UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



	FORM 10-Q

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

For the quarterly period ended ~~March 31,~~June 30, 2017

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

For the transition period from to .

Commission File Number: 001-38087



	GUARANTY BANCSHARES, INC. (Exact name of registrant as specified in its charter)



Texas		75-1656431
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

201 South Jefferson Avenue
Mount Pleasant, Texas		75455
(Address of principal executive offices)		(Zip code)



	(903) 572 - 9881 (Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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. (Check one):



	Large accelerated filer ☐		Accelerated filer ☐

	Non-accelerated filer ☒		Smaller reporting company ☐
	(Do not check if a smaller reporting company)

			Emerging growth company ☒

	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 ☒

As of ~~June 20,~~August 11, 2017, there were ~~11,053,933~~11,058,956 outstanding shares of the registrant’s common stock, par value $1.00 per share.

GUARANTY BANCSHARES, INC.




		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements – (Unaudited)	4
	Consolidated Balance Sheets as of ~~March 31,~~June 30, 2017 and December 31, 2016	4
	Consolidated Statements of ~~Income~~Earnings for the Three and Six Months Ended ~~March 31,~~June 30, 2017 and 2016	6
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended ~~March 31,~~June 30, 2017 and 2016	7
	Consolidated Statements of Changes in ~~Stockholders’~~Shareholders’ Equity for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2017 and 2016	8
	Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2017 and 2016	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6974
Item 4.	Controls and Procedures	6974

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	7075
Item 1A.	Risk Factors	7075
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7075
Item 3.	Defaults Upon Senior Securities	7075
Item 4.	Mine Safety Disclosures	7075
Item 5.	Other Information	7075
Item 6.	Exhibits	7176
SIGNATURES		7277

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)	GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)							GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)
		(Unaudited)		(Audited)		(Unaudited) Pro Forma			(Unaudited)			(Audited)
		March 31, 2017		December 31, 2016		March 31, 2017			June 30, 2017			December 31, 2016
ASSETS
Cash and due from banks		$	32,576	$	39,605	$	32,576		$	36,389		$	39,605
Federal funds sold		83,175		60,600		83,175			17,700			60,600
Interest-bearing deposits		28,006		27,338		28,006			29,217			27,338
Total cash and cash equivalents		143,757		127,543		143,757			83,306			127,543
Securities available for sale		214,463		156,925		214,463			246,233			156,925
Securities held to maturity		185,837		189,371		185,837			182,248			189,371
Loans held for sale		1,446		2,563		1,446			2,435			2,563
Loans, net		1,241,215		1,233,651		1,241,215			1,284,318			1,233,651
Accrued interest receivable		6,304		7,419		6,304			7,631			7,419
Premises and equipment, net		44,823		44,810		44,823			44,491			44,810
Other real estate owned		1,637		1,692		1,637			1,733			1,692
Cash surrender value of life insurance		17,922		17,804		17,922			18,035			17,804
Deferred tax asset		4,426		4,892		4,426			4,121			4,892
Core deposit intangible, net		3,162		3,308		3,162			3,016			3,308
Goodwill		18,742		18,742		18,742			18,742		��	18,742
Other assets		17,465		19,616		17,465			16,160			19,616
Total assets		$	1,901,199	$	1,828,336	$	1,901,199		$	1,912,469		$	1,828,336
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Deposits
Noninterest-bearing		$	370,810	$	358,752	$	370,810		$	387,725		$	358,752
Interest-bearing		1,300,361		1,218,039		1,300,361			1,258,648			1,218,039
Total deposits		1,671,171		1,576,791		1,671,171			1,646,373			1,576,791
Securities sold under agreements to repurchase		12,663		10,859		12,663			14,153			10,859
Accrued interest and other liabilities		7,595		6,006		7,595			7,921			6,006
Other debt		18,929		18,286		18,929			—			18,286
Federal Home Loan Bank advances		25,165		55,170		25,165			25,161			55,170
Subordinated debentures		19,310		19,310		19,310			14,310			19,310
Total liabilities		1,754,833		1,686,422		1,754,833			1,707,918			1,686,422

Commitments and contingent liabilities
KSOP-owned shares		34,300		31,661		—			—			31,661

See accompanying notes to consolidated financial statements.


GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)	GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)										GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)
		(Unaudited)			(Audited)			(Unaudited) Pro Forma				(Unaudited)			(Audited)
		March 31, 2017			December 31, 2016			March 31, 2017				June 30, 2017			December 31, 2016

Shareholders' equity
Preferred stock, $5.00 par value, 15,000,000 shares authorized, no shares issued		—			—			—				—			—
Common stock, $1.00 par value, 50,000,000 shares authorized, 9,616,275 issued, 8,753,933 and 8,751,923 shares outstanding, respectively		9,616			9,616			9,616
Common stock, $1.00 par value, 50,000,000 shares authorized, 11,921,298 and 9,616,275 shares issued, 11,058,956 and 8,751,923 shares outstanding, respectively												11,921			9,616
Additional paid-in capital		101,796			101,736			101,796				155,369			101,736
Retained earnings		60,676			57,160			60,676				62,076			57,160
Treasury stock, 862,342 and 864,352 shares at cost		(20,087		)	(20,111		)	(20,087		)		(20,087		)	(20,111		)
Accumulated other comprehensive loss		(5,635		)	(6,487		)	(5,635		)		(4,728		)	(6,487		)
		146,366			141,914			146,366				204,551			141,914
Less KSOP-owned shares		34,300			31,661			—				—			31,661

Total shareholders' equity		112,066			110,253			146,366				204,551			110,253
Total liabilities and shareholders' equity		$	1,901,199		$	1,828,336		$	1,901,199			$	1,912,469		$	1,828,336

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended March 31,				Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016		2017		2016			2017		2016
Interest income
Loans, including fees	$	14,415	$	12,914	$	15,214	$	13,649		$	29,629	$	26,563
Securities
Taxable	1,311		1,867		1,401		1,393			2,712		3,260
Nontaxable	922		515		920		870			1,842		1,385
Federal funds sold and interest-bearing deposits	488		173		257		183			745		356
Total interest income	17,136		15,469		17,792		16,095			34,928		31,564

Interest expense
Deposits	2,404		2,186		2,627		2,276			5,031		4,462
FHLB advances and federal funds purchased	79		64		58		104			137		168
Subordinated debentures	207		222		188		217			395		439
Other borrowed money	205		194		120		154			325		348
Total interest expense	2,895		2,666		2,993		2,751			5,888		5,417

Net interest income	14,241		12,803		14,799		13,344			29,040		26,147
Provision for loan losses	650		450		800		1,950			1,450		2,400
Net interest income after provision for loan losses	13,591		12,353		13,999		11,394			27,590		23,747

Noninterest income
Service charges	877		823		938		888			1,815		1,711
Net realized gain on securities transactions	—		37
Net realized gain (loss) on securities transactions					25		(19		)	25		18
Net realized gain on sale of loans	429		226		472		519			901		745
Other operating income	1,976		1,805		2,081		1,921			4,057		3,726
Total noninterest income	3,282		2,891		3,516		3,309			6,798		6,200

Noninterest expense
Employee compensation and benefits	6,987		6,450		6,440		6,237			13,427		12,687
Occupancy expenses	1,748		1,747		1,866		1,729			3,614		3,476
Other operating expenses	3,310		3,280		3,600		3,417			6,910		6,697
Total noninterest expense	12,045		11,477		11,906		11,383			23,951		22,860

Income before income taxes	4,828		3,767		5,609		3,320			10,437		7,087
Income tax provision	1,312		1,090		1,633		820			2,945		1,910

Net earnings	$	3,516	$	2,677	$	3,976	$	2,500		$	7,492	$	5,177
Basic earnings per share	$	0.40	$	0.30	$	0.40	$	0.27		$	0.80	$	0.57
Diluted earnings per share	$	0.40	$	0.30	$	0.39	$	0.27		$	0.79	$	0.57

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2017			2016
Net earnings	$	3,516		$	2,677		$	3,976		$	2,500		$	7,492		$	5,177
Other comprehensive income:
Unrealized gains on securities
Unrealized holding gains arising during the period	1,229			2,492			1,457			1,613			2,686			4,105
Amortization of net unrealized gains on held to maturity securities	18			25			17			25			35			50
Reclassification adjustment for net gains included in net earnings	—			(37		)
Reclassification adjustment for net (gains) losses included in net earnings							(25		)	19			(25		)	(18		)
Tax effect	(430		)	(859		)	(501		)	(224		)	(931		)	(1,083		)
Unrealized gains on securities, net of tax	817			1,621			948			1,433			1,765			3,054
Unrealized holding gains (losses) arising during the period on interest rate swaps	35			(225		)
Unrealized holding losses arising during the period on interest rate swaps							(41		)	(98		)	(6		)	(323		)
Total other comprehensive income	852			1,396			907			1,335			1,759			2,731
Comprehensive income	$	4,368		$	4,073		$	4,883		$	3,835		$	9,251		$	7,908

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except share amounts)


	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Less: KSOP-Owned Shares			Total Shareholders’ Equity			Preferred Stock		Common Stock			Additional Paid-in Capital			Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss			Less: KSOP-Owned Shares			Total Shareholders’ Equity
For the Three Months Ended March 31, 2016
For the Six Months Ended June 30, 2016
Balance at December 31, 2015	$	—	$	9,616	$	101,525	$	49,654	$	(16,486	)	$	(6,573	)	$	(35,384	)	$	102,352		$	—	$	9,616		$	101,525		$	49,654			$	(16,486	)		$	(6,573	)	$	(35,384	)	$	102,352
Net earnings	—		—		—		2,677		—			—			—			2,677			—		—			—			5,177				—				—			—			5,177
Other comprehensive income	—		—		—		—		—			1,396			—			1,396			—		—			—			—				—				2,731			—			2,731
Purchase of treasury stock	—		—		—		—		—			—			(3,000		)	(3,000		)	—		—			—			—				(7,261		)		—			(3,000		)	(10,261		)
Sale of treasury stock	—		—		—		—		8,557			—			—			8,557			—		—			—			—				8,557				—			—			8,557
Stock based compensation	—		—		39		—		—			—			—			39			—		—			95			—				—				—			—			95
Net change in fair value of KSOP shares	—		—		—		—		—			—			(1,538		)	(1,538		)	—		—			—			—				—				—			(1,539		)	(1,539		)
Balance at March 31, 2016	—		9,616		101,564		52,331		(7,929		)	(5,177		)	(39,922		)	110,483
Dividends:
Common - $0.26 per share																					—		—			—			(2,328		)		—				—			—			(2,328		)
Balance at June 30, 2016																					$	—	$	9,616		$	101,620		$	52,503			$	(15,190	)		$	(3,842	)	$	(39,923	)	$	104,784

For the Three Months Ended March 31, 2017
For the Six Months Ended June 30, 2017
Balance at December 31, 2016	—		9,616		101,736		57,160		(20,111		)	(6,487		)	(31,661		)	110,253			$	—	$	9,616		$	101,736		$	57,160			$	(20,111	)		$	(6,487	)	$	(31,661	)	$	110,253
Net earnings	—		—		—		3,516		—			—			—			3,516			—		—			—			7,492				—				—			—			7,492
Other comprehensive income	—		—		—		—		—			852			—			852			—		—			—			—				—				1,759			—			1,759
Terminated KSOP put option																					—		—			—			—				—				—			34,300			34,300
Exercise of stock options	—		—		—		—		24			—			—			24			—		5			55			—				24				—			—			84
Sale of common stock																					—		2,300			53,455			—				—				—			—			55,755
Stock based compensation	—		—		60		—		—			—			—			60			—		—			123			—				—				—			—			123
Net change in fair value of KSOP shares	—		—		—		—		—			—			(2,639		)	(2,639		)	—		—			—			—				—				—			(2,639		)	(2,639		)
Balance at March 31, 2017	$	—	$	9,616	$	101,796	$	60,676	$	(20,087	)	$	(5,635	)	$	(34,300	)	$	112,066
Dividends:
Common - $0.26 per share																					—		—			—			(2,576		)		—				—			—			(2,576		)
Balance at June 30, 2017																					$	—	$	11,921	—	$	155,369	—	$	62,076		—	$	(20,087	)	—	$	(4,728	)	$	—		$	204,551

See accompanying notes to consolidated financial statements.


GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)	GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)							GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
		For the Three Months Ended March 31,							For the Six Months Ended June 30,
		2017			2016				2017			2016
Cash flows from operating activities
Net earnings		$	3,516		$	2,677			$	7,492		$	5,177
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation		801			777				1,599			1,572
Amortization		264			241				524			478
Deferred taxes		2,402			(496		)		(160		)	(1,126		)
Premium amortization, net of discount accretion		1,113			1,172				2,357			2,495
Net realized gain on securities transactions		—			(37		)		(25		)	(18		)
Gain on loans held for sale		(429		)	(226		)
Gain on sale of loans									(901		)	(745		)
Provision for loan losses		650			450				1,450			2,400
Origination of loans held for sale		(13,232		)	(13,726		)		(29,330		)	(30,652		)
Proceeds from loans held for sale		14,778			12,835				30,359			32,342
Write-down of other real estate and repossessed assets									1			48
Net loss on sale of premises, equipment, other real estate owned and other assets		27			(8		)		84			36
Stock based compensation		60			39				123			95
Net change in accrued interest receivable and other assets		2,265			(1,286		)		2,761			(2,505		)
Net change in accrued interest payable and other liabilities		21			334				1,909			1,591
Net cash provided by operating activities		12,236			2,746				18,243			11,188

Cash flows from investing activities
Securities available for sale:
Purchases		(61,965		)	(18,252		)		(113,208		)	(26,140		)
Proceeds from sales		—			21,754				13,839			75,221
Proceeds from maturities and principal repayments		5,203			38,444				11,675			46,981
Securities held to maturity:
Purchases		—			(79,649		)		—			(86,642		)
Proceeds from sales		—			1,866				923			1,866
Proceeds from maturities and principal repayments		2,892			3,419				4,950			10,974
Net purchases of premises and equipment		(814		)	(474		)		(1,313		)	(1,089		)
Net proceeds from sale of premises, equipment, other real estate owned and other assets		191			353				394			573
Net increase in loans		(8,375		)	(73,629		)		(52,584		)	(116,841		)
Net cash used in investing activities		(62,868		)	(106,168		)		(135,324		)	(95,097		)

Cash flows from financing activities
Net change in deposits		94,380			56,521				69,582			25,718
Net change in securities sold under agreements to repurchase		1,804			(2,904		)		3,294			1,854
Proceeds from FHLB advances		—			50,000				—			75,000
Repayment of FHLB advances		(30,005		)	(5,051		)		(30,009		)	(5,810		)
Proceeds from other debt		1,000			—				2,000			10,000
Repayment of other debt		(357		)	—				(20,286		)	(18,000		)
Repayments of debentures									(5,000		)	(1,000		)
Purchase of treasury stock									—			(7,261		)
Sale of treasury stock		—			8,557				—			8,557

See accompanying notes to consolidated financial statements.


GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)	GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)					GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
		For the Three Months Ended March 31,					For the Six Months Ended June 30,
		2017		2016			2017			2016

Exercise of stock options		24		—			84			—
Sale of common stock							55,755			—
Cash dividends							(2,576		)	(2,328		)
Net cash provided by financing activities		66,846		107,123			72,844			86,730
Net change in cash and cash equivalents		16,214		3,701			(44,237		)	2,821
Cash and cash equivalents at beginning of year		127,543		111,379
Cash and cash equivalents at beginning of period							127,543			111,379
Cash and cash equivalents at end of period		$	143,757	$	115,080		$	83,306		$	114,200

Supplemental disclosures of cash flow information
Interest paid		$	2,774	$	2,587		5,973			5,376
Income taxes paid		—		1,300			2,840			2,210

Supplemental schedule of noncash investing and financing activities
Transfer loans to other real estate owned and repossessed assets		$	161	$	185		467			293
Terminated KSOP put option							34,300			—
Net change in fair value of KSOP shares		2,639		1,538			2,639			1,539

See accompanying notes to consolidated financial statements.

10.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: Guaranty Bancshares, Inc. (“Guaranty”) is a bank holding company headquartered in Mount Pleasant, Texas that provides, through its wholly-owned subsidiary, Guaranty Bank & Trust, N.A. (the “Bank”), a broad array of financial products and services to individuals and corporate customers, primarily in its markets of East Texas, Bryan/College Station and the Dallas/Fort Worth metroplex. The terms “the Company,” “we,” “us” and “our” mean Guaranty and its subsidiaries, when appropriate. The Company’s main sources of income are derived from granting loans throughout its markets and investing in securities issued by the U.S. Treasury, U.S. government agencies and state and political subdivisions. The Company’s primary lending products are real estate, commercial and consumer loans. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ abilities to honor contracts is dependent on the economy of the State of Texas and primarily the economies of East Texas, Bryan/College Station and the Dallas/Fort Worth metroplex. The Company primarily funds its lending activities with deposit operations. The Company’s primary deposit products are checking accounts, money market accounts and certificates of deposit.

Basis of Presentation: The consolidated financial statements in this Quarterly Report on Form 10-Q (this “Report”) include the accounts of Guaranty, the Bank, and their respective other direct and indirect subsidiaries and any other entities in which Guaranty has a controlling interest. The Bank has five wholly-owned non-bank subsidiaries, Guaranty Company, Inc., G B COM, INC., 2800 South Texas Avenue LLC, Pin Oak Realty Holdings, Inc. and Pin Oak Energy Holdings, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the financial services industry.

The consolidated financial statements in this Report have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of ~~our~~the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with ~~our~~the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2016,, included in ~~our~~the Company’s Prospectus filed with the SEC under Rule 424(b) on May 9, 2017, relating to ~~our~~its initial public offering. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

All dollar amounts referenced and discussed in the notes to the consolidated financial statements in this Report are presented in thousands, unless noted otherwise.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

~~Unaudited Pro Forma Financial Information -~~ KSOP Repurchase Right: In accordance with applicable provisions of the Internal Revenue Code, the terms of ~~our~~Guaranty’s employee stock ownership plan with 401(k) provisions (“KSOP”), provided that, for so long as ~~we were~~Guaranty was a privately-held company without a public market for its common stock, KSOP participants would have the right, for a specified period of time, to require usGuaranty to repurchase shares of ~~our~~its common stock that are distributed to them by the KSOP. This repurchase obligation terminated upon the consummation of ~~our~~Guaranty’s initial public offering and listing of ~~our~~its common stock on the NASDAQ Global Select Market in May 2017. However, because ~~we were~~Guaranty was privately-held ~~during~~without a public market for its common stock as of and for the ~~periods covered by the Report,~~year ended December 31, 2016, the shares of common stock held by the KSOP are reflected in ~~our~~the Company’s consolidated balance sheet as of December 31, 2016 as a line item called “KSOP-owned shares,” appearing between total liabilities and shareholders’ equity. As a result, the KSOP-owned shares are deducted from shareholders’ equity in ~~our~~the Company’s consolidated balance sheet ~~for~~as of December 31, 2016. For all periods following the ~~periods included in this Report. The consolidated balance sheet in this Report~~Company’s initial public offering and continued listing of the

(Continued)

11.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

includes a pro forma column, which assumes that the KSOP repurchase obligation has terminated as of the date presented in the Report. For all periods following our initial public offering and continued listing of ourCompany’s common stock on the NASDAQ Global Select Market, the KSOP-owned shares will be included in, and not be deducted from, shareholders’ equity.

~~Subsequent Events: During May 2017,~~ The termination of the ~~Company completed an initial public offering issuing 2,300,000 shares~~repurchase obligation following the listing of Guaranty’s common stock ~~par value $1.00 per share, at a purchase price~~on the NASDAQ Global Select Market is also reflected in the statement of ~~$27.00 per share, representing gross proceeds of $62,100. Net proceeds after underwriting discounts and expenses were approximately $57,600. The Company used a portion of the proceeds to repay~~changes in full the outstanding balance on our unsecured line of credit with a correspondent bank of $19,900 and repay $5,000 of the subordinated debentures. In addition, the Company contributed $15,000 of the proceeds to the Bank. The Company has retained the remaining proceeds of the offering for general corporate purposes.shareholders’ equity as “terminated KSOP put option.”

Recent Accounting Pronouncements:

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. In addition, the amendments in this update provide a detailed framework to assist entities in evaluating whether a set of assets and activities constitutes a business, as well as clarify the definition of the term output so the term is consistent with how outputs are described in Topic 606. ASU 2017-01 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment changes to be based on the first step in today’s two-step impairment test, thus eliminating step two from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step two of the goodwill impairment test. For pubic companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. For public companies, ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following nine specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned; 6) life insurance policies; 7) distributions received from equity method investees; 8) beneficial interests in securitization transactions; and 9) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to be material to the consolidated financial statements.

~~(Continued)~~

~~12.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit loss" ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently

(Continued)

12.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

in the process of assembling a transition team to assess the adoption of this ASU, which will develop a project plan regarding implementation.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU permits early adoption of the instrument-specific credit risk provision. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), followed by various amendments: ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in these updates amend existing guidance related to revenue from contracts with customers. The amendments supersede and replace nearly all existing revenue recognition guidance, including industry-specific guidance, establish a new control-based revenue recognition model, change the basis for deciding when revenue is recognized over a time or point in time, provide new and more detailed guidance on specific topics and expand and improve disclosures about revenue. In addition, these amendments specify the accounting for some costs to obtain or fulfill a contract with a customer. The amendments are effective for annual and interim periods beginning after December 15, 2017, and must be retrospectively applied. The majority of the Company's income consists of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of the amendments. The Company continues to evaluate the impact of the amendments on the components of noninterest income that have recurring revenue streams; however, the Company does not expect any recognition changes to have a significant impact to the Company's consolidated financial statements.

(Continued)

13.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 2 - ACQUISITIONS

On ~~close of business~~ August 6, 2016, the Company purchased certain assets and assumed certain liabilities associated with a former branch location of a non-related bank in Denton, Texas (Denton), which resulted in the addition of approximately $4,659 in assets and the assumption of approximately $4,658 in liabilities. The Company acquired the bank premises at 4101 Wind River Lane in Denton and recorded it at fair market value of $2,075. Other assets acquired, at fair value, included cash of $2,399, core deposit intangible of $42, goodwill of $141 and loans of $2. Liabilities assumed included non-interest bearing deposits of $581, interest bearing deposits of $4,047 and other liabilities of $30. ~~Consideration~~As a result of the transaction, the Company paid $66 to the seller, representing the difference in the value of the acquired assets less the value of the liabilities assumed by the Company ~~for~~in the ~~acquired assets and assumed liabilities of $66 was netted against the cash received.~~transaction.

Goodwill of $141 ~~for Denton~~ arising from the Denton acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the ~~companies. Goodwill of $141~~companies and is expected to be deductible for income taxes purposes.

NOTE 3 - MARKETABLE SECURITIES

The following tables summarize the amortized cost and fair value of securities available for sale and securities held to maturity as of ~~March 31,~~June 30, 2017 and December 31, 2016 and the corresponding amounts of gross unrealized gains and losses:


March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2017									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	25,223	$	73	$	123	$	25,173	$	18,861	$	180	$	8	$	19,033
Municipal securities	7,817		—		539		7,278		7,793		—		300		7,493
Mortgage-backed securities	80,766		15		1,236		79,545		95,343		24		902		94,465
Collateralized mortgage obligations	102,688		236		457		102,467		124,833		628		219		125,242
Total available for sale	$	216,494	$	324	$	2,355	$	214,463	$	246,830	$	832	$	1,429	$	246,233

Held to maturity:
Municipal securities	$	148,520	$	1,428	$	2,621	$	147,327	$	148,021	$	2,869	$	530	$	150,360
Mortgage-backed securities	26,900		312		191		27,021		24,642		320		93		24,869
Collateralized mortgage obligations	10,417		249		602		10,064		9,585		220		507		9,298
Total held to maturity	$	185,837	$	1,989	$	3,414	$	184,412	$	182,248	$	3,409	$	1,130	$	184,527

(Continued)

14.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)



December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	25,254	$	6	$	377	$	24,883
Municipal securities	7,841		—		622		7,219
Mortgage-backed securities	61,298		—		1,608		59,690
Collateralized mortgage obligations	65,789		10		666		65,133
Total available for sale	$	160,182	$	16	$	3,273	$	156,925

Held to maturity:
Municipal securities	$	149,420	$	901	$	3,889	$	146,432
Mortgage-backed securities	28,450		318		290		28,478
Collateralized mortgage obligations	11,501		265		521		11,245
Total held to maturity	$	189,371	$	1,484	$	4,700	$	186,155

The Company’s held to maturity mortgage-backed securities portfolio includes non-agency collateralized mortgage obligations with a carrying value of ~~$1,493~~$1,522, which had unrealized losses of ~~$602 at March 31,~~$507 as of June 30, 2017. These non-agency mortgage-backed securities were rated AAA at purchase. The Company monitors to ensure it has adequate credit support, and the Company records ~~OTTI~~other than temporary impairment (OTTI) as appropriate. The Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been 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 issuer for a period of time sufficient to allow for any anticipated recovery in fair value. ~~There were no~~The Company did not record any other than temporary impairment losses on ~~debt~~any of its securities ~~related to credit losses recognized~~ during the ~~three~~six months ended ~~March 31,~~June 30, 2017 or for the year ended December 31, 2016.

(Continued)

15.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Information pertaining to securities with gross unrealized losses as of ~~March 31,~~June 30, 2017 and December 31, 2016 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is detailed in the following tables:


	Less Than 12 Months					12 Months or Longer					Total					Less Than 12 Months					12 Months or Longer					Total
March 31, 2017	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
June 30, 2017																Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(123	)	$	12,508	$	—		$	—	$	(123	)	$	12,508	$	(8	)	$	2,981	$	—		$	—	$	(8	)	$	2,981
Municipal securities	(539		)	7,278		—			—		(539		)	7,278		(300		)	7,493		—			—		(300		)	7,493
Mortgage-backed securities	(761		)	62,344		(475		)	14,870		(1,236		)	77,214		(569		)	75,674		(333		)	14,375		(902		)	90,049
Collateralized mortgage obligations	(272		)	42,026		(185		)	8,645		(457		)	50,671		(68		)	25,407		(151		)	8,143		(219		)	33,550
Total available for sale	$	(1,695	)	$	124,156	$	(660	)	$	23,515	$	(2,355	)	$	147,671	$	(945	)	$	111,555	$	(484	)	$	22,518	$	(1,429	)	$	134,073

Held to maturity:
Municipal securities	$	(2,414	)	$	84,716	$	(207	)	$	5,965	$	(2,621	)	$	90,681	$	(406	)	$	38,442	$	(124	)	$	6,015	$	(530	)	$	44,457
Mortgage-backed securities	(191		)	18,024		—			—		(191		)	18,024		(93		)	11,154		—			—		(93		)	11,154
Collateralized mortgage obligations	—			—		(602		)	2,237		(602		)	2,237		—			—		(507		)	2,297		(507		)	2,297
Total held to maturity	$	(2,605	)	$	102,740	$	(809	)	$	8,202	$	(3,414	)	$	110,942	$	(499	)	$	49,596	$	(631	)	$	8,312	$	(1,130	)	$	57,908



	Less Than 12 Months					12 Months or Longer					Total
December 31, 2016	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(377	)	$	22,529	$	—		$	—	$	(377	)	$	22,529
Municipal securities	(622		)	7,219		—			—		(622		)	7,219
Mortgage-backed securities	(1,047		)	44,420		(561		)	15,270		(1,608		)	59,690
Collateralized mortgage obligations	(437		)	55,435		(229		)	9,049		(666		)	64,484
Total available for sale	$	(2,483	)	$	129,603	$	(790	)	$	24,319	$	(3,273	)	$	153,922

Held to maturity:
Municipal securities	$	(3,889	)	$	98,943	$	—		$	—	$	(3,889	)	$	98,943
Mortgage-backed securities	(290		)	19,983		—			—		(290		)	19,983
Collateralized mortgage obligations	—			—		(521		)	2,350		(521		)	2,350
Total held to maturity	$	(4,179	)	$	118,926	$	(521	)	$	2,350	$	(4,700	)	$	121,276

The number of investment positions in an unrealized loss position totaled ~~152~~100 and 177 at ~~March 31,~~June 30, 2017 and December 31, 2016, respectively. The securities in a loss position were composed of ~~tax exempt~~tax-exempt municipal bonds, corporate bonds, collateralized mortgage obligations and mortgage backed securities. Management believes the unrealized loss on the remaining securities is a function of the movement of interest rates since the time of purchase. Based on evaluation of available evidence, including recent changes in interest rates, credit rating information and

(Continued)

16.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment would be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at ~~March 31,~~June 30, 2017.

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, ~~(FHLMC),~~ the Federal National Mortgage Association ~~(FNMA)~~ or the Government National Mortgage ~~Association (GNMA).~~Association.

As of ~~March 31,~~June 30, 2017, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with fair values of approximately ~~$264,248~~$245,600 and $259,499 at ~~March 31,~~June 30, 2017 and December 31, 2016, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.

The proceeds from sales of securities and the associated gains and losses are listed below for:


	Three Months Ended March 31,					Three Months Ended June 30,						Six Months Ended June 30,
	2017		2016			2017			2016			2017			2016
Proceeds	$	—	$	23,620		$	14,762		$	53,467		$	14,762		$	77,087
Gross gains	—		75			38			72			38			147
Gross losses	—		(38		)	(13		)	(91		)	(13		)	(129		)

During the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, the Company sold three held to maturity ~~securities.~~securities each year. The Company sold these municipal securities based upon internal credit analysis, under the belief that they had experienced significant deterioration in creditworthiness. The risk exposure presented by these municipalities had increased beyond acceptable levels, and wethe Company determined that it was reasonably possible that all amounts due would not be collected. The credit analysis determined that the municipalities had been significantly impacted by the significant decline in market oil prices due to the fact that their tax bases are heavily reliant on the energy industry relative to other sectors of the economy. Specifically, the revenues of these municipalities had been adversely impacted by the sustained low-level of oil prices. The Company believes the sale of these securities were merited and permissible under the applicable accounting guidelines because of the significant deterioration in the creditworthiness of the issuers.

Sale of securities held to maturity were as follows for:


	Three Months Ended March 31,					Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016		2017			2016
Proceeds from sales	$	—	$	1,866		$	923		$	—	$	923		$	1,866
Amortized cost	—		1,842			907			—		907			1,842
Gross realized gains	—		24			16			—		16			24
Tax expense related to securities gains/losses	—		(7		)	(4		)	—		(4		)	(7		)

(Continued)

17.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The contractual maturities at ~~March 31,~~June 30, 2017 of available for sale and held to maturity securities at carrying value and estimated fair value are shown below. The Company invests in mortgage-backed securities and collateralized mortgage obligations that have expected maturities that differ from their contractual maturities. These differences arise because borrowers and/or issuers may have the right to call or prepay their obligation with or without call or prepayment penalties.


