corporate bonds		—	—		15,430	3.21%		19,816	4.04%		—	—		35,246	3.68%		—	—		14,647	3.21%		19,849	4.01%		—	—		34,496	3.68%
Municipal securities		4,802	3.86%		48,612	3.23%		50,369	3.35%		66,851	3.23%		170,634	3.28%		12,315	3.81%		49,228	3.48%		53,743	3.00%		75,618	3.05%		190,904	3.20%
Mortgage-backed securities		98	3.39%		92,073	1.56%		53,818	1.71%		16,195	1.93%		162,184	1.65%		54	3.36%		107,314	1.44%		100,349	1.80%		22,462	2.61%		230,179	1.71%
Collateralized mortgage obligations		2,310	3.09%		55,350	2.26%		—	—		6,963	1.02%		64,623	2.15%		1,008	3.58%		19,810	3.00%		44,217	1.42%		—	—		65,035	1.90%
Total	$	7,210	3.61%	$	211,465	2.24%	$	134,062	2.62%	$	90,009	2.80%	$	442,746	2.49%	$	234,879	0.86%	$	240,595	2.12%	$	227,439	2.15%	$	98,080	2.94%	$	800,993	1.86%


	As of December 31, 2020															As of December 31, 2021
	Within One Year			After One Year but Within Five Years			After Five Years but Within Ten Years			After Ten Years			Total			Within One Year			After One Year but Within Five Years			After Five Years but Within Ten Years			After Ten Years			Total
(dollars in thousands)	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total		Yield
U.S. government agencies																$	—	—	$	—	—	$	9,971	1.35%	$	—	—	$	9,971	1.35%
Corporate bonds	$	—	—	$	18,839	2.96%	$	12,143	4.31%	$	—	—	$	30,982	3.49%		—	—		15,223	3.21%		20,712	4.01%		—	—		35,935	3.68%
Municipal securities		4,154	2.84%		35,849	3.13%		51,823	3.39%		83,878	3.23%		175,704	3.25%		13,471	3.43%		57,858	3.31%		44,342	2.92%		65,639	3.19%		181,310	3.18%
Mortgage-backed securities		170	3.37%		74,450	2.04%		22,104	2.05%		10,440	1.81%		107,164	2.02%		70	3.33%		129,327	1.38%		78,468	1.73%		16,396	2.08%		224,261	1.55%
Collateralized mortgage obligations		9,641	1.49%		57,304	2.74%		—	—		—	—		66,945	2.56%		1,491	3.22%		65,897	1.99%		7,604	1.18%		—	—		74,992	1.93%
Total	$	13,965	1.91%	$	186,442	2.56%	$	86,070	3.17%	$	94,318	3.07%	$	380,795	2.80%	$	15,032	3.41%	$	268,305	2.04%	$	161,097	2.29%	$	82,035	2.95%	$	526,469	2.29%

(Continued)

53.

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 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 typically cause the average life of the securities to be much different than 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 ~~6.45~~4.52 years with an estimated effective duration of ~~3.71~~3.21 years as of ~~September 30, 2021.~~March 31, 2022.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, 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.

~~(Continued)~~

~~73.~~

The average yield of our securities portfolio was ~~2.49%~~1.86% as of ~~September 30, 2021,~~March 31, 2022, down from ~~2.80%~~2.29% as of December 31, ~~2020.~~2021. The decline in average yield resulted primarily from ~~decreases in yields on mortgage backed~~the purchase during the first quarter of 2022 of treasury securities ~~and collateralized mortgage obligations~~with a book value of ~~2.02% and 2.56% at December~~$271.1 million as of March 31, ~~2020, respectively, to 1.65% and 2.15% at September 30, 2021, respectively.~~2022, that earn an average yield of 0.87%. As of ~~September 30, 2021, municipal securities and mortgage-backed~~March 31, 2022, treasury securities comprised ~~39.8% and 35.9%~~33.8% of the ~~portfolio, respectively. As~~portfolio. No treasury securities were held as of December 31, ~~2020, municipal securities and mortgage-backed securities comprised 46.1% and 28.1% of the portfolio, respectively.~~2021.

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.

Total deposits as of ~~September 30, 2021~~March 31, 2022 were ~~$2.56~~$2.80 billion, an increase of ~~$276.7~~$126.6 million, or ~~12.1%~~4.7%, compared to ~~$2.29~~$2.67 billion as of December 31, ~~2020.~~2021. The majority of the deposit balance increase was due to ~~the deposit of government stimulus payments and PPP funds into demand and money market accounts at the Bank,~~organic growth, as well as apparent changes in depositor spending habits resulting from economic ~~and other uncertainties due to COVID-19.~~uncertainties.

The following table presents the average balances on deposits for the periods indicated:


(dollars in thousands)	For the Nine Months Ended September 30, 2021		For the Year Ended December 31, 2020		Increase (Decrease) ($)			Increase (Decrease) (%)			For the Quarter Ended March 31, 2022		For the Year Ended December 31, 2021		Increase (Decrease) ($)			Increase (Decrease) (%)
NOW and interest-bearing demand accounts	$	361,445	$	293,111	$	68,334			23.31	%	$	414,839	$	355,171	$	59,668			16.80	%
Savings accounts		116,604		87,092		29,512			33.89	%		134,974		119,818		15,156			12.65	%
Money market accounts		757,472		642,239		115,233			17.94	%		835,554		773,553		62,001			8.02	%
Certificates and other time deposits		358,698		445,911		(87,213	)		(19.56	%)		324,790		352,833		(28,043	)		(7.95	%)
Total interest-bearing deposits		1,594,219		1,468,353		125,866			8.57	%		1,710,157		1,601,375		108,782			6.79	%
Noninterest-bearing demand accounts		892,260		696,454		195,806			28.11	%		1,027,429		916,562		110,867			12.10	%
Total deposits	$	2,486,479	$	2,164,807	$	321,672			14.86	%	$	2,737,586	$	2,517,937	$	219,649			8.72	%

The aggregate amount of certificates and other time deposits in denominations ~~of $100,000 or more~~greater than $250,000 as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 was ~~$236.4~~$110.9 million and ~~$266.3~~$228.1 million, respectively.

The scheduled maturities of uninsured certificates and other time deposits greater than ~~$100,000~~$250,000 were as follows:


	As of September 30, 2021
(dollars in thousands)	Amount		Weighted Average Interest Rate			As of March 31, 2022
Under 3 months	$	69,838		0.64	%	$	30,692
3 to 6 months		72,207		0.64	%		11,552
6 to 12 months		60,566		0.67	%		41,096
12 to 24 months		23,288		1.16	%
24 to 36 months		6,612		1.92	%
36 to 48 months		734		1.90	%
Over 48 months		3,193		0.56	%
Over 12 months							12,372
Total	$	236,438		0.74	%	$	95,712

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.

(Continued)

~~74.~~54.

Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, total borrowing capacity of ~~$570.4~~$722.1 million and ~~$476.5~~$638.7 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within ~~three~~two years. As of ~~September 30, 2021,~~March 31, 2022, approximately ~~$1.40~~$1.52 billion in real estate loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to hedge interest rate risk.

The following table presents our FHLB borrowings by maturity and weighted average rate as of ~~September 30, 2021:~~March 31, 2022:


(dollars in thousands)	Balance		Weighted Average Interest Rate			Balance		Weighted Average Interest Rate
Less than 90 days	$	40,000		0.13	%
90 days to less than one year		1,500		1.99	%
One to three years		6,000		1.76	%		6,000		1.76	%
After three to five years		—		—			—		—
After five years		—		—
Total	$	47,500		0.39	%

Federal Reserve Bank of Dallas. The Federal Reserve Bank of Dallas has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain commercial and industrial and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020, $184.8~~2021, $212.4 million and ~~$158.8~~$182.9 million, respectively, were available under this arrangement. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, approximately ~~$240.4~~$261.8 million and ~~$214.5~~$236.4 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, no borrowings were outstanding under this arrangement.