	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	—	$	—	$	1,050	$	1,055	$	—	$	—	$	2,831	$	2,838
Due after one year through five years	7,444		7,478		5,577		5,722		1,094		1,104		5,553		5,731
Due after five years through ten years	17,779		17,695		40,910		41,560		17,767		17,929		40,659		42,175
Due after ten years	7,817		7,278		100,983		98,990		7,793		7,493		98,978		99,616
Mortgage-backed securities	80,766		79,545		26,900		27,021		95,343		94,465		24,642		24,869
Collateralized mortgage obligations	102,688		102,467		10,417		10,064		124,833		125,242		9,585		9,298
	$	216,494	$	214,463	$	185,837	$	184,412	$	246,830	$	246,233	$	182,248	$	184,527

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes ~~our~~the Company’s loan portfolio by type of loan as of:


	March 31, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Commercial and industrial	$	205,903	$	223,997	$	217,497	$	223,997
Real estate:
Construction and development	152,760		129,366		177,600		129,366
Commercial real estate	372,855		367,656		378,722		367,656
Farmland	62,130		62,362		63,839		62,362
1-4 family residential	360,873		362,952		356,457		362,952
Multi-family residential	23,943		26,079		28,833		26,079
Consumer	52,816		53,505		51,677		53,505
Agricultural	21,473		18,901		21,854		18,901
Overdrafts	390		317		364		317
Total loans	1,253,143		1,245,135		1,296,843		1,245,135
Less:
Allowance for loan losses	11,928		11,484		12,525		11,484
Total net loans	$	1,241,215	$	1,233,651	$	1,284,318	$	1,233,651

As of ~~March 31,~~June 30, 2017 and December 31, 2016, included in total loans above were ~~$1,055~~$1,127 and $1,210 in unamortized loan costs, net of loan fees, respectively.

(Continued)

18.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method for the ~~three~~six months ended ~~March 31,~~June 30, 2017, for the year ended December 31, 2016 and for the ~~three~~six months ended ~~March 31,~~June 30, 2016:


For the three months ended March 31, 2017	Commercial and industrial			Construction and development		Commercial real estate		Farmland			1-4 family residential			Multi-family residential			Consumer			Agricultural		Overdrafts			Total
For the six months ended June 30, 2017																												Commercial and industrial			Construction and development		Commercial real estate			Farmland		1-4 family residential			Multi-family residential			Consumer			Agricultural			Overdrafts			Total
Allowance for loan losses:
Beginning balance	$	1,592		$	1,161	$	3,264	$	482		$	3,960		$	281		$	585		$	153	$	6		$	11,484		$	1,592		$	1,161	$	3,264		$	482	$	3,960		$	281		$	585		$	153		$	6		$	11,484
Provision for loan losses	177			188		123		(10		)	(72		)	(53		)	280			2		15			650			464			393		284			59		(69		)	(12		)	66			222			43			1,450
Loans charged-off	(6		)	—		—		—			(118		)	—			(89		)	—		(35		)	(248		)	(48		)	—		(84		)	—		(186		)	—			(158		)	(4		)	(70		)	(550		)
Recoveries	—			—		—		—			—			—			22			—		20			42			—			—		—			—		21			—			92			—			28			141
Ending balance	$	1,763		$	1,349	$	3,387	$	472		$	3,770		$	228		$	798		$	155	$	6		$	11,928		$	2,008		$	1,554	$	3,464		$	541	$	3,726		$	269		$	585		$	371		$	7		$	12,525
Allowance ending balance:
Individually evaluated for impairment	$	129		$	—	$	31	$	41		$	40		$	—		$	—		$	—	$	—		$	241		$	246		$	—	$	31		$	92	$	139		$	—		$	—		$	225		$	—		$	733
Collectively evaluated for impairment	1,634			1,349		3,356		431			3,730			228			798			155		6			11,687			1,762			1,554		3,433			449		3,587			269			585			146			7			11,792
Loans:
Individually evaluated for impairment	919			—		6,411		170			1,769			247			34			612		—			10,162			1,174			—		3,751			170		2,726			241			192			789			—			9,043
Collectively evaluated for impairment	204,984			152,760		366,444		61,960			359,104			23,696			52,782			20,861		390			1,242,981			216,323			177,600		374,971			63,669		353,731			28,592			51,485			21,065			364			1,287,800
Ending balance	$	205,903		$	152,760	$	372,855	$	62,130		$	360,873		$	23,943		$	52,816		$	21,473	$	390		$	1,253,143		$	217,497		$	177,600	$	378,722		$	63,839	$	356,457		$	28,833		$	51,677		$	21,854		$	364		$	1,296,843



For the year ended December 31, 2016	Commercial and industrial			Construction and development			Commercial real estate		Farmland		1-4 family residential			Multi-family residential			Consumer			Agricultural		Overdrafts			Total
Allowance for loan losses:
Beginning balance	$	1,878		$	1,004		$	2,106	$	400	$	2,839		$	325		$	562		$	138	$	11		$	9,263
Provision for loan losses	910			162			1,158		82		1,117			(44		)	171			15		69			3,640
Loans charged-off	(1,213		)	(9		)	—		—		(71		)	—			(269		)	—		(200		)	(1,762		)
Recoveries	17			4			—		—		75			—			121			—		126			343
Ending balance	$	1,592		$	1,161		$	3,264	$	482	$	3,960		$	281		$	585		$	153	$	6		$	11,484
Allowance ending balance:
Individually evaluated for impairment	$	64		$	—		$	—	$	47	$	108		$	—		$	34		$	—	$	—		$	253
Collectively evaluated for impairment	1,528			1,161			3,264		435		3,852			281			551			153		6			11,231
Loans:
Individually evaluated for impairment	231			1,825			1,196		258		2,588			5			200			15		—			6,318
Collectively evaluated for impairment	223,766			127,541			366,460		62,104		360,364			26,074			53,305			18,886		317			1,238,817
Ending balance	$	223,997		$	129,366		$	367,656	$	62,362	$	362,952		$	26,079		$	53,505		$	18,901	$	317		$	1,245,135

(Continued)

19.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


For the three months ended March 31, 2016	Commercial and industrial			Construction and development			Commercial real estate		Farmland			1-4 family residential			Multi-family residential		Consumer			Agricultural			Overdrafts			Total
For the six months ended June 30, 2016																													Commercial and industrial			Construction and development		Commercial real estate		Farmland		1-4 family residential			Multi-family residential		Consumer			Agricultural			Overdrafts			Total
Allowance for loan losses:
Beginning balance	$	1,878		$	1,004		$	2,106	$	400		$	2,839		$	325	$	562		$	138		$	11		$	9,263		$	1,878		$	1,004	$	2,106	$	400	$	2,839		$	325	$	562		$	138		$	11		$	9,263
Provision for loan losses	(504		)	(200		)	145		(50		)	1,115			13		(83		)	(12		)	26			450			1,201			35		433		112		512			58		17			(7		)	39			2,400
Loans charged-off	—			—			—		—			(14		)	—		(51		)	—			(39		)	(104		)	(11		)	—		—		—		(22		)	—		(89		)	—			(67		)	(189		)
Recoveries	11			4			—		—			—			—		18			—			23			56			13			4		—		—		—			—		77			—			38			132
Ending balance	$	1,385		$	808		$	2,251	$	350		$	3,940		$	338	$	446		$	126		$	21		$	9,665		$	3,081		$	1,043	$	2,539	$	512	$	3,329		$	383	$	567		$	131		$	21		$	11,606
Allowance ending balance:
Individually evaluated for impairment	$	288		$	—		$	—	$	47		$	92		$	—	$	84		$	—		$	—		$	511		$	1,773		$	—	$	—	$	47	$	93		$	—	$	70		$	—		$	—		$	1,983
Collectively evaluated for impairment	1,097			808			2,251		303			3,848			338		362			126			21			9,154			1,308			1,043		2,539		465		3,236			383		497			131			21			9,623
Loans:
Individually evaluated for impairment	3,270			39			128		283			2,038			3		235			—			—			5,996			8,476			39		1,116		302		2,168			—		200			58			—			12,359
Collectively evaluated for impairment	213,659			92,792			336,871		54,038			332,385			34,652		51,317			19,808			546			1,136,068			209,921			108,659		346,316		65,872		332,401			36,860		52,827			19,386			560			1,172,802
Ending balance	$	216,929		$	92,831		$	336,999	$	54,321		$	334,423		$	34,655	$	51,552		$	19,808		$	546		$	1,142,064		$	218,397		$	108,698	$	347,432	$	66,174	$	334,569		$	36,860	$	53,027		$	19,444		$	560		$	1,185,161

Credit Quality

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.

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. The Company typically measures impairment based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or based on the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent.

The following tables summarize the credit exposure in the consumer and commercial loan portfolios as of:


March 31, 2017	Commercial and industrial		Construction and development		Commercial real estate		Farmland		1-4 family residential		Multi-family residential		Consumer		Agricultural		Total
June 30, 2017																			Commercial and industrial		Construction and development		Commercial real estate		Farmland		1-4 family residential		Multi-family residential		Consumer and Overdrafts		Agricultural		Total
Grade:
Pass	$	200,851	$	152,760	$	365,789	$	61,503	$	354,074	$	23,696	$	52,308	$	19,802	$	1,230,783	$	212,162	$	177,333	$	373,861	$	63,035	$	348,212	$	28,592	$	50,917	$	20,396	$	1,274,508
Special mention	4,025		—		1,287		457		3,011		—		440		972		10,192		3,977		267		1,063		543		3,376		—		434		656		10,316
Substandard	1,027		—		5,701		170		3,745		247		397		699		11,986		1,358		—		3,798		261		4,869		241		690		802		12,019
Doubtful	—		—		78		—		43		—		61		—		182		—		—		—		—		—		—		—		—		—
Total	$	205,903	$	152,760	$	372,855	$	62,130	$	360,873	$	23,943	$	53,206	$	21,473	$	1,253,143	$	217,497	$	177,600	$	378,722	$	63,839	$	356,457	$	28,833	$	52,041	$	21,854	$	1,296,843

(Continued)

20.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


December 31, 2016	Commercial and industrial		Construction and development		Commercial real estate		Farmland		1-4 family residential		Multi-family residential		Consumer		Agricultural		Total		Commercial and industrial		Construction and development		Commercial real estate		Farmland		1-4 family residential		Multi-family residential		Consumer and Overdrafts		Agricultural		Total
Grade:
Pass	$	218,975	$	127,537	$	360,264	$	61,713	$	353,483	$	25,871	$	52,648	$	17,965	$	1,218,456	$	218,975	$	127,537	$	360,264	$	61,713	$	353,483	$	25,871	$	52,648	$	17,965	$	1,218,456
Special mention	4,299		4		1,927		248		4,311		—		524		478		11,791		4,299		4		1,927		248		4,311		—		524		478		11,791
Substandard	706		1,825		5,465		401		5,121		208		568		458		14,752		706		1,825		5,465		401		5,121		208		568		458		14,752
Doubtful	17		—		—		—		37		—		82		—		136		17		—		—		—		37		—		82		—		136
Total	$	223,997	$	129,366	$	367,656	$	62,362	$	362,952	$	26,079	$	53,822	$	18,901	$	1,245,135	$	223,997	$	129,366	$	367,656	$	62,362	$	362,952	$	26,079	$	53,822	$	18,901	$	1,245,135

The following tables summarize the payment status of loans in the Company’s total loan portfolio, including an aging of delinquent loans, loans 90 days or more past due continuing to accrue interest and loans classified as nonperforming as of:


March 31, 2017	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
June 30, 2017								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	460	181	30	671	205,232	205,903	—	$	168	$	142	$	451	$	761	$	216,736	$	217,497	$	—
Real estate:
Construction and development	60	—	—	60	152,700	152,760	—	135		—		—		135		177,465		177,600		—
Commercial real estate	1,225	41	136	1,402	371,453	372,855	—	677		16		—		693		378,029		378,722		—
Farmland	114	—	—	114	62,016	62,130	—	145		122		—		267		63,572		63,839		—
1-4 family residential	3,867	323	1,183	5,373	355,500	360,873	—	3,107		644		1,092		4,843		351,614		356,457		—
Multi-family residential	49	198	—	247	23,696	23,943	—	—		—		192		192		28,641		28,833		—
Consumer	610	95	80	785	52,031	52,816	—	531		139		126		796		50,881		51,677		—
Agricultural	188	14	14	216	21,257	21,473	—	344		—		—		344		21,510		21,854		—
Overdrafts	—	—	—	—	390	390	—	—		—		—		—		364		364		—
Total	6,573	852	1,443	8,868	1,244,275	1,253,143	—	$	5,107	$	1,063	$	1,861	$	8,031	$	1,288,812	$	1,296,843	$	—


December 31, 2016	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	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	941	105	25	1,071	222,926	223,997	—	$	941	$	105	$	25	$	1,071	$	222,926	$	223,997	$	—
Real estate:
Construction and development	73	—	1,825	1,898	127,468	129,366	—	73		—		1,825		1,898		127,468		129,366		—
Commercial real estate	1,629	32	134	1,795	365,861	367,656	—	1,629		32		134		1,795		365,861		367,656		—
Farmland	100	26	7	133	62,229	62,362	—	100		26		7		133		62,229		62,362		—
1-4 family residential	3,724	803	1,041	5,568	357,384	362,952	—	3,724		803		1,041		5,568		357,384		362,952		—
Multi-family residential	207	49	—	256	25,823	26,079	—	207		49		—		256		25,823		26,079		—
Consumer	613	205	87	905	52,600	53,505	—	613		205		87		905		52,600		53,505		—
Agricultural	59	—	15	74	18,827	18,901	—	59		—		15		74		18,827		18,901		—
Overdrafts	—	—	—	—	317	317	—	—		—		—		—		317		317		—
Total	7,346	1,220	3,134	11,700	1,233,435	1,245,135	—	$	7,346	$	1,220	$	3,134	$	11,700	$	1,233,435	$	1,245,135	$	—

(Continued)

21.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents information regarding nonaccrual loans as of:


	March 31, 2017	December 31, 2016	June 30, 2017		December 31, 2016
Commercial and industrial	517	82	$	480	$	82
Real estate:
Construction and development	—	1,825	—		1,825
Commercial real estate	136	415	708		415
Farmland	163	176	163		176
1-4 family residential	1,772	1,699	1,839		1,699
Multi-family residential	—	5	241		5
Consumer	165	192	215		192
Agricultural	313	15	312		15
Total	3,066	4,409	$	3,958	$	4,409

Impaired Loans and Troubled Debt Restructurings

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. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with original contractual terms of the loan. Loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance nonperforming loans and troubled debt restructurings.

The outstanding balances of TDRs are shown below:


	March 31, 2017	December 31, 2016	June 30, 2017		December 31, 2016
Nonaccrual TDRs	42	90	$	—	$	43
Performing TDRs	330	415	323		462
Total	372	505	$	323	$	505
Specific reserves on TDRs	4	4	$	21	$	4

The following tables present loans by class modified as TDRs that occurred during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016:


Three Months Ended March 31, 2017	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Six Months Ended June 30, 2017				Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial	1	34	34	1	$	34	$	13
1-4 family residential	1	11	11	1	11		11
Total	2	45	45	2	$	45	$	24

There were no TDRs that have subsequently defaulted inthrough June 30, 2017. The TDRs described above ~~did not increase~~increased the allowance for loan losses by $21 and resulted in no charge-offs during the ~~three~~six months ended ~~March 31,~~June 30, 2017.