Subordinated Debt, Trust Preferred Securities and Other Debentures. 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 of the trust preferred securities and the common securities in $3.1 million of the Company’s junior subordinated debentures. These debentures ~~which will mature on October 30, 2032.~~ were redeemed subsequent to quarter end, prior to filing of this report.

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 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.

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 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~~As of March 31, 2022, interest was payable on Trust II Debentures ~~is payable~~ at a variable rate per annum, reset quarterly, equal to ~~3-month~~3 month LIBOR plus 3.35%. 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%. Interest on the DCB Trust I Debentures is payable at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.80%. 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 (1) June 15, 2012 for the DCB Trust I Debentures, (2) October 30, 2012 for the Trust II Debentures and (3) October 1, 2016 for the Trust III Debentures, and before their respective maturity dates, the debentures are redeemable, in whole or in part, for cash at our option on at least 30, but not more than 60, days’ notice at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.

On March 4, 2022, the Company completed a private placement of $35.0 million 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 term SOFR plus

(Continued)

55.

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, and is presented net of $664,000 in related issuance costs on the consolidated balance sheets.

On May 1, 2020, the Company issued $10.0 million in debentures to directors and other related parties. The debentures have stated maturity dates between November 1, 2020 and November 1, 2024, and bear interest at fixed annual

~~(Continued)~~

~~75.~~

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. $500,000 matured in November of 2020 and $9.5 million remains as of ~~September 30, 2021.~~March 31, 2022. The debentures are redeemable by the Company at its option, in whole in or 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.

Other Borrowings. We 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. In March 2017, we entered into an unsecured revolving line of credit for $25.0 million, and we renewed that line of credit in March ~~2021.~~2022. The line of credit bears interest at the prime rate ~~(3.25%~~(3.50% as of ~~September 30, 2021)~~March 31, 2022) subject to a floor of 3.50%, with quarterly interest payments, and matures in March ~~2022.~~2023. As of ~~September 30, 2021,~~March 31, 2022, there was no outstanding balance on the line of credit.

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 ~~events, such as COVID-19.~~events. For the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and the year ended December 31, ~~2020,~~2021, liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Although access to purchased funds from correspondent banks and overnight or longer term advances from the FHLB and the Federal Reserve Bank of Dallas are available, and have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, we maintained two federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate $60.0 million in federal funds. There were no funds under these lines of credit outstanding as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above in “Other Borrowings” provides an additional source of liquidity.

(Continued)

~~76.~~56.

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 ~~$2.89~~$3.15 billion for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~$2.57~~$2.92 billion for the year ended December 31, ~~2020.~~2021.


	For the Nine Months Ended September 30, 2021			For the Year Ended December 31, 2020			Quarter Ended March 31, 2022			Year Ended December 31, 2021
Sources of Funds:
Deposits:
Noninterest-bearing		30.88	%		27.09	%		32.65	%		31.36	%
Interest-bearing		55.17	%		57.11	%		54.35	%		54.79	%
Advances from FHLB		1.72	%		2.95	%		1.20	%		1.68	%
Line of credit		0.23	%		0.26	%		0.12	%		0.21	%
Subordinated debentures		0.69	%		0.67	%
Subordinated debt								0.97	%		0.68	%
Securities sold under agreements to repurchase		0.56	%		0.70	%		0.35	%		0.51	%
Accrued interest and other liabilities		0.85	%		0.96	%		0.77	%		0.85	%
Shareholders’ equity		9.90	%		10.26	%
Equity								9.59	%		9.92	%
Total		100.00	%		100.00	%		100.00	%		100.00	%

Uses of Funds:
Loans		64.87	%		71.72	%		60.60	%		64.31	%
Securities available for sale		12.90	%		13.17	%		10.45	%		12.19	%
Securities held to maturity		1.36	%		1.40	%		11.03	%		2.54	%
Nonmarketable equity securities		0.35	%		0.42	%		0.48	%		0.34	%
Federal funds sold		12.62	%		4.82	%		9.85	%		12.75	%
Interest-bearing deposits in other banks		0.92	%		5.70	%		0.79	%		0.91	%
Other noninterest-earning assets		6.98	%		2.77	%		6.80	%		6.96	%
Total		100.00	%		100.00	%		100.00	%		100.00	%

Average noninterest-bearing deposits to average deposits		35.88	%		32.17	%		37.53	%		36.40	%
Average loans to average deposits		76.69	%		86.52	%		70.76	%		75.92	%

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, increased ~~$55.8~~$50.1 million, or ~~3.0%~~2.7%, for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period in ~~2020,~~2021, while our average deposits increased ~~$347.7~~$369.7 million, or ~~16.3%~~15.6%, for the same time ~~periods.~~period. 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.

As of ~~September 30, 2021,~~March 31, 2022, we had ~~$392.3~~$426.7 million in outstanding commitments to extend credit and ~~$9.9~~$9.4 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, ~~2020,~~2021, we had ~~$324.3~~$405.3 million in outstanding commitments to extend credit and ~~$8.5~~$8.4 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.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of ~~September 30, 2021,~~March 31, 2022, we had cash and cash equivalents of ~~$408.9~~$222.1 million, compared to ~~$351.8~~$499.6 million as of December 31, ~~2020.~~2021. The ~~increase~~decrease was primarily due to ~~an increase~~a decrease in federal funds sold of ~~$127.7~~$292.7 million, ~~offset by a decrease in interest-bearing deposits held at other banks of $57.5 million.~~which was primarily used to purchase additional investment securities during the quarter.

Capital Resources

Total ~~shareholders’~~ equity ~~increased~~decreased to ~~$297.4~~$291.9 million as of ~~September 30, 2021,~~March 31, 2022, compared to ~~$272.6~~$302.2 million as of December 31, ~~2020, an increase~~2021, a decrease of ~~$24.8~~$10.3 million, or ~~9.1%~~3.4%. The ~~increase~~decrease from December 31, ~~2020~~2021 was ~~primarily the result~~due to payment of ~~net earnings, partially offset by~~dividends of $2.7 million, repurchase of treasury stock for $2.0 million, and a decrease in other comprehensive income ~~and payment~~during the quarter of ~~dividends. The Company also issued a 10.0% stock dividend~~$17.2 million, resulting from fluctuations in the ~~first quarter~~fair market value of ~~2021 that resulted in an additional 1,093,932 shares~~securities. These decreases were partially offset by net income of ~~common stock issued.~~$10.7 million during the quarter.

(Continued)

~~77.~~57.

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 certain regulatory capital requirements at the bank holding company and bank levels. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, 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 learn about the economic impacts of COVID-19,~~ our regulatory capital levels may decrease depending on our level of earnings and provisions for credit losses. However, we expect to closely monitor our loan portfolio, operating expenses and overall capital levels in order to remain in compliance with all regulatory capital standards applicable to us.

The following table presents our regulatory capital ratios as of:


	September 30, 2021					December 31, 2020					March 31, 2022					December 31, 2021
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Guaranty Bancshares, Inc. (consolidated)

Total capital (to risk weighted assets)	$	289,390		14.13	%	$	263,144		13.20	%	$	339,743		15.89	%	$	297,370		14.51	%
Tier 1 capital (to risk weighted assets)		263,721		12.87	%		238,115		11.94	%		278,653		13.03	%		271,696		13.25	%
Tier 1 capital (to average assets)		263,721		9.06	%		238,115		9.13	%		278,653		8.99	%		271,696		9.18	%
Common equity tier 1 risk-based capital		253,411		12.37	%		227,805		11.43	%		268,343		12.55	%		261,386		12.75	%

Guaranty Bank & Trust, N.A.