(Continued)

22.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


Three Months Ended March 31, 2016	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Six Months Ended June 30, 2016				Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate				1	$	796	$	796
Consumer	3	23	23	4	32		24
1-4 family residential				2	189		189
Total	3	23	23	7	$	1,017	$	1,009

There were no TDRs that subsequently defaulted in 2016. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the ~~three~~six months ended ~~March 31,~~June 30, 2016.

The following table presents information about the Company’s impaired loans as ~~of and for the three months ended:~~of:


March 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2017											Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	373	$	373	$	—	$	159	$	5	$	712	$	712	$	—	$	345
Real estate:
Construction and development	—		—		—		1,217		—		—		—		—		608
Commercial real estate	5,893		5,893		—		4,936		73		3,468		3,468		—		5,177
Farmland	7		7		—		65		—		7		7		—		90
1-4 family residential	1,315		1,315		—		1,675		18		1,785		1,785		—		1,566
Multi-family residential	247		247		—		102		4		241		241		—		172
Consumer	34		34		—		105		1		192		192		—		91
Agricultural	612		612		—		214		13		490		490		—		387
Subtotal	8,481		8,481		—		8,473		114		6,895		6,895		—		8,436
With allowance recorded:
Commercial and industrial	546		546		129		624		10		462		462		246		533
Real estate:
Commercial real estate	518		518		31		251		3		283		283		31		173
Farmland	163		163		41		163		—		163		163		92		109
1-4 family residential	454		454		40		609		5		941		941		139		505
Consumer	—		—		—		100				—		—		—		50
Agricultural											299		299		225		82
Subtotal	1,681		1,681		241		1,747		18		2,148		2,148		733		1,452
Total	$	10,162	$	10,162	$	241	$	10,220	$	132	$	9,043	$	9,043	$	733	$	9,888

(Continued)

23.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents information about the Company’s impaired loans as ~~of and for the year ended:~~of:


December 31, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	28	$	28	$	—	$	809	$	3	$	28	$	28	$	—	$	809
Real estate:
Construction and development	1,825		1,825		—		172		84		1,825		1,825		—		172
Commercial real estate	1,196		1,196		—		871		47		1,196		1,196		—		871
Farmland	89		89		—		109		5		89		89		—		109
1-4 family residential	1,799		1,799		—		1,575		106		1,799		1,799		—		1,575
Multi-family residential	5		5		—		2		1		5		5		—		2
Consumer	105		105		—		89		12		105		105		—		89
Agricultural	15		15		—		68		2		15		15		—		68
Subtotal	5,062		5,062		—		3,695		260		5,062		5,062		—		3,695
With allowance recorded:
Commercial and industrial	203		203		64		3,153		4		203		203		64		3,153
Real estate:
Farmland	169		169		47		169		1		169		169		47		169
1-4 family residential	789		789		108		639		44		789		789		108		639
Consumer	95		95		34		155		8		95		95		34		155
Agricultural	—		—		—		2		—		—		—		—		2
Subtotal	1,256		1,256		253		4,118		57		1,256		1,256		253		4,118
Total	$	6,318	$	6,318	$	253	$	7,813	$	317	$	6,318	$	6,318	$	253	$	7,813

During the six months ended June 30, 2017 and 2016, total interest income and cash-based interest income recognized on impaired loans was minimal.

NOTE 5 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER DEBT

At ~~March 31,~~June 30, 2017 and December 31, 2016, securities sold under agreements to repurchase totaled ~~$12,663~~$14,153 and $10,859, respectively.

~~On March 31,~~During the quarter ended June 30, 2017, the Company used a portion of the proceeds from its initial public offering to repay the outstanding balance on a line of credit ~~and amortizing note~~ with ~~our~~its correspondent ~~bank were restructured and combined into one unsecured $25,000~~bank. The line of credit, ~~with~~which had an outstanding balance of ~~$18,929~~$0 at quarter ~~end. The line of credit~~end, bears interest at the prime rate plus 0.50%, with interest payable quarterly, and matures in March 2018. ~~The outstanding balance of the line of credit was repaid in full upon completion of our initial public offering as described in the subsequent events in Note 1.~~

(Continued)

24.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 6 - SUBORDINATED DEBENTURES

Subordinated debentures are made up of the following as of:

March 31, 2017 December 31, 2016
Debentures II $ 3,093
$ 3,093
Debentures III 2,062
2,062
DCB Debentures I 5,155
5,155
Other Debentures 9,000
9,000
$ 19,310
$ 19,310



	June 30, 2017		December 31, 2016
Trust II Debentures	$	3,093	$	3,093
Trust III Debentures	2,062		2,062
DCB Trust I Debentures	5,155		5,155
Other debentures	4,000		9,000
	$	14,310	$	19,310

The Company has three trusts, Guaranty (TX) Capital Trust II (“Trust II”), Guaranty (TX) Capital Trust III (“Trust III”), and DCB Financial Trust I (“DCB Trust I”) (“Trust II”, “Trust III” and together with ~~DCB~~“DCB Trust I,” the “Trusts”). Upon formation, the Trusts issued pass-through securities (“TruPS”) with a liquidation value of $1,000 per share to third parties in private placements. Concurrently with the issuance of the TruPS, the Trusts issued common securities to the Company. The Trusts invested the proceeds of the sales of securities to the Company (“Debentures”). The Debentures mature approximately 30 years after the formation date, which may be shortened if certain conditions are met (including the Company having received prior approval of the Federal Reserve and any other required regulatory approvals).



	Trust II		Trust III		DCB Trust I
Formation date	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

The securities held by the Trusts qualify as Tier I capital for the Company under Federal Reserve Board guidelines. The Federal Reserve’s guidelines restrict core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred securities is less than the limit of 25% of Tier I capital, net of goodwill, the full amount is includable in Tier I capital at ~~March 31,~~June 30, 2017 and December 31, 2016. Additionally, the terms provide that trust preferred securities would no longer qualify for Tier I capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the junior subordinated debentures.

With certain exceptions, the amount of the principal and any accrued and unpaid interest on the Debentures are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company. Interest on the Debentures is payable quarterly. The interest is deferrable on a cumulative basis for up to five consecutive years following a suspension of dividend payments on all other capital stock. No principal payments are due until maturity for each of the Debentures.

Debentures II

Debentures III

DCB Debentures I

Trust II Debentures

Trust III Debentures

DCB Trust I Debentures

Original amount

3,093

2,062

5,155

3,093

2,062

5,155

Maturity date

October 30, 2032

October 1, 2036

June 15, 2037

October 30, 2032

October 1, 2036

June 15, 2037

Interest due

Quarterly

(Continued)

25.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In accordance with ASC 810, "Consolidation," the junior subordinated debentures issued by the Company to the subsidiary trusts are shown as liabilities in the consolidated balance sheets and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of earnings.

Trust II Debentures II

Interest is payable at a variable rate per annum, reset quarterly, equal to 3 month LIBOR plus 3.35%.

On any interest payment date on or after October 30, 2012 and prior to maturity date, the ~~Debentures II~~debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days’ notice, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.

Trust III Debentures ~~III~~

Interest was payable at a variable rate per annum, reset quarterly, equal to 3 month LIBOR plus 1.67%.

On any interest payment date on or after October 1, 2016 and prior to maturity date, the ~~Debentures III~~debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days’ notice, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.

DCB Trust I Debentures I

Interest is payable at a variable rate per annum, reset quarterly, equal to 3 month LIBOR plus 1.80%.

On any interest payment date on or after June 15, 2012 and prior to maturity date, the ~~DCB Debentures I~~debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days’ notice, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.

Other ~~Debentures~~debentures

In July 2015, the Company issued $4,000 in debentures, of which $3,000 were issued to directors and other related parties. The $3,000 of debentures to related parties ~~which will mature~~were repaid in May 2017. The remaining $1,000 of debentures were issued at par value of $500 each with rates of 2.50% and 4.00% and maturity dates of July 1, 2017 ~~2018,~~ and ~~2019.~~January 1, 2019, respectively. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holder on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued interest. ~~The debentures were issued at par value of $500 each with rates ranging from 2.50% to 4.00% and maturity dates from July 1, 2017 to January 1, 2019.~~

In December 2015, the Company issued $5,000 in debentures, of which $2,500 were issued to directors and other related ~~parties, which will mature in~~parties. In May 2017, $2,000 of the related party debentures were repaid. The remaining $3,000 of debentures were issued at par value of $500 each with rates ranging from 3.00% to 5.00% and maturity dates from July 1, 2018 ~~2019, and~~to July 1, 2020. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holder on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued interest. ~~The debentures were issued at par value of $500 each with rates ranging from 3.00% to 5.00% and maturity dates from July 1, 2018 to July 1, 2020.~~

~~As noted in the subsequent events in Note 1, $5,000 of the Other Debentures were repaid upon completion of our initial public offering in May 2017.~~

(Continued)

26.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 7 - STOCK OPTIONS

The Company’s 2015 Equity Incentive Plan ~~(“Stock Option Plan” or the~~(the “Plan”) executed April 15, 2015, which is shareholder-approved, amended and restated the Company’s 2014 Stock Option ~~Plan (“Original Plan”).~~Plan. The maximum number of shares of common stock that may be issued pursuant to stock-based awards under the Plan equals 1,000,000 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. Currently outstanding option awards have vesting periods ranging from 5 to 10 years and have 10-year contractual terms.

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 activity in the Plan during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 follows:


Three Months Ended March 31, 2017	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Six Months Ended June 30, 2017								Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at beginning of year	340,377		$	23.43	7.34	$	194	340,377		$	23.43	7.34	$	194
Granted	9,000		26.00		9.96	—		109,200		27.00		9.90	548
Exercised	(2,010	)	11.94		3.08	28		(7,033	)	11.94		4.73	141
Forfeited	(1,000	)	24.00		5.55	2		(6,000	)	23.17		7.38	53
Balance, March 31, 2017	346,367		$	23.56	7.19	$	844
Balance, June 30, 2017								436,544		$	24.51	7.63	$	3,277

Exercisable at end of period	92,667		$	22.91	6.46	$	287	117,484		$	24.11	7.01	$	930


Three Months Ended March 31, 2016	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Six Months Ended June 30, 2016								Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at beginning of year	314,391		$	23.28	8.00	$	225	314,391		$	23.28	8.00	$	225
Granted	21,000		23.00		8.79	21		26,500		23.21		9.59	21
Forfeited	(10,400	)	23.23		7.74	8		(17,400	)	23.17		8.37	14
Balance, March 31, 2016	324,991		$	23.27	7.86	$	238
Balance, June 30, 2016								323,491		$	23.28	7.63	$	232

Exercisable at end of period	47,191		$	20.83	6.51	$	149	58,891		$	21.25	6.79	$	162

A summary of nonvested activity in the Plan during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 follows:

Three Months Ended March 31, 2017 Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life in Years Aggregate Intrinsic Value
Outstanding at beginning of year 250,700
$ 23.73
7.65 $ 69
Granted 9,000
26.00
9.96 —
Vested (6,000 ) 23.90
9.15 13
Balance, March 31, 2017 253,700
$ 23.80
7.46 $ 557

(Continued)

27.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)



Six Months Ended June 30, 2017	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at beginning of year	250,700		$	23.73	7.65	$	69
Granted	109,200		27.00		9.90	548
Vested	(36,840	)	25.40		9.16	244
Forfeited	(4,000	)	23.17		7.38	53
Balance, June 30, 2017	319,060		$	24.66	7.86	$	2,347


Three Months Ended March 31, 2016	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Six Months Ended June 30, 2016								Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at beginning of year	267,200		$	23.72	8.22	$	—	267,200		$	23.72	8.22	$	76
Granted	21,000		23.00		8.79	21		26,500		23.21		9.59	21
Vested	(10,400	)	23.23		7.47	8		(12,300	)	23.00		8.81	12
Balance, March 31, 2016	277,800		$	23.68	8.09	$	89
Forfeited								(16,800	)	23.17		8.37	14
Balance, June 30, 2016								264,600		$	23.74	7.82	$	70

Information related to the Plan is as follows for the ~~three~~six months ended:


	March 31, 2017		June 30, 2017
Intrinsic value of options exercised	$	28	$	141
Cash received from options exercised	24		84
Tax benefit realized from options exercised	—		—
Weighted average fair value of options granted	4.30		5.25

As of ~~March 31,~~June 30, 2017, there was ~~$995~~$1,795 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of ~~4.63~~4.34 years.

The Company granted options under the ~~2015 Stock Option~~ Plan induring the first six months of 2016 and 2017. Expense of ~~$60~~$123 and ~~$39~~$94 was recorded during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, respectively.

NOTE 8 - 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% of a participant’s qualified compensation starting January 1, 2016. As of ~~March~~December 31, ~~2017,~~2016, the plan included a ~~put option,~~repurchase obligation, or “put option”, which is a right to demand that the sponsor redeem shares of employer stock distributed to the participant under the terms of the plan, for which there iswas no public market for such shares, with an established cash price. This put option was ~~extinguished~~terminated upon completion of ~~our~~the Company’s initial public offering and listing of ~~our~~its common stock on the NASDAQ Global Select Market in May ~~2017, as described in Note 1.~~2017. Total contributions accrued or paid during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 totaled ~~$226~~$445 and ~~$234,~~$491, respectively.

Benefits under the KSOP generally are distributed to participants in the form of cash, although participants have the right to receive distributions in the form of shares of or common stock. Because the Company’s common stock was not yet actively traded as of ~~March~~December 31, ~~2017,~~2016, the participants could demand (in accordance with the terms of the KSOP and applicable law) that the Company repurchase any shares of common stock distributed to them at the estimated fair value.

~~The~~

(Continued)

28.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

As of December 31, 2016, the fair value of shares of common stock, held by the KSOP, was deducted from permanent shareholders’ equity in the consolidated balance sheets, and reflected in a line item below liabilities and above shareholders’ equity. ~~As of March 31, 2017, this~~This presentation was necessary in order to recognize the put option within the KSOP-owned shares, consistent with SEC guidelines, because the Company was not yet publicly traded. The Company used a valuation by an external third party to determine the maximum possible cash obligation related to those securities. Increases or decreases in the value of the cash obligation were included in a separate line item in the statements of changes in shareholders’ equity. The fair value of allocated and unallocated shares subject to the repurchase obligation totaled ~~$34,300 and~~ $31,661 ~~at March 31, 2017 and~~as of December 31, ~~2016, respectively.~~2016.

As of ~~March 31,~~June 30, 2017 and December 31, 2016, the number of shares held by the KSOP was 1,319,225. Of these shares, there were 50,000 shares unallocated to plan participants as of ~~March 31,~~June 30, 2017 and December 31, 2016. In

~~(Continued)~~

~~28.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

During the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, the Company did not repurchase any shares from KSOP participants that received distributions of shares from the KSOP which were subject to the put option that applied to the KSOP shares before we were publicly traded. All shares held by the KSOP were treated as outstanding at each of the respective period ends.