Total capital (to risk weighted assets)	$	301,528		14.71	%	$	285,490		14.32	%	$	324,424		15.17	%	$	311,335		15.19	%
Tier 1 capital (to risk weighted assets)		275,839		13.45	%		260,459		13.06	%		297,670		13.92	%		285,661		13.94	%
Tier 1 capital (to average assets)		275,839		9.48	%		260,459		9.99	%		297,670		9.60	%		285,661		9.66	%
Common equity tier 1 risk-based capital		275,839		13.45	%		260,459		13.06	%		297,670		13.92	%		285,661		13.94	%

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments as of ~~September 30, 2021~~March 31, 2022 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.


	As of September 30, 2021										As of March 31, 2022
(in thousands)	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total		1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total
Time deposits	$	288,124		44,214	$	7,705	$	—	$	340,043	$	274,380	$	40,052	$	8,859	$	—	$	323,291
Advances from FHLB		41,500		6,000		—		—		47,500		1,500		6,000		—		—		7,500
Subordinated debentures		—		7,500		2,000		10,310		19,810
Subordinated debt												2,000		7,500		—		44,646		54,146
Operating leases		423		3,622		3,636		7,562		15,243		1,816		3,733		3,251		5,677		14,477
Total	$	330,047	$	61,336	$	13,341	$	17,872	$	422,596	$	279,696	$	57,285	$	12,110	$	50,323	$	399,414

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.

(Continued)

~~78.~~58.

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of ~~September 30, 2021~~March 31, 2022 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 September 30, 2021										As of March 31, 2022
(in thousands)	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total		1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total
Standby and commercial letters of credit	$	6,962	$	54	$	381	$	2,525	$	9,922	$	8,069	$	37	$	381	$	934	$	9,421
Commitments to extend credit		205,931		85,924		10,574		89,903		392,332		236,325		84,438		11,006		94,976		426,745
Total	$	212,893	$	85,978	$	10,955	$	92,428	$	402,254	$	244,394	$	84,475	$	11,387	$	95,910	$	436,166

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. Management evaluated the likelihood of funding the standby and commercial letters of credit as of ~~September 30, 2021,~~March 31, 2022, and determined the likelihood to be improbable. Therefore, no ACL was recorded for standby and commercial letters of credit as of ~~September 30, 2021.~~March 31, 2022.

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 ~~September 30, 2021.~~March 31, 2022.

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.

Annualized inflation in the U.S. accelerated to 8.5% in March 2022, the highest level in over 50 years, primarily as a result of lingering effects from the COVID-19 pandemic and related governmental policies and exacerbated by the war in Ukraine. However, unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature, which means that interest rates have a more significant impact on our performance than the effects of general levels of inflation.

To combat record levels of inflation, the Federal Reserve approved its first interest rate increase in more than three years in March 2022, and members of the Federal Open Markets Committee signaled expectations for further rate increases that could result in an approximately 175 basis point increase in the federal funds rate during 2022, with potential additional increases in 2023. If the Federal Reserve does ultimately increase interest rates, we expect those increases to have a net positive impact on our net income, despite likely absolute increases in our operating expenses due to inflation
.

(Continued)

59.

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. 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.

~~(Continued)~~

~~79.~~

Our exposure to interest rate risk is managed by the asset-liability committee of the Bank, 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:


	September 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income			Percent Change in Fair Value of Equity			Percent Change in Net Interest Income			Percent Change in Fair Value of Equity			Percent Change in Net Interest Income			Percent Change in Fair Value of Equity			Percent Change in Net Interest Income			Percent Change in Fair Value of Equity
+300		6.69	%		4.75	%		4.40	%		5.04	%		4.40	%		(5.30	%)		13.70	%		1.57	%
+200		4.02	%		5.14	%		2.62	%		4.45	%		2.60	%		(2.15	%)		8.38	%		2.75	%
+100		1.53	%		2.50	%		1.42	%		3.35	%		0.86	%		(1.16	%)		2.66	%		1.27	%
Base		—			—			—			—			—			—			—			—
-100		(2.32	)%		6.20	%		(1.92	)%		3.96	%		(0.81	%)		(5.98	%)		(5.11	%)		(1.92	%)

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

(Continued)

60.

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.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in 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 deflation.

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 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.

~~(Continued)~~

~~80.~~

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 Report 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.

The non-GAAP financial measures that we discuss in this Report 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 in 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 Report when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as total ~~shareholders’~~ equity attributable to Guaranty Bancshares, Inc., less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is 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.

(Continued)

61.

The following table reconciles, as of the dates set forth below, total ~~shareholders’~~ equity attributable to Guaranty Bancshares, Inc. to tangible common equity and presents tangible book value per common share compared to book value per common share:

As of September 30,

As of December 31,

(dollars in thousands, except per share data)

2021

2020

2020

Tangible Common Equity

Total shareholders’ equity

$
297,408

$
266,853

$
272,643

Adjustments:

Goodwill

(32,160
)

(32,160
)

(32,160
)
Core deposit intangible, net

(2,426
)

(3,213
)

(2,999
)
Total tangible common equity

$
262,822

$
231,480

$
237,484

Common shares outstanding*(1)

12,081,477

12,087,063

12,028,957

Book value per common share*

$
24.62

$
22.08

$
22.67

Tangible book value per common share*

$
21.75

$
19.15

$
19.74

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

(1) Excludes the dilutive effect, if any, of 155,058, 0 and 32,781 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2021 and 2020, and December 31, 2020, respectively.


	As of March 31,						As of December 31,
(dollars in thousands, except per share data)	2022			2021			2021
Tangible common equity
Equity attributable to Guaranty Bancshares, Inc.	$	291,282		$	280,097		$	302,214
Adjustments:
Goodwill		(32,160	)		(32,160	)		(32,160	)
Core deposit intangible, net		(2,199	)		(2,786	)		(2,313	)
Total tangible common equity attributable to Guaranty Bancshares, Inc.	$	256,923		$	245,151		$	267,741
Common shares outstanding(1)		12,066,480			12,053,597			12,122,717
Book value per common share	$	24.14		$	23.24		$	24.93
Tangible book value per common share		21.3			20.3			22.1

(1) Excludes the dilutive effect, if any, of 151,871, 139,138 and 146,576 shares of common stock issuable upon exercise of outstanding stock options as of March 31, 2022 and 2021, and December 31, 2021, respectively.

Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total ~~common shareholders’~~ equity attributable to Guaranty Bancshares, Inc. to total assets.

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 attributable to Guaranty Bancshares, Inc. and assets while not increasing our tangible common equity or tangible assets.

~~(Continued)~~

~~81.~~

The following table reconciles, as of the dates set forth below, total tangible common equity and total assets to tangible assets:


(dollars in thousands)	As of September 30, 2021			As of December 31, 2020			As of March 31, 2022			As of December 31, 2021
Total tangible common equity	$	262,822		$	237,484
Tangible Assets
Total tangible common equity attributable to Guaranty Bancshares, Inc.							$	256,923		$	267,741
Tangible assets
Total assets		2,968,268			2,740,832			3,189,829			3,086,070
Adjustments:
Goodwill		(32,160	)		(32,160	)		(32,160	)		(32,160	)
Core deposit intangible, net		(2,426	)		(2,999	)		(2,199	)		(2,313	)
Total tangible assets	$	2,933,682		$	2,705,673		$	3,155,470		$	3,051,597

Total Shareholders' Equity to Total Assets		10.02	%		9.95	%
Tangible Common Equity to Tangible Assets		8.96	%		8.78	%
Total equity to total assets								9.13	%		9.79	%
Tangible common equity to tangible assets								8.14	%		8.77	%

(Continued)

62.

The following tables reconcile, as of and for the dates set forth below, ~~various metrics impacted by the effects of COVID-19 on reported data.~~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


	Nine Months Ended September 30,						Three Months Ended September 30,						Three Months Ended June 30,			Three Months Ended March 31,
(dollars in thousands, except per share data)	2021			2020			2021			2020			2021			2022			2021
Net earnings	$	30,647		$	17,487		$	9,253		$	10,134		$	10,432		$	10,738		$	10,962
Adjustments:
Provision for credit losses		(1,700	)		13,200			(700	)		(300	)		(1,000	)
Reversal of provision for credit losses																	(1,250	)		—
Income tax provision		6,827			3,605			2,179			2,350			2,312			2,235			2,336
PPP loans, including fees		(6,864	)		(3,616	)		(1,005	)		(1,076	)		(1,954	)		(783	)		(3,905	)
Net interest expense on PPP-related borrowings		—			34			—			3			—			—			—
Net core earnings	$	28,910		$	30,710		$	9,727		$	11,111		$	9,790		$	10,940		$	9,393

Weighted-average common shares outstanding, basic*		12,054,426			12,271,889			12,067,769			12,113,266			12,056,550
Earnings per common share, basic*	$	2.54		$	1.43		$	0.77		$	0.84		$	0.87
Net core earnings per common share, basic*		2.40			2.50			0.81			0.92			0.81
Weighted-average common shares outstanding, basic																	12,109,074			12,038,638
Earnings per common share, basic																$	0.89		$	0.91
Net core earnings per common share, basic																	0.90			0.78

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.

Net Core Earnings to Average Assets, as Adjusted, and Average Equity

Nine Months Ended
September 30,

Three Months Ended
September 30,

Three Months Ended
June 30,

(dollars in thousands)

2021

2020

2021

2020

2021

Net core earnings

$
28,910

$
30,710

$
9,727

$
11,111

$
9,790

Total average assets

2,889,882

2,541,214

2,953,181

2,639,335

2,938,944

Adjustments:

PPP loans average balance

(133,309
)

(124,541
)

(107,931
)

(209,506
)

(155,417
)
Excess fed funds sold due to PPP-related borrowings

—

(30,657
)

—

(8,152
)

—

Total average assets, adjusted

$
2,756,573

$
2,386,016

$
2,845,250

$
2,421,677

$
2,783,527

Net core earnings to average assets, as adjusted

1.40

1.72

1.36

1.83

1.41

Total average equity

$
286,228

$
261,205

$
295,076

$
265,027

$
285,803

Net core earnings to average equity

13.50

15.70

13.08

16.68

13.74

~~(Continued)~~

~~82.~~


	Three Months Ended March 31,
(dollars in thousands)	2022			2021
Net core earnings	$	10,940		$	9,393
Total average assets		3,146,339			2,775,567
Adjustments:
PPP loans average balance		(36,720	)		(137,251	)
Excess fed funds sold due to PPP-related borrowings		—			—
Total average assets, adjusted	$	3,109,619		$	2,638,316
Net core earnings to average assets, as adjusted		1.43			1.44
Total average equity	$	301,579		$	277,612
Net core earnings to average equity		14.71			13.72

Total Interest-Earning Assets, net of PPP Effects


	For the Three Months Ended September 30, 2021									For the Nine Months Ended September 30, 2021										Quarter Ended March 31, 2022									Quarter Ended March 31, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate				Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total interest-earning assets	$	2,780,081		$	25,235			3.60	%	$	2,720,103		$	77,032			3.79	%		$	2,963,030		$	25,893			3.54	%	$	2,609,299		$	26,513			4.12	%

Total loans		1,921,005			22,605			4.67			1,906,989			69,664			4.88				1,937,000			22,272			4.66			1,886,863			24,195			5.20
Adjustments:
PPP loan average balance and net fees(1)		(107,931	)		(1,005	)		3.69			(133,309	)		(6,265	)		6.28				(36,720	)		(783	)		8.65			(137,251	)		(3,513	)		10.38
Total loans, net of PPP effects		1,813,074			21,600			4.73			1,773,680			63,399			4.78				1,900,280			21,489			4.59			1,749,612			20,682			4.79

Total interest-earning assets, net of PPP effects	$	2,672,150		$	24,230			3.60	%	$	2,586,794		$	70,767			3.66	%		$	2,926,310		$	25,110			3.48	%	$	2,472,048		$	23,000			3.77	%

(1) Interest earned consists of interest income of $270,000 and $990,000, and net origination fees recognized in earnings of $661,000 and $5.3 million for the three and nine months ended September 30, 2021, respectively.
(1) Interest earned consists of interest income of $89,000 and $335,000, and net origination fees recognized in earnings of $694,000 and $3.2 million for the quarter ended March 31, 2022 and 2021, respectively.																			(1) Interest earned consists of interest income of $89,000 and $335,000, and net origination fees recognized in earnings of $694,000 and $3.2 million for the quarter ended March 31, 2022 and 2021, respectively.

(Continued)

63.

Net Interest Income and Net Interest Margin, Net of PPP Effects

(dollars in thousands)

Three Months Ended
September 30, 2021

Nine Months Ended
September 30, 2021

Three Months Ended
June 30, 2021

Three Months Ended
September 30, 2020

Net interest income

$
23,570

$
71,538

$
23,477

$
22,279

Adjustments:

PPP-related interest income

(270
)

(990
)

(385
)

(527
)
PPP-related net origination fees

(735
)

(5,275
)

(1,362
)

(549
)
PPP-related borrowings

—

—

—

3

Net interest income, net of PPP effects

$
22,565

$
65,273

$
21,730

$
21,206

Total average interest-earning assets

$
2,780,081

$
2,720,103

$
2,769,054

$
2,481,453

Total average interest-earning assets, net of PPP effects

2,672,150

2,586,794

2,613,637

2,263,795

Net interest margin(1)

3.36
%

3.52
%

3.40
%

3.57
%
Net interest margin, net of PPP effects(2)

3.35

3.37

3.33

3.73

Net interest income

$
23,570

$
71,538

$
23,477

$
22,279

Interest income tax adjustments

278

798

269

233

Net interest income, fully taxable equivalent ("FTE")

$
23,848

$
72,336

$
23,746

$
22,512

Net interest income, FTE, net of PPP effects

22,843

66,071

21,999

21,439

Net interest margin, FTE(3)

3.40

3.56

3.44

3.61

Net interest margin, FTE, net of PPP effects(4)

3.39

3.41

3.38

3.77

(1) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.

(2) Net interest margin is equal to net interest income, net of PPP effects, divided by average interest-earning assets, excluding average PPP loans, annualized. Taxes are not a part of this calculation.

(3) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.

(4) Net interest margin on a taxable equivalent basis is equal to net interest income, net of PPP effects, adjusted for nontaxable income divided by average interest-earning assets, excluding average PPP loans, annualized, using a marginal tax rate of 21%.