~~Supplemental Retirement Plan~~

The Company maintains a non-qualified, non-contributory supplemental retirement plan. The plan covers a retired officer to provide benefits equal to amounts payable under the Company’s retirement plan and certain social security benefits to aggregate a predetermined percentage of the officer’s final five-year average salary. The plan is non-funded. There were no amounts expensed during the three months ended March 31, 2017 and 2016. The recorded obligation was approximately $0 and $5 as of March 31, 2017 and December 31, 2016, respectively and is included in accrued interest and other liabilities on the consolidated balance sheets.

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.

~~The~~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 ~~$17,922~~$18,035 and $17,804 as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively.

Expense related to these plans totaled ~~$256~~$317 and ~~$196~~$275 for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, respectively, and is included in employee compensation and benefits on the consolidated statements of earnings. The recorded liability totaled approximately ~~$2,251~~$2,305 and $2,002 as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively and is included in accrued interest and other liabilities on the 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 the 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 asset levels for the Company as a whole. These bonus amounts are established annually by ~~our~~the Company’s board of directors. The bonus expense under this plan for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 totaled ~~$581~~$1,103 and ~~$499,~~$931, respectively and is included in employee compensation and benefits on the consolidated statements of earnings.

NOTE 9 - INCOME TAXES

Income tax expenses were as follows for:


	Three Months Ended March 31,						Six Months Ended June 30,
	2017			2016			2017			2016
Income tax expense for the period	$	1,312		$	1,090		$	2,945		$	1,910
Effective tax rate	27.19		%	28.93		%	28.22		%	26.95		%

The effective tax rates differ from the statutory federal tax rate of 35% largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank owned life insurance.

(Continued)

29.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

~~(Continued)~~

~~29.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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 sheet in other liabilities.

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 their 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 6. Management believes 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 is the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this liability to other liabilities of the Company. To meet this objective, the Company utilizes interest rate swaps as an asset/liability management strategy to hedge the change in value of the cash flows due to changes in expected interest rate assumptions.

Interest rate swaps with notional amounts totaling $5,000 as of ~~March 31,~~June 30, 2017 and December 31, 2016, were designated as cash flow hedges of the debentures and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income.

Therefore, the aggregate fair value of the swaps is recorded in accrued interest and other liabilities within the consolidated balance sheets with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.

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


March 31, 2017:
June 30, 2017:									June 30, 2017:
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
$	2,000	5.979	%	3 month LIBOR plus 1.67%	October 1, 2016	9.01	$	329	2,000	5.979	%	3 month LIBOR plus 1.67%	October 1, 2016	8.76	$	353
$	3,000	7.505	%	3 month LIBOR plus 3.35%	October 30, 2012	5.59	$	331	3,000	7.505	%	3 month LIBOR plus 3.35%	October 30, 2012	5.34	$	348



December 31, 2016:
Notional Amount		Pay Rate		Receive Rate	Effective Date	Maturity in Years	Unrealized Losses
$	2,000	5.979	%	3 month LIBOR plus 1.67%	October 1, 2016	9.25	$	342
$	3,000	7.505	%	3 month LIBOR plus 3.35%	October 30, 2012	5.83	$	353

Interest expense recorded on these swap transactions totaled ~~$207~~$395 and ~~$222~~$439 during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, respectively, and is reported as a component of interest expense on the debentures. At ~~March 31,~~June 30, 2017, the Company expected none of the unrealized loss to be reclassified as a reduction of interest expense during the remainder of 2017.

(Continued)

30.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 11 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States of America, are not included in the consolidated balance sheets.

~~(Continued)~~

~~30.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

These transactions are referred to as “off-balance sheet commitments.” The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit, which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

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 assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

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 ~~March 31,~~June 30, 2017 and December 31, 2016, no 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
	March 31, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Commitments to extend credit	$	350,323	$	297,607	$	343,450	$	297,607
Letters of credit	9,113		8,879		8,768		8,879

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

~~The~~At June 30, 2017, the Company ~~at March 31, 2017,~~ had letters of credit of ~~$77,000~~$62,000 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.

NOTE 12 - REGULATORY MATTERS

Under banking law, there are legal restrictions limiting the amount of dividends the Company can declare. Approval of the regulatory authorities is required if the effect of the dividends declared would cause regulatory capital of the Company to fall below specified minimum levels.

The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

(Continued)

31.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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				To Be Well Capitalized Under Prompt Corrective Action Provisions				Actual				Minimum Required For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2017
June 30, 2017
Total capital to risk-weighted assets:
Consolidated	$	152,967	10.84	%	$	112,877	8.00	%			n/a		$	210,959	14.54	%	$	116,085	8.00	%			n/a
Bank	177,589		12.60	%	112,778		8.00	%	$	140,973	10.00	%	197,899		13.64	%	116,102		8.00	%	$	145,127	10.00	%
Tier 1 capital to risk-weighted assets:
Consolidated	141,039		10.00	%	84,658		6.00	%			n/a		198,434		13.68	%	87,063		6.00	%			n/a
Bank	165,661		11.75	%	84,584		6.00	%	112,778		8.00	%	185,374		12.77	%	87,076		6.00	%	116,102		8.00	%
Tier 1 capital to average assets:
Consolidated	141,039		7.66	%	73,640		4.00	%			n/a		198,434		10.68	%	74,355		4.00	%			n/a
Bank	165,661		9.01	%	73,572		4.00	%	91,965		5.00	%	185,374		9.98	%	74,313		4.00	%	92,892		5.00	%
Common equity tier 1 risk-based capital:
Common equity tier 1 capital to risk-weighted assets:
Consolidated	130,729		9.27	%	63,494		4.50	%			n/a		188,124		12.96	%	65,298		4.50	%			n/a
Bank	165,661		11.75	%	63,438		4.50	%	91,632		6.50	%	185,374		12.77	%	65,307		4.50	%	94,333		6.50	%


	Actual				Minimum Required For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions				Actual				Minimum Required For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2016
Total capital to risk-weighted assets:
Consolidated	$	149,468	10.86	%	$	110,083	8.00	%			n/a		$	149,468	10.86	%	$	110,083	8.00	%			n/a
Bank	173,528		12.63	%	109,947		8.00	%	$	137,434	10.00	%	173,528		12.63	%	109,947		8.00	%	$	137,434	10.00	%
Tier 1 capital to risk-weighted assets:
Consolidated	137,984		10.03	%	82,562		6.00	%			n/a		137,984		10.03	%	82,562		6.00	%			n/a
Bank	162,044		11.79	%	82,460		6.00	%	109,947		8.00	%	162,044		11.79	%	82,460		6.00	%	109,947		8.00	%
Tier 1 capital to average assets:
Consolidated	137,984		7.71	%	71,560		4.00	%			n/a		137,984		7.71	%	71,560		4.00	%			n/a
Bank	162,044		9.06	%	71,505		4.00	%	89,381		5.00	%	162,044		9.06	%	71,505		4.00	%	89,381		5.00	%
Common equity tier 1 risk-based capital:
Common equity tier 1 capital to risk-weighted assets:
Consolidated	127,674		9.28	%	61,922		4.50	%			n/a		127,674		9.28	%	61,922		4.50	%			n/a
Bank	162,044		11.79	%	61,845		4.50	%	89,332		6.50	%	162,044		11.79	%	61,845		4.50	%	89,332		6.50	%

In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the “Basel III Capital Rules”). The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier I” (“CETI”), (ii) specify that Tier I capital consist of Common Equity Tier I and “Additional Tier I Capital” instruments meeting specified requirements, (iii) define Common Equity Tier I narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Common Equity Tier I and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations. The Basel III Capital Rules became effective for the Company on January 1, 2015, with certain transition provisions to be fully phased in by January 1, 2019.

Starting in January 2016, the implementation of the capital conservation buffer will be effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the ~~minimum required risk-weighted capital ratios. Failure to meet the full amount of the buffer will result in restrictions on~~

(Continued)

32.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

minimum required risk-weighted capital ratios. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the ~~Bank~~Company to maintain minimum amounts and ratios (set forth in the table below) of total, CETI and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), ad of Tier I capital (as defined) to average assets (as defined). Management believes, as of ~~March 31,~~June 30, 2017 and December 31, 2016 that the ~~Bank~~Company met all capital adequacy requirements to which it was subject.

As of ~~March 31,~~June 30, 2017 and December 31, 2016, the ~~Company’s~~Bank’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~~Bank must maintain minimum total risk-based, CETI, Tier 1 risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since ~~March 31,~~June 30, 2017 that management believes have changed the ~~Company’s~~Bank’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 I capital, net of goodwill, the rules permit the inclusion of $10,310 of trust preferred securities in Tier I capital at ~~March 31,~~June 30, 2017 and December 31, 2016. Additionally, the rules provide that trust preferred securities would no longer qualify for Tier I 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.

Dividends paid by the Company are mainly provided by dividends from its subsidiaries. However, certain regulatory restrictions exist regarding the ability of its bank subsidiary to transfer funds to the Company 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)

33.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on the present value of estimated future cash flows using the loan's existing rate or, if repayment is expected solely from the collateral, the fair value of collateral, less costs to sell, is determined using recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant (Level 3). Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business (Level 3). Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly (Level 3).

(Continued)

34.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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


As of March 31, 2017	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Other Unobservable Inputs (Level 3)
As of June 30, 2017											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:
Available for sale securities
Mortgage-backed securities	$	79,545		$	—	$	79,545		$	—	$	94,465		$	—	$	94,465		$	—
Collateralized mortgage obligations	102,467			—		102,467			—		125,242			—		125,242			—
Municipal securities	7,278			—		7,278			—		7,493			—		7,493			—
Corporate bonds	25,173			—		25,173			—		19,033			—		19,033			—
Derivative instruments	(661		)	—		(661		)	—		(701		)	—		(701		)	—

Assets at fair value on a nonrecurring basis:
Impaired loans	9,921			—		—			9,921		8,310			—		—			8,310
Other real estate owned	1,637			—		—			1,637		1,733			—		—			1,733


As of December 31, 2016	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Other Unobservable Inputs (Level 3)		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:
Available for sale securities
Mortgage-backed securities	$	59,690		$	—	$	59,690		$	—	$	59,690		$	—	$	59,690		$	—
Collateralized mortgage obligations	65,133			—		65,133			—		65,133			—		65,133			—
Municipal securities											7,219			—		7,219			—
Corporate bonds	24,883			—		24,883			—		24,883			—		24,883			—
U.S. treasury securities	—			—		—			—		—			—		—			—
Derivative instruments	(695		)	—		(695		)	—		(695		)	—		(695		)	—

Assets at fair value on a nonrecurring basis:
Impaired loans	6,065			—		—			6,065		6,065			—		—			6,065
Other real estate owned	1,692			—		—			1,692		1,692			—		—			1,692

There were no transfers between Level 2 and Level 3 during the six months ended 2017 or for the year ended December 31, 2016.

Nonfinancial Assets and Nonfinancial Liabilities

Nonfinancial assets measured at fair value on a nonrecurring basis during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, 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.

(Continued)

35.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents foreclosed assets that were remeasured and recorded at fair value as of:


	March 31, 2017			December 31, 2016			March 31, 2016			June 30, 2017			December 31, 2016			June 30, 2016
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	87		$	78		$	134		$	351		$	78		$	43
Charge-offs recognized in the allowance for loan losses	(78		)	(11		)	(14		)	(109		)	(11		)	(8		)
Fair value of foreclosed assets remeasured at initial recognition	$	9		$	67		$	120		$	242		$	67		$	35

Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	—		$	170		$	—		$	—		$	170		$	135
Write-downs included in collection and other real estate owned expense	—			(69		)	—			—			(69		)	(58		)
Fair value of foreclosed assets remeasured subsequent to initial recognition	$	—		$	101		$	—		$	—		$	101		$	77

The following tables present quantitative information about nonrecurring Level 3 fair value measurements as of:

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range (Weighted Average)

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range (Weighted Average)

March 31, 2017

June 30, 2017

Impaired loans

9,921

Fair value of collateral - sales comparison approach

Selling costs or other normal adjustments: Real estate Equipment

10%-20% (16%) 10%-20% (14%)

8,310

Fair value of collateral - sales comparison approach

Selling costs or other normal adjustments: Real estate Equipment

10%-20% (16%) 10%-20% (21%)

Other real estate owned

1,637

Appraisal value of collateral

Selling costs or other normal adjustments

10%-20% (16%)

1,733

Appraisal value of collateral

Selling costs or other normal adjustments

10%-20% (16%)



	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
December 31, 2016
Impaired loans	$	6,065	Fair value of collateral - sales comparison approach	Selling costs or other normal adjustments: Real estate Equipment	10%-20% (16%) 40%-50% (42%)
Other real estate owned	$	1,692	Appraisal value of collateral	Selling costs or other normal adjustments	10%-20% (16%)

(Continued)

36.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of ~~March 31,~~June 30, 2017 and December 31, 2016, are as follows:


	Fair value measurements as of March 31, 2017 using:										Fair value measurements as of June 30, 2017 using:
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		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	$	143,757	$	115,751	$	28,006	$	—	$	143,757	$	83,306	$	54,089	$	29,217	$	—	$	83,306
Marketable securities held to maturity	185,837		—		184,412		—		184,412		182,248		—		184,527		—		184,527
Loans, net	1,241,215		—		—		1,246,011		1,246,011		1,284,318		—		—		1,283,241		1,283,241
Accrued interest receivable	6,304		—		6,304		—		6,304		7,631		—		7,631		—		7,631
Nonmarketable equity securities	7,285		—		7,285		—		7,285		7,679		—		7,679		—		7,679
Cash surrender value of life insurance	17,922		—		17,922		—		17,922		18,035		—		18,035		—		18,035
Financial liabilities:
Deposits	$	1,671,171	$	1,335,456	$	336,371	$	—	$	1,671,827	$	1,646,373	$	1,329,161	$	317,418	$	—	$	1,646,579
Securities sold under repurchase agreements	12,663		—		12,663		—		12,663		14,153		—		14,153		—		14,153
Accrued interest payable	1,010		—		1,010		—		1,010		805		—		805		—		805
Other debt	18,929		—		18,929		—		18,929
Federal Home Loan Bank advances	25,165		—		25,163		—		25,163		25,161		—		25,156		—		25,156
Subordinated debentures	19,310		—		16,852		—		16,852		14,310		—		11,897		—		11,897



	Fair value measurements as of December 31, 2016 using:
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Financial assets:
Cash, due from banks, federal funds sold and interest-bearing deposits	$	127,543	$	100,205	$	27,338	$	—	$	127,543
Marketable securities held to maturity	189,371		—		186,155		—		186,155
Loans, net	1,233,651		—		—		1,235,306		1,235,306
Accrued interest receivable	7,419		—		7,419		—		7,419
Nonmarketable equity securities	10,500		—		10,500		—		10,500
Cash surrender value of life insurance	17,804		—		17,804		—		17,804
Financial liabilities:
Deposits	$	1,576,791	$	1,234,875	$	342,615	$	—	$	1,577,490
Securities sold under repurchase agreements	10,859		—		10,859		—		10,859
Accrued interest payable	889		—		889		—		889
Other debt	18,286		—		18,286		—		18,286
Federal Home Loan Bank advances	55,170		—		55,160		—		55,160
Subordinated debentures	19,310		—		16,809		—		16,809

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).

(Continued)

37.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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.

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 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. 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)

38.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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



					Three Months Ended June 30,				Six Months Ended June 30,
	March 31, 2017		March 31, 2016		2017		2016		2017		2016
Numerator:
Net earnings (basic)	$	3,516	$	2,677	$	3,976	$	2,500	$	7,492	$	5,177
Net earnings (diluted)	$	3,516	$	2,677	$	3,976	$	2,500	$	7,492	$	5,177

Denominator:
Weighted-average shares outstanding (basic)	8,751,945		8,968,052		10,019,049		9,257,995		9,388,998		9,113,023
Effect of dilutive securities:
Common stock equivalent shares from stock options	32,465		9,914		87,776		9,647		60,273		9,647
Weighted-average shares outstanding (diluted)	8,784,410		8,977,966		10,106,825		9,267,642		9,449,271		9,122,670

Net earnings per share
Basic	$	0.40	$	0.30	$	0.40	$	0.27	$	0.80	$	0.57
Diluted	$	0.40	$	0.30	$	0.39	$	0.27	$	0.79	$	0.57

(Continued)

39.

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”) as well as with our consolidated financial statements and notes thereto appearing in our Prospectus, filed with the SEC on May 9, 2017 pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”), relating to our initial public offering (the “IPO Prospectus”). Unless the context indicates otherwises, 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.

This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements” and “Risk Factors” in our IPO Prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. For additional information concerning forward-looking statements, please read “-Special Cautionary Notice Regarding Forward-Looking Statements” below.

General

Guaranty Bank & Trust, N.A. (the “Bank”) was originally chartered as a Texas state banking association over a century ago in 1913, and converted its charter to a national banking association in 2012. Guaranty Bancshares, Inc. (the “Company”) wasWe were incorporated in 1990 to serve as the holding company for ~~the Bank.~~Guaranty Bank & Trust. Since our founding, we have built a reputation based on financial stability and community leadership. In May 2017, ~~the Company~~we consummated an initial public offering of ~~its~~our common stock, which is traded on the NASDAQ Global Select Market under the symbol “GNTY.”

We currently operate 26 banking locations in the Dallas/Fort Worth metroplex, East Texas and Bryan/College Station markets. Our growth has been consistent and primarily organic. Our principal executive office is located at 201 South Jefferson Street, Mount Pleasant, Texas 75455, and our telephone number is (903) 572-9881. Our website address is www.gnty.com. Information contained on ~~the Company’s~~our website does not constitute a part of this Quarterly Report on Form 10-Q 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.

40.

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 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 Loan Losses

Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Fees associated with the originating 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. 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 loan losses is an estimated amount management believes is adequate to absorb inherent losses on existing loans that may be uncollectible based upon review and evaluation of our loan portfolio. Management’s periodic evaluation of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience and the results of periodic reviews of the portfolio.

The allowance for loan losses is comprised of two components. The first component, the general reserve, is determined in accordance with current authoritative accounting guidance that considers historical loss rates for the last five years adjusted for qualitative factors based upon general economic conditions and other qualitative risk factors both internal and external to us. Such qualitative factors include current local economic conditions and trends including unemployment, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. For purposes of determining the general reserve, the loan portfolio, less cash secured loans, government guaranteed loans and impaired loans, is multiplied by our adjusted historical loss rate. The second component of the allowance for loan losses, the specific reserve, is determined in accordance with current authoritative accounting guidance based on probable and incurred losses on specific classified loans.

The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).

Due to our growth over the past several years, a portion of the loans in our portfolio and our lending relationships are of relatively recent origin. The new loan portfolios have limited delinquency and credit loss history and have not yet exhibited an observable loss trend. The credit quality of loans in theses loan portfolios are impacted by delinquency status and debt service coverage generated by the borrowers’ business 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, loans do

41.

not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refers 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 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 loan 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 in identifying loans that are individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan losses. Internal risk ratings are updated on a continuous basis.

Loans are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan’s observable market price. ~~At March 31,~~As of June 30, 2017 and December 31, 2016, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral.

From time to time, we modify our loan agreement with a borrower. A modified loan is considered a troubled debt restructuring 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 is subject to impairment and the need for a specific allowance for loan loss allocation. An allowance for loan loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral.

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. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real estate portfolio are generally diverse in terms of type and geographic location throughout the State of Texas. This diversity helps us reduce the exposure to adverse economic events that affect any single market or industry.

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

42.

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.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

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 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 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.

~~Acquisitions Affecting Year-over-Year Comparability~~

~~The comparability of our consolidated results of operations for the three months ended March 31, 2017 to the three months ended March 31, 2016 is affected by purchased or~~ ~~de novo~~ ~~locations opened during the period. In May and December, 2016, we opened~~ ~~de novo~~ branch locations in Denton and College Station, Texas, respectively. On the close of business August 6, 2016, we purchased certain assets and assumed certain liabilities associated with a former branch location of a non-related bank in Denton, Texas. Therefore, the results of the purchased and ~~de novo~~ ~~operations were included in our results of operations during 2017 but were not included in our results of operations for 2016.~~

Discussion and Analysis of Results of Operations for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2017 and 2016

Results of Operations

The following discussion and analysis of our results of operations compares our results of operations for the ~~three~~six months ended ~~March 31,~~June 30, 2017 with the ~~three~~six months ended ~~March 31,~~June 30, 2016. The results of operations for the

~~43.~~

~~three~~ six months ended ~~March 31,~~June 30, 2017 are not necessarily indicative of the results of operations that may be expected for ~~all of~~ the year ending December 31, 2017.

Net earnings were ~~$3.5~~$7.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, as compared to ~~$2.7~~$5.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2016. The following table presents key earnings data for the periods indicated:

43.


	For the Three Months Ended March 31, 2017						For the Six Months Ended June 30,
	2017			2016			2017			2016
	(Dollars in thousands, except per share data)						(Dollars in thousands, except per share data)
Net earnings	$	3,516		$	2,677		$	7,492		$	5,177
Net earnings per common share
-basic	0.40			0.30			0.80			0.57
-diluted	0.40			0.30			0.79			0.57
Net interest margin⁽¹⁾	3.34		%	3.21		%	3.37		%	3.24		%
Net interest rate spread⁽²⁾	3.15		%	3.02		%	3.16		%	3.05		%
Return on average assets	0.76		%	0.62		%	0.80		%	0.59		%
Return on average equity	9.72		%	7.61		%	9.23		%	7.22		%
Average equity to average total assets	7.77		%	8.12		%	8.67		%	8.20		%
Dividend payout ratio							32.50		%	45.61		%

(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.

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 for the ~~three~~six months ended ~~March 31,~~June 30, 2017 was ~~$14.2~~$29.0 million compared to ~~$12.8~~$26.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2016, an increase of ~~$1.4~~$2.9 million, or ~~11.2%~~11.1%. The increase in net interest income was comprised of a ~~$1.7~~$3.4 million, or ~~10.8%~~10.7%, increase in interest income offset by a ~~$229,000,~~$471,000, or ~~8.6%~~8.7%, increase in interest expense. The growth in interest income was primarily attributable to a ~~$141.9~~$127.6 million, or ~~13.0%~~11.3%, increase in average loans outstanding for the ~~three~~six months ended ~~March 31,~~June 30, 2017, compared to the ~~three~~six months ended ~~March 31,~~June 30, 2016, ~~partially offset~~further improved by a ~~0.02% decrease~~0.03% increase in the average yield on total loans. The increase in average loans outstanding was primarily due to organic growth in all of our markets and continuing maturity of de novo and acquired locations in the Dallas/Fort Worth metroplex and Bryan/College Station markets. The ~~$229,000~~$471,000 increase in interest expense for the ~~three~~six months ended ~~March 31,~~June 30, 2017 was primarily related to a ~~$67.8~~$79.9 million, or ~~5.7%~~6.81%, increase in average interest-bearing deposits over the same period in 2016. The majority of this increase iswas due to organic growth, primarily in money market accounts, driven in part by favorable rates that were offered in our Bryan/College Station and Dallas/Fort Worth metroplex markets. For the ~~three~~six months ended ~~March 31,~~June 30, 2017, net interest margin and net interest spread were ~~3.34%~~3.37% and ~~3.15%~~3.16%, respectively, compared to ~~3.21%~~3.24% and ~~3.02%~~3.05% for the same period in 2016, which reflects the increases in interest income discussed above relative to the increases in interest expense.

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 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~~six months ended ~~March 31,~~June 30, 2017 and 2016,

~~44.~~

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.

44.


	For the Three Months Ended March 31,														For the Six Months Ended June 30,
	2017							2016							2017							2016
	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
	(Dollars in thousands)														(Dollars in thousands)
Assets
Interest-earnings assets:
Total loans⁽¹⁾	$	1,233,126		$	14,415	4.74	%	$	1,091,213		$	12,914	4.76	%	$	1,253,670		$	29,629	4.77	%	$	1,126,049		$	26,563	4.74	%
Securities available for sale	187,648			1,104		2.39	%	280,951			1,421		2.03	%	202,421			2,302		2.29	%	243,626			2,348		1.94	%
Securities held to maturity	187,621			1,129		2.44	%	143,723			961		2.69	%	186,064			2,252		2.44	%	171,854			2,297		2.69	%
Nonmarketable equity securities	8,745			256		11.87	%	7,728			47		2.45	%	7,251			320		8.90	%	8,268			132		3.21	%
Interest-bearing deposits in other banks	112,362			232		0.84	%	82,130			126		0.62	%	89,189			425		0.96	%	74,228			224		0.61	%
Total interest-earning assets	1,729,502			$	17,136	4.02	%	1,605,745			$	15,469	3.87	%	1,738,595			$	34,928	4.05	%	1,624,025			$	31,564	3.91	%
Allowance for loan losses	(11,564		)					(9,452		)					(11,810		)					(10,053		)
Noninterest-earnings assets	144,338							135,864							144,418							136,638
Total assets	$	1,862,276						$	1,732,157						$	1,871,203						$	1,750,610
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,254,317		$	2,404	0.78	%	$	1,186,521		$	2,186	0.74	%	$	1,252,962		$	5,031	0.81	%	$	1,173,073		$	4,462	0.76	%
Advances from FHLB and Fed Funds Purchased	49,389			68		0.56	%	23,759			52		0.88	%
Advances from FHLB and fed funds purchased															37,209			112		0.61	%	51,603			143		0.56	%
Other debt	18,693			205		4.45	%	18,006			194		4.33	%	13,534			325		4.84	%	15,506			348		4.51	%
Subordinated debentures	19,310			207		4.35	%	21,310			222		4.19	%	18,023			395		4.42	%	20,810			439		4.24	%
Securities sold under agreements to repurchase	11,075			11		0.40	%	11,343			12		0.43	%	12,263			25		0.41	%	12,422			25		0.40	%
Total interest-bearing liabilities	1,352,784			$	2,895	0.87	%	1,260,939			$	2,666	0.85	%	1,333,991			$	5,888	0.89	%	1,273,414			$	5,417	0.86	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits	358,581							325,469							368,341							328,178
Accrued interest and other liabilities	6,149							5,063							6,576							5,516
Total noninterest-bearing liabilities	364,730							330,532							374,917							333,694
Shareholders’ equity	144,762							140,686							162,295							143,502
Total liabilities and shareholders’ equity	$	1,862,276						$	1,732,157						$	1,871,203						$	1,750,610
Net interest rate spread⁽²⁾						3.15	%						3.02	%						3.16	%						3.05	%
Net interest income				$	14,241						$	12,803						$	29,040						$	26,147
Net interest margin⁽³⁾						3.34	%						3.21	%						3.37	%						3.24	%

(1) Includes average outstanding balances of loans held for sale of ~~$1.6~~$2.8 million and ~~$3.2~~$3.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, respectively.

(2) Net interest rate 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.

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.

45.


	For the Three Months Ended March 31, 2017 vs. 2016									For the Six Months Ended June 30, 2017 vs. 2016
	Increase (Decrease)									Increase (Decrease)
	Due to Change in						Total Increase			Due to Change in						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)									(Dollars in thousands)
Interest-earning assets:
Total loans	$	6,728		$	(5,227	)	$	1,501		$	6,082		$	(3,016	)	$	3,066
Securities available for sale	(2,226		)	1,909			(317		)	(945		)	899			(46		)
Securities held to maturity	1,071			(903		)	168			347			(392		)	(45		)
Nonmarketable equity securities	121			88			209			(91		)	279			188
Interest-earning deposits in other banks	253			(147		)	106			144			57			201
Total increase (decrease) in interest income	$	5,947		$	(4,280	)	$	1,667		$	5,537		$	(2,173	)	$	3,364

Interest-bearing liabilities:
Interest-bearing deposits	$	527		$	(309	)	$	218		$	647		$	(78	)	$	569
Advances from FHLB and Fed funds Purchased	143			(127		)	16
Advances from FHLB and fed funds purchased										(87		)	56			(31		)
Other debt	31			(20		)	11			(95		)	72			(23		)
Subordinated debentures	(87		)	72			(15		)	(123		)	79			(44		)
Securities sold under agreements to repurchase	(1		)	—			(1		)	(1		)	1			—
Total increase (decrease) in interest expense	613			(384		)	229
Total increase in interest expense										340			131			471
Increase (decrease) in net interest income	$	5,334		$	(3,896	)	$	1,438		$	5,197		$	(2,304	)	$	2,893

Provision for Loan Losses

The provision for loan losses is a charge to income in order to bring our allowance for loan 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 loan losses when determined appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.

The provision for loan losses for the ~~three~~six months ended ~~March 31,~~June 30, 2017 was ~~$650,000~~$1.5 million compared to ~~$450,000~~$2.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2016. The ~~increase~~decrease in the provision expense ~~is directly~~was related to one large loan ~~growth~~relationship whose repayment ability deteriorated in the ~~respective period.~~prior year, thus increasing a specific reserve allocated to the borrower during the prior year. Net charge offs were ~~$206,000~~$409,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2017 compared to ~~$48,000~~$57,000 for the same period in 2016. The increase in net charge offs was attributable primarily to charge-offs in our one-to-four family and consumer portfolios during the first six months of 2017.

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 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.

~~46.~~

The following table presents components of noninterest income for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 and the period-over-period variations in the categories of noninterest income:

46.


	For the Three Months Ended March 31,				Increase (Decrease)			For the Six Months Ended June 30,				Increase (Decrease)
	2017		2016		2017 v. 2016			2017		2016		2017 v. 2016
	(Dollars in thousands)							(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	877	$	823	$	54		$	1,815	$	1,711	$	104
Merchant and debit card fees	732		650		82			1,523		1,336		187
Fiduciary income	350		349		1			693		694		(1		)
Gain on sales of loans	429		226		203			901		745		156
Bank-owned life insurance income	117		118		(1		)	231		225		6
Gain on sales of investment securities	—		37		(37		)	25		18		7
Loan processing fee income	145		142		3			308		312		(4		)
Other	632		546		86
Other noninterest income								1,302		1,159		143
Total noninterest income	$	3,282	$	2,891	$	391		$	6,798	$	6,200	$	598

Total noninterest income increased ~~$391,000,~~$598,000, or ~~13.5%~~9.65%, for the ~~three~~six months ended ~~March 31,~~June 30, 2017 compared to the same period in 2016. ~~Significant~~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 constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were ~~$877,000~~$1.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, which increased over the same period in 2016 by ~~$54,000,~~$104,000, or ~~6.6%~~6.1%. This increase in service charges was due in part to our deposit growth during the same period and a new deposit service charge and fee schedule implemented during February 2017.