~~(Continued)~~

~~83.~~


(dollars in thousands)	Quarter Ended March 31, 2022			Quarter Ended December 31, 2021			Quarter Ended March 31, 2021
Net interest income	$	24,323		$	24,020		$	24,491
Adjustments:
PPP-related interest income		(89	)		(154	)		(335	)
PPP-related net origination fees		(694	)		(804	)		(3,178	)
Net interest income, net of PPP effects	$	23,540		$	23,062		$	20,978

Total average interest-earning assets	$	2,963,030		$	2,844,147		$	2,609,299
Total average interest-earning assets, net of PPP effects		2,926,310			2,783,085			2,472,048

Net interest margin(1)		3.33	%		3.35	%		3.81	%
Net interest margin, net of PPP effects(2)		3.26			3.29			3.44

Net interest income	$	24,323		$	24,020		$	24,491
Interest income tax adjustments		301			277			250
Net interest income, fully taxable equivalent ("FTE")	$	24,624		$	24,297		$	24,741
Net interest income, FTE, net of PPP effects		23,841			23,339			21,228

Net interest margin, FTE(3)		3.37	%		3.39	%		3.85	%
Net interest margin, FTE, net of PPP effects(4)		3.30			3.33			3.48

(1) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(2) Net interest margin is equal to net interest income, net of PPP effects, divided by average interest-earning assets, excluding average PPP loans, annualized. Taxes are not a part of this calculation.
(3) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.
(4) Net interest margin on a taxable equivalent basis is equal to net interest income, net of PPP effects, adjusted for nontaxable income divided by average interest-earning assets, excluding average PPP loans, annualized, using a marginal tax rate of 21%.

Efficiency Ratio, Net of PPP Effects


(dollars in thousands)		Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021			Three Months Ended June 30, 2021			Three Months Ended September 30, 2020				Quarter Ended March 31, 2022			Quarter Ended December 31, 2021			Quarter Ended March 31, 2021
Total noninterest expense		$	19,287		$	54,302		$	17,703		$	16,758			$	19,079		$	18,976		$	17,312
Adjustments:
PPP-related deferred costs			—			599			207			24				—			—			392
Total noninterest expense, net of PPP effects		$	19,287		$	54,901		$	17,910		$	16,782			$	19,079		$	18,976		$	17,704

Net interest income			23,570			71,538			23,477			22,279				24,323			24,020			24,491
Net interest income, net of PPP effects			22,565			65,273			21,730			21,206				23,540			23,062			20,978

Total noninterest income		$	6,449		$	18,538		$	5,970		$	6,663			$	6,479		$	6,038		$	6,119
Securities gains (losses)																—			—			—
Noninterest income, as adjusted															$	6,479		$	6,038		$	6,119

Efficiency ratio(1)			64.25	%		60.28	%		60.12	%		57.90	%			61.94	%		63.13	%		56.56	%
Efficiency ratio, net of PPP effects(2)			66.47			65.51			64.66			60.22				63.56			65.21			65.34

(1) The efficiency ratio was calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.	(1) The efficiency ratio was calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.													(1) The efficiency ratio was calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.
(2) The efficiency ratio, net of PPP effects, was calculated by dividing total noninterest expense, net of PPP-related deferred costs, by net interest income, net of PPP effects, plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.	(2) The efficiency ratio, net of PPP effects, was calculated by dividing total noninterest expense, net of PPP-related deferred costs, by net interest income, net of PPP effects, plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.													(2) The efficiency ratio, net of PPP effects, was calculated by dividing total noninterest expense, net of PPP-related deferred costs, by net interest income, net of PPP effects, plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.

(Continued)

64.

ACL to Total Loans, Excluding PPP


(dollars in thousands)	As of September 30, 2021			As of June 30, 2021			As of September 30, 2020			As of March 31, 2022			As of December 31, 2021			As of March 31, 2021
Total loans	$	1,970,881		$	1,890,164		$	1,958,634		$	2,014,061		$	1,908,040		$	1,912,367
Adjustments:
PPP loans		(75,304	)		(127,390	)		(209,609	)		(19,302	)		(50,611	)		(158,236	)
Total loans, excluding PPP	$	1,895,577		$	1,762,774		$	1,749,025		$	1,994,759		$	1,857,429		$	1,754,131

Allowance for credit losses	$	30,621		$	31,548		$	33,757		$	29,096		$	30,433		$	32,770

Allowance for credit losses / period-end loans		1.55	%		1.67	%		1.72	%		1.44	%		1.59	%		1.71	%
Allowance for credit losses / period-end loans. excluding PPP		1.62			1.79			1.93			1.46			1.64			1.87

Loan Yield, Net of PPP Effects


	Three Months Ended September 30, 2021									Three Months Ended June 30, 2021									Quarter Ended March 31, 2022									Quarter Ended December 31, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total loans	$	1,921,005		$	22,605			4.67	%	$	1,912,722		$	22,864			4.79	%	$	1,937,000		$	22,272			4.66	%	$	1,925,046		$	22,833			4.71	%
Adjustments:
PPP loans average balance and net fees		(107,931	)		(1,005	)		3.69			(155,417	)		(1,747	)		4.51			(36,720	)		(783	)		8.65			(61,062	)		(958	)		6.22
Total loans, net of PPP effects	$	1,813,074		$	21,600			4.73	%	$	1,757,305		$	21,117			4.82	%	$	1,900,280		$	21,489			4.59	%	$	1,863,984		$	21,875			4.66	%
Effect of removing PPP loans on loan yield								0.06	%								0.03	%								-0.07	%								-0.05	%

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

(dollars in thousands)

Average
Outstanding
Balance

Interest
Earned/
Interest
Paid

Average
Yield/ Rate

Average
Outstanding
Balance

Interest
Earned/
Interest
Paid

Average
Yield/ Rate

Total loans

$
1,921,005

$
22,605

4.67
%

$
1,964,894

$
22,681

4.59
%
Adjustments:

PPP loans average balance and net fees

(107,931
)

(1,005
)

3.69

(209,506
)

(1,076
)

2.04

Total loans, net of PPP effects

$
1,813,074

$
21,600

4.73
%

$
1,755,388

$
21,605

4.90
%
Effect of removing PPP loans on loan yield

0.06
%

0.31
%

~~(Continued)~~

~~84.~~


	Quarter Ended March 31, 2022									Quarter Ended March 31, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total loans	$	1,937,000		$	22,272			4.66	%	$	1,886,863		$	24,195			5.20	%
Adjustments:
PPP loans average balance and net fees		(36,720	)		(783	)		8.65			(137,251	)		(3,513	)		10.38
Total loans, net of PPP effects	$	1,900,280		$	21,489			4.59	%	$	1,749,612		$	20,682			4.79	%
Effect of removing PPP loans on loan yield								-0.07	%								-0.41	%

Cautionary Notice Regarding Forward-Looking Statements

This Report, our other filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of section 27A of the Securities Act and section 21E of the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of the operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. 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.

(Continued)

65.