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 ~~$732,000~~$1.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017 compared to ~~$650,000~~$1.3 million for the same period in 2016, an increase of ~~$82,000,~~$187,000, or ~~12.6%~~14.0%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during 2017.

Gain on Sales of Loans. We originate long-term fixed-rate mortgage loans for resale into the secondary market. We sold 79160 loans for ~~$14.4~~$29.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017 compared to 40138 loans for ~~$8.8~~$27.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2016. Gain on sale of loans was ~~$429,000~~$901,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2017, an increase of ~~$203,000,~~$156,000, or ~~89.8%~~20.9%, compared to ~~$226,000~~$745,000 for the same period in 2016, which reflects an increase in mortgage volume and the number of loans sold.

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 ~~$86,000,~~$143,000, or ~~15.8%~~12.3%, for the ~~three~~six months ended ~~March 31,~~June 30, 2017 compared to the same period in 2016 due primarily to the growth in our loan portfolio and increased mortgage origination volume causing an increase in fee income generated from loan administration fees and income from mortgage loan origination and processing fees.

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.

~~47.~~

For the ~~three~~six months ended ~~March 31,~~June 30, 2017, noninterest expense totaled ~~$12.0~~$24.0 million, an increase of ~~$568,000~~$1.1 million million, or ~~4.9%~~4.77%, compared to ~~$11.5~~$22.9 million for the ~~three~~six months ended ~~March 31,~~June 30, 2016. The following table presents, for the periods indicated, the major categories of noninterest expense:

47.

For the Three Months Ended March 31, Increase (Decrease)
2017 2016 2017 v. 2016
(Dollars in thousands)
Employee compensation and benefits $ 6,987
$ 6,450
$ 537
Non-staff expenses:
Occupancy expenses 1,748
1,747
1
Amortization 264
242
22
Software support fees 483
476
7
FDIC insurance assessment fees 191
300
(109 )
Legal and professional fees 361
451
(90 )
Advertising and promotions 241
202
39
Telecommunication expense 143
162
(19 )
ATM and debit card expense 249
269
(20 )
Director and committee fees 259
228
31
Other 1,119
950
169
Total noninterest expense $ 12,045
$ 11,477
$ 568

~~Significant~~



	For the Six Months Ended June 30,				Increase (Decrease)
	2017		2016		2017 v. 2016
	(Dollars in thousands)
Employee compensation and benefits	$	13,427	$	12,687	$	740
Non-staff expenses:
Occupancy expenses	3,614		3,476		138
Amortization	523		479		44
Software and Technology	1,000		917		83
FDIC insurance assessment fees	365		600		(235		)
Legal and professional fees	780		877		(97		)
Advertising and promotions	576		474		102
Telecommunication expense	284		308		(24		)
ATM and debit card expense	513		502		11
Director and committee fees	507		458		49
Other noninterest expense	2,362		2,082		280
Total noninterest expense	$	23,951	$	22,860	$	1,091

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 ~~$7.0~~$13.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, an increase of ~~$537,000,~~$740,000, or ~~8.3%~~5.8%, compared to ~~$6.5~~$12.7 million for the same period in 2016. The increase was due primarily to an increase in per employee salaries, as well as increased health insurance expenses, bonus expense, benefit plan expenses and payroll taxes. As of ~~March 31,~~June 30, 2017 and 2016, we had ~~399~~395 and ~~392~~399 full-time equivalent employees, respectively, ~~an increase~~a decrease of ~~seven~~four employees.

Occupancy Expenses. Occupancy expenses were $3.6 million and $3.5 million for the six months ended June 30, 2017 and 2016, respectively. The increase of $138,000, or 4.0%, resulted primarily from additional lease expense of banking centers totaling $94,000 and an increase in ad valorem taxes of $66,000, primarily associated with repossessed assets.

FDIC Insurance Assessment Fees. FDIC assessment fees were ~~$191,000~~$365,000 and ~~$300,000~~$600,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, respectively. The decrease of ~~$109,000,~~$235,000, or ~~36.3%~~39.2%, resulted from the effect of an update in our accounting methodology during 2016 related to accrual of the assessment fees and an increased one time expense in the prior period.

~~Legal and Professional Fees.~~ Legal and professional fees, which include audit, loan review and regulatory assessments, were $361,000 and $451,000 for the three months ended March 31, 2017 and 2016, respectively. The decrease of $90,000, or 20.0%, was primarily due to a decrease in third-party investment advisory fees related to our Wealth Management Group during 2017.

Advertising and Promotions. Advertising and promotion related expenses were ~~$241,000~~$576,000 and ~~$202,000~~$474,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, respectively. The increase of ~~$39,000,~~$102,000, or ~~19.3%~~21.5%, was primarily due to additional advertising expenses related to our two locations in Denton, Texas and three locations in Bryan/College Station, Texas.

~~Director and Committee Fees.~~ We pay fees to our board of directors for their attendance at board and committee meetings for both the Company and the Bank. Director and committee fees paid were $259,000 and $228,000 for the three months ended March 31, 2017 and 2016, respectively. The expense increased $31,000, or 13.6%, due to an increase in the per meeting fees paid to directors effective January 1, 2017.

~~48.~~

business development expenses (i.e., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense increased to ~~$1.1~~$2.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, compared to ~~$950,000~~$2.1 million for the same period in 2016, an increase of ~~$169,000,~~$280,000, or ~~17.8%~~13.4%. The increase was primarily due to additional stock appreciation rights and stock option expenses of ~~$112,000~~$256,000 during the comparable periods.

48.

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 ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, income tax expense totaled ~~$1.3~~$2.9 million and $1.9 million, respectively. Our effective tax rates for the six months ended June 30, 2017 and 2016 were 28.22% and 26.95%, respectively.

Discussion and Analysis of Results of Operations for the Three Months Ended June 30, 2017 and 2016

Results of Operations

The following discussion and analysis of our results of operations compares our results of operations for the three months ended June 30, 2017 with the three months ended June 30, 2016. The results of operations for the three months ended June 30, 2017 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.

Net earnings were $4.0 million for the three months ended June 30, 2017, as compared to $2.5 million for the three months ended June 30, 2016. The following table presents key earnings data for the periods indicated:



	For the Three Months Ended June 30,
	2017			2016
	(Dollars in thousands, except per share data)
Net earnings	$	3,976		$	2,500
Net earnings per common share
-basic	0.40			0.27
-diluted	0.39			0.27
Net interest margin⁽¹⁾	3.40		%	3.27		%
Net interest rate spread⁽²⁾	3.17		%	3.08		%
Return on average assets	0.85		%	0.57		%
Return on average equity	8.85		%	6.83		%
Average equity to average total assets	9.55		%	8.27		%

(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.

Net Interest Income

Net interest income for the three months ended June 30, 2017 was $14.8 million compared to $13.3 million for the three months ended June 30, 2016, an increase of $1.5 million, or 10.9%. The increase in net interest income was comprised of a $1.7 million, or 10.5%, increase in interest income offset by a $242,000, or 8.8%, increase in interest expense. The growth in interest income was primarily attributable to a $113.1 million, or 9.7%, increase in average loans outstanding for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, and further improved by a 0.06% increase in the average yield on total loans. The increase in average loans outstanding was primarily due to organic growth in all of our markets and continuing maturity of de novo and acquired locations in the Dallas/Fort Worth metroplex and Bryan/College Station markets. The $242,000 increase in interest expense for the three months ended June 30, 2017 was primarily related to a $92.0 million, or 7.9%, increase in average interest-bearing deposits over the same period in 2016, and an increase in the average rate of 0.05%. The majority of this increase was due to organic growth, primarily in money market accounts, driven in part by favorable rates that were offered in our Bryan/College Station and Dallas/Fort Worth metroplex markets. For the three months ended June 30, 2017, net interest margin and net interest spread were 3.40% and 3.17%, respectively, compared to 3.27% and

49.

3.08% for the same period in 2016, which reflects the increases in interest income discussed above relative to the increases in interest expense.

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 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 June 30, 2017 and 2016, 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.



	For the Three Months Ended June 30,
	2017							2016
	Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Interest-earnings assets:
Total loans⁽¹⁾	$	1,273,989		$	15,214	4.79	%	$	1,160,885		$	13,649	4.73	%
Securities available for sale	217,031			1,198		2.21	%	206,302			927		1.81	%
Securities held to maturity	184,524			1,123		2.44	%	199,985			1,336		2.69	%
Nonmarketable equity securities	5,774			64		4.45	%	8,808			85		3.88	%
Interest-bearing deposits in other banks	66,272			193		1.17	%	66,325			98		0.59	%
Total interest-earning assets	1,747,590			$	17,792	4.08	%	1,642,305			$	16,095	3.94	%
Allowance for loan losses	(12,054		)					(10,653		)
Noninterest-earnings assets	144,489							137,411
Total assets	$	1,880,025						$	1,769,063
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,251,623		$	2,627	0.84	%	$	1,159,625		$	2,276	0.79	%
Advances from FHLB and fed funds purchased	25,163			44		0.70	%	79,448			91		0.46	%
Other debt	8,431			120		5.71	%	13,007			154		4.76	%
Subordinated debentures	16,750			188		4.50	%	20,310			217		4.30	%
Securities sold under agreements to repurchase	13,437			14		0.42	%	13,501			13		0.39	%
Total interest-bearing liabilities	1,315,404			$	2,993	0.91	%	1,285,891			$	2,751	0.86	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits	377,994							330,887
Accrued interest and other liabilities	6,991							5,967
Total noninterest-bearing liabilities	384,985							336,854
Shareholders’ equity	179,636							146,318
Total liabilities and shareholders’ equity	$	1,880,025						$	1,769,063
Net interest rate spread⁽²⁾						3.17	%						3.08	%
Net interest income				$	14,799						$	13,344
Net interest margin⁽³⁾						3.40	%						3.27	%

(1) Includes average outstanding balances of loans held for sale of $1.4 million and $1.5 million for the three months ended June 30, 2017 and 2016, respectively.

(2) Net interest rate 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.

50.



	For the Three Months Ended June 30, 2017 vs. 2016
	Increase (Decrease)
	Due to Change in						Total Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	5,418		$	(3,853	)	$	1,565
Securities available for sale	238			33			271
Securities held to maturity	(377		)	164			(213		)
Nonmarketable equity securities	(135		)	114			(21		)
Interest-earning deposits in other banks	(1		)	96			95
Total increase (decrease) in interest income	$	5,143		$	(3,446	)	$	1,697

Interest-bearing liabilities:
Interest-bearing deposits	$	774		$	(423	)	$	351
Advances from FHLB and fed funds purchased	(381		)	334			(47		)
Other debt	(261		)	227			(34		)
Subordinated debentures	(160		)	131			(29		)
Securities sold under agreements to repurchase	—			1			1
Total increase (decrease) in interest expense	(28		)	270			242
Increase (decrease) in net interest income	$	5,171		$	(3,716	)	$	1,455

Provision for Loan Losses

The provision for loan losses for the three months ended June 30, 2017 was $800,000 compared to $2.0 million for the three months ended June 30, 2016. The decrease in the provision expense was related to one large loan relationship whose repayment ability deteriorated in the prior year, thus increasing a specific reserve allocated to the borrower during the prior year. Net charge offs were $203,000 for the three months ended June 30, 2017 compared to $9,000 for the same period in 2016.

Noninterest Income

The following table presents components of noninterest income for the three months ended June 30, 2017 and 2016 and the period-over-period variations in the categories of noninterest income:

51.



	For the Three Months Ended June 30,					Increase (Decrease)
	2017		2016			2017 v. 2016
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	938	$	888		$	50
Merchant and debit card fees	791		686			105
Fiduciary income	343		345			(2		)
Gain on sales of loans	472		519			(47		)
Bank-owned life insurance income	114		107			7
Gain (loss) on sales of investment securities	25		(19		)	44
Loan processing fee income	163		170			(7		)
Other noninterest income	670		613			57
Total noninterest income	$	3,516	$	3,309		$	207

Total noninterest income increased $207,000, or 6.3%, for the three months ended June 30, 2017 compared to the same period in 2016. 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 constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $938,000 for the three months ended June 30, 2017, which increased over the same period in 2016 by $50,000, or 5.6%. This increase in service charges was due in part to our deposit growth during the same period and a new deposit service charge and fee schedule implemented during February 2017.

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 $791,000 for the three months ended June 30, 2017 compared to $686,000 for the same period in 2016, an increase of $105,000, or 15.3%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during 2017.

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 $57,000, or 9.3%, for the three months ended June 30, 2017 compared to the same period in 2016 due primarily to the growth in our loan portfolio and increased mortgage origination volume causing an increase in fee income generated from loan administration fees and income from mortgage loan origination and processing fees.

Noninterest Expense

For the three months ended June 30, 2017, noninterest expense totaled $11.9 million, an increase of $523,000, or 4.6%, compared to $11.4 million for the three months ended June 30, 2016. The following table presents, for the periods indicated, the major categories of noninterest expense:

52.



	For the Three Months Ended June 30,				Increase (Decrease)
	2017		2016		2017 v. 2016
	(Dollars in thousands)
Employee compensation and benefits	$	6,440	$	6,237	$	203
Non-staff expenses:
Occupancy expenses	1,866		1,729		137
Amortization	259		237		22
Software and Technology	517		441		76
FDIC insurance assessment fees	174		300		(126		)
Legal and professional fees	419		426		(7		)
Advertising and promotions	335		272		63
Telecommunication expense	141		146		(5		)
ATM and debit card expense	264		233		31
Director and committee fees	248		230		18
Other noninterest expense	1,243		1,132		111
Total noninterest expense	$	11,906	$	11,383	$	523

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 $6.4 million for the three months ended June 30, 2017, an increase of $203,000, or 3.3%, compared to $6.2 million for the same period in 2016. The increase was due primarily to an increase in per employee salaries, as well as increased health insurance expenses, benefit plan expenses and payroll taxes. As of June 30, 2017 and 2016, we had 395 and 399 full-time equivalent employees, respectively, a decrease of four employees.

Occupancy Expenses. Occupancy expenses were $1.9 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively. The increase of $137,000, or 7.9%, resulted primarily from additional lease expense of banking centers of $53,000 and an increase in ad valorem taxes of $72,000, primarily associated with repossessed assets.

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 $517,000 for the three months ended June 30, 2017, compared to $441,000 for the same period in 2016, an increase of $76,000, or 17.2%. The increase resulted primarily from the addition of new technology related to remote deposit capture and general increases in support and technology contract costs.

FDIC Insurance Assessment Fees. FDIC assessment fees were $174,000 and $300,000 for the three months ended June 30, 2017 and 2016, respectively. The decrease of $126,000, or 42.0%, resulted from the effect of an update in our accounting methodology during 2016 related to accrual of the assessment fees and an increased one time expense in the prior period.

Advertising and Promotions. Advertising and promotion related expenses were $335,000 and $272,000 for the three months ended June 30, 2017 and 2016, respectively. The increase of $63,000, or 23.2%, was primarily due to additional advertising expenses related to our two locations in Denton, Texas and three locations in Bryan/College Station, Texas.

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, OREO related expenses, gains or losses on the sale of OREO, business development expenses (i.e., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense increased to $1.2 million for the three months ended

53.

June 30, 2017, compared to $1.1 million for the same period in 2016, an increase of $111,000, or 9.81%. The increase was primarily due to additional stock appreciation rights expense of $138,000 during the three months ended June 30, 2017.