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 impact of COVID-19, including any variants thereof, on our business, including the impact of the actions taken by federal, state and local governmental authorities in response to COVID-19 (including, without limitation, interest rate policy, restrictions on the operation of businesses, the CARES Act and any other economic stimulus and recovery measures), and the resulting effect of all such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

•

our ability to prudently manage our growth and execute our strategy;

•

risks associated with our acquisition and de novo branching strategy;

•

business and economic conditions generally and in the financial services industry, nationally and within our primary Texas markets;

•

concentration of our business within our geographic areas of operation in Texas;

•

deterioration of our asset quality and higher loan charge-offs;

•

changes in the value of collateral securing our loans;

•

inaccuracies in the assumptions and estimate we make in establishing the allowance for credit losses reserve and other estimates;

•

changes in management personnel and our ability to attract, motivate and retain qualified personnel;

•

liquidity risks associated with our business;

•

interest rate risk associated with our business that could decrease net interest income;

•

our ability to maintain important deposit customer relationships and our reputation;

•

operational risks associated with our business;

•

volatility and direction of market interest rates;

•

change in regulatory requirements to maintain minimum capital levels;

•

increased competition in the financial services industry, particularly from regional and national institutions;

•

institution and outcome of litigation and other legal proceeding against us or to which we become subject;

•

changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;

•

further government intervention in the U.S. financial system;

•

changes in the scope and cost of FDIC insurance and other coverage;

•

natural disasters and adverse weather, acts of terrorism (including cyberattacks), an outbreak of hostilities or public health outbreaks (such as COVID-19), or other international or domestic calamities, and other matters beyond our control;

~~(Continued)~~

~~85.~~

•

risks that the financial institutions we may acquire or de novo branches we may open will not be integrated successfully, or the integrations may be more time consuming or costly than expected;

•

technology related changes are difficult to make or are more expensive than expected; and

•

the other factors that are described under the caption “Risk Factors” or referenced in this report, our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, and other risks included in the Company’s filings with the SEC.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties 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.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Company manages market risk, which, as a financial institution is primarily interest rate volatility, through the Asset-Liability Committee of the Bank, in accordance with policies approved by its board of directors. The Company uses an interest rate risk simulation model and shock analysis 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Sensitivity and Market Risk” herein for a discussion of how we manage market risk.

(Continued)

66.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures:

As of the end of the period covered by this Report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this Report.

Changes in internal control over financial reporting:

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~September 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(Continued)

~~86.~~67.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

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’s combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect the Company’s reputation, even if resolved in the Company’s favor.

Item 1A.Risk Factors

In evaluating an investment in the Company’s common stock, investors should consider carefully, among other things, the risk factors previously disclosed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, and other risks included in the Company’s filings with the SEC. The Company’s business could be harmed by any of these risks. The trading price of the Company’s common stock could decline due to any of these risks, and you may lose all or part of your investment. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

(Continued)

~~87.~~68.

Item 2.Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceed

On March 13, 2020, the Company announced the adoption of a stock repurchase program that authorized the repurchase of up to 1,000,000 shares of the Company common stock. The stock repurchase program was effective until March 13, 2022, when it expired by its terms.

On April 21, 2022, the Company announced the adoption of a new stock repurchase program that authorized the repurchase of up to 1,000,000 shares of the Company common stock. The stock repurchase program will be effective until the earlier of ~~March 13, 2022,~~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. ~~There were no repurchases made through~~The repurchase plan permits shares to be acquired from time to time in the ~~third quarter~~open market or negotiated transactions at prices management considers to be attractive and in the best interest of ~~2021.~~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.

The table below contains information regarding all shares repurchased by the Company during the periods indicated.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January, 2022		—	$	—		—		562,523
February, 2022		13,902		34.97		13,902		548,621
March, 2022		42,335		35.59		21,828	—1
Total		56,237	$	35.44		35,730

1 Applicable stock repurchase program expired on March 13, 2022.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

(Continued)

~~88.~~69.

Item 6.Exhibits


Exhibit Number		Description of Exhibit

3.1		Amended and Restated Certificate of Formation of Guaranty Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed May 1, ~~2017 (File No. 333-217176))~~2017).

3.2		Amended and Restated Bylaws of Guaranty Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed April 6, ~~2017 (File No. 333-217176))~~2017).

4.1		Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on April 6, ~~2017, file number 333-217176)~~2017).

		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.

10.1		Renewal Revolving Promissory Note between Guaranty Bancshares, Inc and Frost Bank, dated March 31, 2022 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 1, 2022).

10.2		Loan Agreement between Guaranty Bancshares, Inc and Frost Bank, dated March 31, 2017, as amended (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 1, 2022).

10.3		Subordinated Note Purchase Agreement, dated as of March 4, 2022, by and between Guaranty Bancshares, Inc. and the Purchaser (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 4, 2022).

31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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*
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*

______________________________

* Filed with this Quarterly Report on Form 10-Q

** Furnished with this Quarterly Report on Form 10-Q

(Continued)

~~89.~~70.

SIGNATURES

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


		GUARANTY BANCSHARES, INC.
		(Registrant)

Date: ~~November 5, 2021~~May 9, 2022		/s/ Tyson T. Abston
		Tyson T. Abston
		Chairman of the Board & Chief Executive Officer

Date: ~~November 5, 2021~~May 9, 2022		/s/ Clifton A. Payne
		Clifton A. Payne
		Chief Financial Officer & Director

~~90.~~71.



Texas	001-38087	75-1656431
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)
16475 Dallas Parkway, Suite 600 Addison, Texas		75001
(Address of Principal Executive Offices)		(Zip Code)


Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, par value $1.00 per share	GNTY	NASDAQ Global Select Market


	PART I — FINANCIAL INFORMATION	Page

Item 1.	Financial Statements – (Unaudited)	31
	Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	1
	Consolidated Statements of Earnings for the Three Months Ended March 31, 2022 and 2021	2
	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021	3
	Consolidated Statements of ~~Earnings~~Changes in Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	4
	Consolidated Statements of ~~Comprehensive Income~~Cash Flows for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	5
	~~Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020~~	6
	~~Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020~~	8
	Notes to Consolidated Financial Statements	107
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4538
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	8666
Item 4.	Controls and Procedures	8667

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	8768
Item 1A.	Risk Factors	8768
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8869
Item 3.	Defaults Upon Senior Securities	8869
Item 4.	Mine Safety Disclosures	8869
Item 5.	Other Information	8869
Item 6.	Exhibits	8970

SIGNATURES		9071


	Three Months Ended March 31,
	2022			2021
Net earnings	$	10,738		$	10,962
Other comprehensive loss:
Unrealized losses on securities, net of tax		(16,989	)		(2,235	)

Unrealized (losses) gains on interest rate swaps:
Unrealized holding gains arising during the period		497			449
Reclassification of realized gains on interest rate swap termination from accumulated other comprehensive income		(685	)		0
Unrealized (losses) gains on interest rate swaps		(188	)		449

Total other comprehensive loss		(17,177	)		(1,786	)

Comprehensive (loss) income	$	(6,439	)	$	9,176


	For the Quarter Ended March 31,
	2022			2021
Cash flows from operating activities
Net earnings	$	10,738		$	10,962
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		1,069			1,108
Amortization		219			343
Deferred taxes		(4,188	)		(221	)
Premium amortization, net of discount accretion		1,399			1,056
Gain on sale of loans		(905	)		(1,398	)
Reversal of provision for credit losses		(1,250	)		0
Origination of loans held for sale		(25,758	)		(32,850	)
Proceeds from loans held for sale		29,626			35,127
Write-down of other real estate and repossessed assets		0			2
Net gain on sale of premises, equipment, other real estate owned and other assets		(39	)		(50	)
Stock based compensation		156			162
Net change in accrued interest receivable and other assets		6,792			(7,406	)
Net change in accrued interest payable and other liabilities		804			3,049
Net cash provided by operating activities	$	18,663		$	9,884

Cash flows from investing activities
Securities available for sale:
Purchases	$	0		$	(50,604	)
Proceeds from maturities and principal repayments		14,431			19,776
Securities held to maturity:
Purchases		(915,587	)		0
Proceeds from maturities and principal repayments		603,937			0
Net originations of loans		(106,123	)		(45,685	)
Purchases of premises and equipment		(1,685	)		(799	)
Proceeds from BOLI death benefit		0			464
Proceeds from sale of premises, equipment, other real estate owned and other assets		72			115
Net cash used in investing activities	$	(404,955	)	$	(76,733	)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☒


	(Unaudited)			(Audited)			(Unaudited)			(Audited)
	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	34,741		$	47,836		$	58,788		$	42,979
Federal funds sold		346,500			218,825			139,300			431,975
Interest-bearing deposits		27,634			85,130			24,003			24,651
Total cash and cash equivalents		408,875			351,791			222,091			499,605
Securities available for sale		269,070			380,795			306,704			342,206
Securities held to maturity		173,676			0			494,289			184,263
Loans held for sale		1,903			5,542			1,166			4,129
Loans, net of allowance for credit losses of $30,621 and $33,619, respectively		1,938,268			1,831,737
Loans, net of allowance for credit losses of $29,096 and $30,433, respectively								1,983,449			1,876,076
Accrued interest receivable		7,673			9,834			8,961			8,901
Premises and equipment, net		53,834			55,212			54,316			53,470
Other real estate owned		40			404
Cash surrender value of life insurance		36,582			35,510			37,352			37,141
Core deposit intangible, net		2,426			2,999			2,199			2,313
Goodwill		32,160			32,160			32,160			32,160
Other assets		43,761			34,848			47,142			45,806
Total assets	$	2,968,268		$	2,740,832		$	3,189,829		$	3,086,070
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND EQUITY
Liabilities
Deposits
Noninterest-bearing	$	972,854		$	779,740		$	1,065,789		$	1,014,518
Interest-bearing		1,590,217			1,506,650			1,731,621			1,656,309
Total deposits		2,563,071			2,286,390			2,797,410			2,670,827
Securities sold under agreements to repurchase		11,195			15,631			11,090			14,151
Accrued interest and other liabilities		26,284			25,257			27,803			26,568
Line of credit		3,000			12,000			0			5,000
Federal Home Loan Bank advances		47,500			109,101			7,500			47,500
Subordinated debentures		19,810			19,810
Subordinated debt								54,146			19,810
Total liabilities		2,670,860			2,468,189			2,897,949			2,783,856
Commitments and contingencies (see Note 11)
Shareholders' equity
Preferred stock, $5.00 par value, 15,000,000 shares authorized, 0 shares issued		0			0
Common stock, $1.00 par value, 50,000,000 shares authorized, 14,097,738 and 12,951,676 shares issued, and 12,081,477 and 10,935,415 shares outstanding, respectively		14,098			12,952
Equity
Preferred stock, $5.00 par value, 15,000,000 shares authorized, 0 shares issued								0			0
Common stock, $1.00 par value, 50,000,000 shares authorized, 14,138,978 shares issued, and 12,066,480 and 12,122,717 shares outstanding, respectively								14,139			14,139
Additional paid-in capital		224,458			188,032			225,700			225,544
Retained earnings		100,910			113,449			115,727			107,645
Treasury stock, 2,016,261 shares at cost		(51,419	)		(51,419	)
Accumulated other comprehensive income		9,361			9,629
Total shareholders' equity		297,408			272,643
Total liabilities and shareholders' equity	$	2,968,268		$	2,740,832
Treasury stock, 2,072,498 and 2,016,261 shares at cost								(53,412	)		(51,419	)
Accumulated other comprehensive (loss) income								(10,872	)		6,305
Equity attributable to Guaranty Bancshares, Inc.								291,282			302,214
Noncontrolling interest								598			0
Total equity								291,880			302,214
Total liabilities and equity							$	3,189,829		$	3,086,070


	Attributable to Guaranty Bancshares, Inc.
	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest		Total Equity
For the Three Months Ended March 31, 2022
Balance at December 31, 2021	$	—	$	14,139	$	225,544	$	107,645		$	(51,419	)	$	6,305		$	—	$	302,214
Net earnings		—		—		—		10,738			—			—			—		10,738
Other comprehensive loss		—		—		—		—			—			(17,177	)		—		(17,177	)
Purchase of treasury stock		—		—		—		—			(1,993	)		—			—		(1,993	)
Stock based compensation		—		—		156		—			—			—			—		156
Cash dividends:
Common - $0.22 per share		—		—		—		(2,656	)		—			—			—		(2,656	)
Equity attributable to Guaranty Bancshares, Inc. at March 31, 2022	$	—	$	14,139	$	225,700	$	115,727		$	(53,412	)	$	(10,872	)	$	—	$	291,282
Contributions from noncontrolling interest		—		—		—		—			—			—			598		598
Total equity at March 31, 2022	$	—	$	14,139	$	225,700	$	115,727		$	(53,412	)	$	(10,872	)	$	598	$	291,880


~~Commercial and industrial:~~		This portfolio segment includes general secured and unsecured commercial loans which are not secured by real estate or may be secured by real estate but made for the primary purpose of a short term revolving line of credit. Credit risk inherent in this portfolio segment include fluctuations in the local and national economy.

~~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 non-agricultural vacant land. Credit risk inherent in this portfolio include fluctuations in property values, unemployment, and changes in the local and national economy.

~~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 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 & pastureland 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.

~~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 4 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.

~~Multi-family residential:~~		This portfolio segment includes loans secured by structures containing 5 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.


~~Mortgage Warehouse:~~		The mortgage warehouse portfolio 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.

~~SBA – Paycheck Protection Program Loans~~		Loans originated under the PPP are 100% government guaranteed by the SBA. As a result, the loans are excluded from the segments above and a minimal reserve estimate was applied to this segment of loans for purposes of calculating the credit loss provision.


~~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 make principal and interest payments in the event that they 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.

~~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.


September 30, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2022									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
U.S. government agencies	$	10,013	$	46	$	0	$	10,059	$	10,012	$	0	$	731	$	9,281
Corporate bonds		34,105		1,233		92		35,246		35,055		86		645		34,496
Mortgage-backed securities		157,846		2,143		847		159,142		212,489		131		14,728		197,892
Collateralized mortgage obligations		63,272		1,405		54		64,623		69,090		62		4,117		65,035
Total available for sale	$	265,236	$	4,827	$	993	$	269,070	$	326,646	$	279	$	20,221	$	306,704

Held to maturity:
Treasury securities									$	271,098	$	0	$	1,169	$	269,929
Municipal securities	$	170,634	$	9,139	$	147	$	179,626		190,904		1,997		3,060		189,841
Mortgage-backed securities		3,042		0		37		3,005		32,287		0		1,534		30,753
Total held to maturity	$	173,676	$	9,139	$	184	$	182,631	$	494,289	$	1,997	$	5,763	$	490,523


	Less Than 12 Months					12 Months or Longer					Total					Less Than 12 Months					12 Months or Longer					Total
September 30, 2021	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
March 31, 2022																Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
U.S. government agencies																$	(731	)	$	9,281	$	0		$	0	$	(731	)	$	9,281
Corporate bonds	$	(92	)	$	7,678	$	0		$	0	$	(92	)	$	7,678		(645	)		23,336		0			0		(645	)		23,336
Mortgage-backed securities		(803	)		68,150		(44	)		3,276		(847	)		71,426		(12,285	)		168,057		(2,443	)		22,846		(14,728	)		190,903
Collateralized mortgage obligations		(54	)		18,203		0			0		(54	)		18,203		(4,117	)		56,020		0			0		(4,117	)		56,020
Total available for sale	$	(949	)	$	94,031	$	(44	)	$	3,276	$	(993	)	$	97,307	$	(17,778	)	$	256,694	$	(2,443	)	$	22,846	$	(20,221	)	$	279,540

Held to maturity:
Treasury securities																$	(1,169	)	$	269,929	$	0		$	0		(1,169	)		269,929
Municipal securities	$	(147	)	$	4,381	$	0		$	0	$	(147	)	$	4,381		(2,333	)		41,962		(727	)		2,347		(3,060	)		44,309
Mortgage-backed securities		(37	)		3,006		0			0		(37	)		3,006		(1,534	)		30,753		0			0		(1,534	)		30,753
Total held to maturity	$	(184	)	$	7,387	$	0		$	0	$	(184	)	$	7,387	$	(5,036	)	$	342,644	$	(727	)	$	2,347	$	(5,763	)	$	344,991


	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
September 30, 2021	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
March 31, 2022									Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	0	$	0	$	4,802	$	4,868	$	0	$	0	$	233,817	$	233,217
Due after one year through five years		14,645		15,430		48,612		50,466		14,620		14,647		98,824		98,980
Due after five years through ten years		29,473		29,875		50,369		53,350		30,447		29,130		53,743		53,495
Due after ten years		0		0		66,851		70,942		0		0		75,618		74,078
Mortgage-backed securities		157,846		159,142		3,042		3,005		212,489		197,892		32,287		30,753
Collateralized mortgage obligations		63,272		64,623		0		0		69,090		65,035		0		0
Total securities	$	265,236	$	269,070	$	173,676	$	182,631	$	326,646	$	306,704	$	494,289	$	490,523


For the Nine Months Ended September 30, 2021	Commercial and industrial			Construction and development			Commercial real estate			Farmland		1-4 family residential			Multi-family residential		Consumer			Agricultural			Overdrafts			Total
Quarter Ended March 31, 2022																													Commercial and industrial			Construction and development			Commercial real estate			Farmland		1-4 family residential			Multi-family residential		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		$	3,600		$	4,221		$	13,765		$	1,698	$	5,818		$	396	$	762		$	169		$	4		$	30,433
Provision for credit losses		(268	)		(774	)		(670	)		365		(559	)		213		(61	)		(73	)		127			(1,700	)
(Reversal of) provision for credit losses																														230			(323	)		(1,569	)		302		(119	)		60		146			(13	)		36			(1,250	)
Loans charged-off		(300	)		—			(816	)		—		—			—		(113	)		—			(173	)		(1,402	)		(119	)		—			0			—		—			—		(17	)		—			(67	)		(203	)
Recoveries		15			1			11			—		—			—		32			—			45			104			39			0			1			—		30			—		16			—			30			116
Ending balance	$	3,480		$	3,962		$	14,305		$	1,585	$	5,754		$	576	$	787		$	166		$	6		$	30,621		$	3,750		$	3,898		$	12,197		$	2,000	$	5,729		$	456	$	907		$	156		$	3		$	29,096


	Real Estate		Non-RE		Total		Allowance for Credit Losses Allocation
March 31, 2022									Real Estate		Non-RE		Total		Allowance for Credit Losses Allocation
Commercial and industrial	$	119	$	—	$	119	$	40	$	757	$	—	$	757	$	282
Real estate:
Construction and development		609		—		609		207
Commercial real estate		4,540		—		4,540		603		4,295		—		4,295		553
Consumer										250		—		250		250
Total	$	5,268	$	—	$	5,268	$	850	$	5,302	$	—	$	5,302	$	1,085


September 30, 2021	30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days and Greater Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
March 31, 2022															30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days and Greater Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial and industrial	$	874	$	0	$	38	$	912	$	379,558	$	380,470	$	—	$	223	$	0	$	119	$	342	$	293,992	$	294,334	$	—
Real estate:
Construction and development		0		0		230		230		309,516		309,746		—		170		0		0		170		317,865		318,035		—
Commercial real estate		197		777		258		1,232		632,121		633,353		—		727		6,990		0		7,717		666,841		674,558		—
Farmland		149		195		28		372		135,041		135,413		—		100		433		195		728		186,254		186,982		—
1-4 family residential		1,407		465		569		2,441		400,962		403,403		—		2,674		625		234		3,533		427,222		430,755		—
Multi-family residential		—		—		—		—		40,810		40,810		—		0		0		0		0		42,021		42,021		—
Consumer		206		33		47		286		52,706		52,992		—		226		287		34		547		52,123		52,670		—
Agricultural		31		9		20		60		14,139		14,199		—		105		0		0		105		14,298		14,403		—
Overdrafts		—		—		—		—		495		495		—		0		0		0		0		303		303		—
Total	$	2,864	$	1,479	$	1,190	$	5,533	$	1,965,348	$	1,970,881	$	—	$	4,225	$	8,335	$	582	$	13,142	$	2,000,919	$	2,014,061	$	—


	September 30, 2021		December 31, 2020
Nonaccrual TDRs	$	84	$	90
Performing TDRs		9,522		9,626
Total	$	9,606	$	9,716
Specific reserves on TDRs	$	—	$	—


Nine Months Ended September 30, 2021	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial and industrial		1	$	17	$	17
Total		1	$	17	$	17


Year Ended December 31, 2020	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Year Ended December 31, 2021							Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Construction and development		2	$	1,289	$	1,081
Commercial and industrial		1		129		85		1		17		14
Commercial real estate		1		1,017		670
Total		4	$	2,435	$	1,836		1	$	17	$	14


Year	Current Weighted Average Rate			Principal Due		Current Weighted Average Rate			Principal Due
2021		0.13	%	$	40,000
2022		1.99	%		1,500		1.99	%	$	1,500
2023		—			—
2024		1.76	%		6,000		1.76	%		6,000
2025		—			—
				$	47,500				$	7,500


	Trust II		Trust III		DCB Trust I
Formation date	October 30, 2002		July 25, 2006		March 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


	September 30, 2021		September 30, 2020
Intrinsic value of options exercised	$	630	$	3
Cash received from options exercised		1,113		72
Weighted average fair value of options granted		5.82		3.86


	September 30, 2021		December 31, 2020			September 30, 2020
Other real estate owned remeasured at initial recognition:
Carrying value of other real estate owned prior to remeasurement	$	0	$	42		$	0
Charge-offs recognized in the allowance for credit losses		0		(9	)		0
Fair value of other real estate owned remeasured at initial recognition	$	0	$	33		$	0

Other real estate owned remeasured subsequent to initial recognition:
Carrying value of other real estate owned prior to remeasurement	$	0	$	62		$	62
Write-downs included in collection and other real estate owned expense		0		(1	)		(1	)
Fair value of other real estate owned remeasured subsequent to initial recognition	$	0	$	61		$	61


September 30, 2021	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Other real estate owned	$	40	Appraisal value of collateral	Selling costs or other normal adjustments	10%-20% (16%)


	As of September 30,						As of December 31,
(dollars in thousands, except per share data)	2021			2020			2020
Tangible Common Equity
Total shareholders’ equity	$	297,408		$	266,853		$	272,643
Adjustments:
Goodwill		(32,160	)		(32,160	)		(32,160	)
Core deposit intangible, net		(2,426	)		(3,213	)		(2,999	)
Total tangible common equity	$	262,822		$	231,480		$	237,484
Common shares outstanding*(1)		12,081,477			12,087,063			12,028,957
Book value per common share*	$	24.62		$	22.08		$	22.67
Tangible book value per common share*	$	21.75		$	19.15		$	19.74

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
(1) Excludes the dilutive effect, if any, of 155,058, 0 and 32,781 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2021 and 2020, and December 31, 2020, respectively.


	Three Months Ended September 30, 2021									Three Months Ended September 30, 2020
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total loans	$	1,921,005		$	22,605			4.67	%	$	1,964,894		$	22,681			4.59	%
Adjustments:
PPP loans average balance and net fees		(107,931	)		(1,005	)		3.69			(209,506	)		(1,076	)		2.04
Total loans, net of PPP effects	$	1,813,074		$	21,600			4.73	%	$	1,755,388		$	21,605			4.90	%
Effect of removing PPP loans on loan yield								0.06	%								0.31	%