Income Tax Expense

For the three months ended June 30, 2017 and 2016, income tax expense totaled $1.6 million and $820,000, respectively. Our effective tax rates for the three months ended ~~March 31,~~June 30, 2017 and 2016, were ~~27.19%~~29.11% and ~~28.93%~~24.70%, respectively.

Discussion and Analysis of Financial Condition

~~The following discussion and analysis of the Company’s financial condition discusses and analyzes the financial condition of the Company~~ as of ~~March 31,~~June 30, 2017 ~~and December 31, 2016.~~

Assets

Our total assets increased ~~$72.9~~$84.1 million, or ~~4.0%~~4.6%, from ~~$1.83~~$1.8 billion as of December 31, 2016 to ~~$1.90~~$1.9 billion as of ~~March 31,~~June 30, 2017. Our asset growth was primarily due to increases in our loan ~~portfolio,~~and securities portfolios, offset by decreases in federal funds sold and ~~securities portfolio.~~other assets.

Loan Portfolio

Our primary source of income is derived through interest earned on loans to small- to medium-sized businesses, commercial companies, professionals and individuals located in our primary market areas. A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.

Our loan portfolio is the largest category of our earning assets. As of ~~March 31,~~June 30, 2017, total loans were ~~$1.25~~$1.30 billion, an increase of ~~$8.0~~$51.7 million, or ~~0.6%~~4.2%, from the December 31, ~~2016.~~2016 balance of $1.25 billion. In addition to these amounts, ~~$1.4~~$2.4 million and $2.6 million in ~~loan~~loans were classified as held for sale as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively.

Total loans, excluding those held for sale, as a percentage of deposits were ~~74.99%~~78.8% and ~~78.97%~~79.0% as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively. Total loans, excluding those held for sale, as a percentage of total assets were ~~65.91%~~67.8% and ~~68.10%~~68.1% as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively.

~~49.~~54.

The following table summarizes our loan portfolio by type of loan and dollar and percentage change from December 31, 2016 to ~~March 31,~~June 30, 2017:


	As of March 31, 2017		As of December 31, 2016		Dollar Change			Percent Change		As of June 30, 2017		As of December 31, 2016		Dollar Change			Percent Change
	(Dollars in thousands)									(Dollars in thousands)
Commercial and industrial	$	205,903	$	223,997	$	(18,094	)	(8.10	)%	$	217,497	$	223,997	$	(6,500	)	(2.90	)%
Real estate:
Construction and development	152,760		129,366		23,394			18.10	%	177,600		129,366		48,234			37.28	%
Commercial real estate	372,855		367,656		5,199			1.40	%	378,722		367,656		11,066			3.01	%
Farmland	62,130		62,362		(232		)	(0.40	)%	63,839		62,362		1,477			2.37	%
1-4 family residential	360,873		362,952		(2,079		)	(0.60	)%	356,457		362,952		(6,495		)	(1.79	)%
Multi-family residential	23,943		26,079		(2,136		)	(8.20	)%	28,833		26,079		2,754			10.56	%
Consumer	53,206		53,822		(616		)	(1.10	)%
Consumer and overdrafts										52,041		53,822		(1,781		)	(3.31	)%
Agricultural	21,473		18,901		2,572			13.60	%	21,854		18,901		2,953			15.62	%
Total loans held for investment	$	1,253,143	$	1,245,135	$	8,008		0.60	%	$	1,296,843	$	1,245,135	$	51,708		4.15	%

Total loans held for sale	$	1,446	$	2,563	$	(1,117	)	(43.60	)%	$	2,435	$	2,563	$	(128	)	(4.99	)%

Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured.

We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

We had ~~$8.2~~$9.2 million in nonperforming assets as of ~~March 31,~~June 30, 2017, compared to $9.6 million as of December 31, 2016. We had ~~$3.1~~$4.0 million in nonperforming loans as of ~~March 31,~~June 30, 2017, compared to $4.4 million as of December 31, 2016. The ~~$1.3~~$0.5 million, or ~~30.5%~~10.2%, decrease in our nonperforming (nonaccrual) loans from December 31, 2016 to ~~March 31,~~June 30, 2017 primarily relates to one loan relationship in the amount of $1.7 million that was previously classified as nonaccrual but returned to accrual status in accordance with the terms of our loan policy, which was partially offset by smaller balance loans that entered non-accrual status during the period.

~~50.~~55.

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


	March 31, 2017			December 31, 2016			June 30, 2017			December 31, 2016
	(Dollars in thousands)						(Dollars in thousands)
Nonaccrual loans	$	3,066		$	4,409		$	3,958		$	4,409
Accruing loans 90 or more days past due	—			—			—			—
Total nonperforming loans	3,066			4,409			3,958			4,409
Other real estate owned:
Commercial real estate, construction and development, and farmland	1,084			1,074			1,046			1,074
Residential real estate	553			618			687			618
Total other real estate owned	1,637			1,692			1,733			1,692
Repossessed assets owned	3,526			3,530			3,501			3,530
Total other assets owned	5,163			5,222			5,234			5,222
Total nonperforming assets	$	8,229		$	9,631		$	9,192		$	9,631
Restructured loans-nonaccrual	$	42		$	90		$	—		$	43
Restructured loans-accruing	330			415			323			462
Ratio of nonperforming loans total loans⁽¹⁾⁽²⁾	0.24		%	0.35		%
Ratio of nonperforming loans to total loans⁽¹⁾⁽²⁾							0.31		%	0.35		%
Ratio of nonperforming assets to total assets	0.43		%	0.53		%	0.48		%	0.53		%

(1) Excludes loans held for sale of ~~$1.4~~$2.4 million and $2.6 million as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively.

(2) Restructured loans-nonaccrual are included in nonaccrual loans which are a component of nonperforming loans.

The following table presents nonaccrual loans by category as of:


	March 31, 2017		December 31, 2016		June 30, 2017		December 31, 2016
	(Dollars in thousands)				(Dollars in thousands)
Nonaccrual loans by category:
Real estate:
Construction and development	$	—	$	1,825	$	—	$	1,825
Commercial real estate	136		415		708		415
Farmland	163		176		163		176
1-4 family residential	1,772		1,699		1,839		1,699
Multi-family residential	—		5		241		5
Commercial and industrial	517		82		480		82
Consumer	165		192		215		192
Agricultural	313		15		312		15
Total	$	3,066	$	4,409	$	3,958	$	4,409

Potential Problem Loans

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

~~51.~~

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.~~short-

56.

term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated as doubtful have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

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

The following table summarizes the internal ratings of our loans as of:


	March 31, 2017												June 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Loss		Total		Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)												(Dollars in thousands)
Real estate:
Construction and development	$	152,760	$	—	$	—	$	—	$	—	$	152,760	$	177,333	$	267	$	—	$	—	$	—	$	177,600
Commercial real estate	365,789		1,287		5,701		78		—		372,855		373,861		1,063		3,798		—		—		378,722
Farmland	61,503		457		170		—		—		62,130		63,035		543		261		—		—		63,839
1-4 family residential	354,074		3,011		3,745		43		—		360,873		348,212		3,376		4,869		—		—		356,457
Multi-family residential	23,696		—		247		—		—		23,943		28,592		—		241		—		—		28,833
Commercial and industrial	200,851		4,025		1,027		—		—		205,903		212,162		3,977		1,358		—		—		217,497
Consumer	52,308		440		397		61		—		53,206
Consumer and overdrafts													50,917		434		690		—		—		52,041
Agricultural	19,802		972		699		—		—		21,473		20,396		656		802		—		—		21,854
Total	$	1,230,783	$	10,192	$	11,986	$	182	$	—	$	1,253,143	$	1,274,508	$	10,316	$	12,019	$	—	$	—	$	1,296,843


	December 31, 2016												December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Loss		Total		Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)												(Dollars in thousands)
Real estate:
Construction and development	$	127,537	$	4	$	1,825	$	—	$	—	$	129,366	$	127,537	$	4	$	1,825	$	—	$	—	$	129,366
Commercial real estate	360,264		1,927		5,465		—		—		367,656		360,264		1,927		5,465		—		—		367,656
Farmland	61,713		248		401		—		—		62,362		61,713		248		401		—		—		62,362
1-4 family residential	353,483		4,311		5,121		37		—		362,952		353,483		4,311		5,121		37		—		362,952
Multi-family residential	25,871		—		208		—		—		26,079		25,871		—		208		—		—		26,079
Commercial and industrial	218,975		4,299		706		17		—		223,997		218,975		4,299		706		17		—		223,997
Consumer	52,648		524		568		82		—		53,822
Consumer and overdrafts													52,648		524		568		82		—		53,822
Agricultural	17,965		478		458		—		—		18,901		17,965		478		458		—		—		18,901
Total	$	1,218,456	$	11,791	$	14,752	$	136	$	—	$	1,245,135	$	1,218,456	$	11,791	$	14,752	$	136	$	—	$	1,245,135

~~52.~~57.

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please see “-Critical Accounting Policies-Allowance for Loan 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 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 ~~March 31,~~June 30, 2017, the allowance for loan losses totaled ~~$11.9~~$12.5 million, or ~~0.95%~~0.97%, of total ~~loans.~~loans, excluding those held for sale. As of December 31, 2016, the allowance for loan losses totaled $11.5 million, or 0.92%, of total ~~loans.~~loans, excluding those held for sale. The increase in allowance is due to general reserves for organic loan growth, specific allocations on impaired assets and slightly higher qualitative factors in general allocation in recognition of certain macroeconomic trends in consumer and commercial real estate lending.

~~53.~~58.

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


	For the Three Months Ended March 31,						For the Year Ended December 31,			For the Six Months Ended June 30,						For the Year Ended December 31,
	2017			2016			2016			2017			2016			2016
	(Dollars in thousands)									(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	1,233,126		$	1,091,213		$	1,179,938		$	1,253,670		$	1,126,049		$	1,179,938
Gross loans outstanding at end of period⁽²⁾	$	1,253,143		$	1,142,064		$	1,245,135		$	1,296,843		$	1,185,161		$	1,245,135
Allowance for loan losses at beginning of the period	11,484			9,263			9,263			11,484			9,263			9,263
Provision for loan losses	650			450			3,640			1,450			2,400			3,640
Charge offs:
Charge-offs:
Real Estate:
Construction and development	—			—			9			—			—			9
Commercial real estate	—			—			—			84			—			—
Farmland	—			—			—			—			—			—
1-4 family residential	118			14			71			186			22			71
Multi-family residential	—			—			—			—			—			—
Commercial and industrial	6			—			1,213			48			11			1,213
Consumer	89			51			269			158			89			269
Agriculture	—			—			—			4			—			—
Overdrafts	35			39			200			70			67			200
Total charge-offs	248			104			1,762			550			189			1,762
Recoveries:
Real Estate:
Construction and development	—			4			4			—			4			4
Commercial real estate	—			—			—			—			—			—
Farmland	—			—			—			—			—			—
1-4 family residential	—			—			75			21			—			75
Multi-family residential	—			—			—			—			—			—
Commercial and industrial	—			11			17			—			13			17
Consumer	22			18			121			92			77			121
Agriculture	—			—			—			—			—			—
Overdrafts	20			23			126			28			38			126
Total recoveries	42			56			343			141			132			343
Net charge-offs	206			48			1,419			409			57			1,419
Allowance for loan losses at end of period	$	11,928		$	9,665		$	11,484		$	12,525		$	11,606		$	11,484
Ratio of allowance to end of period loans⁽²⁾	0.95		%	0.85		%	0.92		%	0.97		%	0.98		%	0.92		%
Ratio of net charge-offs to average loans⁽¹⁾	0.07		%	0.02		%	0.12		%	0.07		%	0.01		%	0.12		%

(1) Includes average outstanding balances of loans held for sale of ~~$1.6~~$2.8 million, ~~$3.2~~$3.0 million and $3.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 and for the year ended December 31, 2016, respectively.

(2) Excludes loans held for sale of ~~$1.4~~$2.4 million, ~~$5.0~~$2.9 million and $2.6 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016 and for the year ended December 31, 2016, respectively.

The allowance for loan losses to non-performing loans has increased from ~~260.47%~~260.5% at December 31, 2016 to ~~389.04%~~316.4% at ~~March 31,~~June 30, 2017. Non-performing loans decreased to ~~$3.1~~$4.0 million at ~~March 31,~~June 30, 2017 compared to $4.4 million at December 31, 2016 due primarily to one large loan totaling $1.7 million that was removed from nonaccrual status in the first quarter of ~~2017.~~2017, and offset by smaller loans added to non-accrual status.

~~54.~~59.

Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. If our primary market areas experience economic declines, if asset quality deteriorates or if we are successful in growing the size of our loan portfolio, our allowance could become inadequate and material additional provisions for loan losses could be required.

The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan 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 March 31, 2017				As of December 31, 2016				As of June 30, 2017				As of December 31, 2016
	Amount		Percent to Total		Amount		Percent to Total		Amount		Percent to Total		Amount		Percent to Total
	(Dollars in thousands)								(Dollars in thousands)
Real estate:
Construction and development	$	1,349	11.31	%	$	1,161	10.11	%	$	1,554	13.69	%	$	1,161	10.39	%
Commercial real estate	3,387		28.40	%	3,264		28.42	%	3,464		29.20	%	3,264		29.53	%
Farmland	472		3.96	%	482		4.20	%	541		4.92	%	482		5.01	%
1-4 family residential	3,770		31.61	%	3,960		34.48	%	3,726		27.49	%	3,960		29.15	%
Multi-family residential	228		1.91	%	281		2.45	%	269		2.22	%	281		2.09	%
Total real estate	9,206		77.18	%	9,148		79.66	%	9,554		77.53	%	9,148		76.17	%
Commercial and industrial	1,763		14.78	%	1,592		13.86	%	2,008		16.77	%	1,592		17.99	%
Consumer	804		6.74	%	591		5.15	%	592		4.01	%	591		4.32	%
Agricultural	155		1.30	%	153		1.33	%	371		1.69	%	153		1.52	%
Total allowance for loan losses	$	11,928	100.00	%	$	11,484	100.00	%	$	12,525	100.00	%	$	11,484	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 ~~March 31,~~June 30, 2017, the carrying amount of our investment securities totaled ~~$400.3~~$428.5 million, an increase of ~~$54.0~~$82.2 million, or ~~15.6%~~23.7%, compared to $346.3 million as of December 31, 2016. Investment securities represented ~~21.1%~~22.4% and 18.9% of total assets as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively.

Our investment portfolio consists of securities classified as available for sale and held to maturity. As of ~~March 31,~~June 30, 2017, securities available for sale and securities held to maturity totaled ~~$214.5~~$246.2 million and ~~$185.8~~$182.2 million, respectively. As of December 31, 2016, securities available for sale and securities in held to maturity totaled $156.9 million and $189.4 million, respectively. Held to maturity percentages represented ~~46.4%~~42.5% of our investment portfolio as of ~~March 31,~~June 30, 2017 and 54.7% as of December 31, 2016. While we generally seek to maintain 50.0% or less of our portfolio in held to maturity securities, the Company has the intent and ability to hold its held to maturity securities until maturity or call and the December 31, 2016 policy exception was approved by our board of directors. 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.

~~55.~~60.

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


	As of March 31, 2017								As of June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)								(Dollars in thousands)
Corporate bonds	$	25,223	$	73	$	123	$	25,173	$	18,861	$	180	$	8	$	19,033
Municipal securities	156,337		1,428		3,160		154,605		155,814		2,869		830		157,853
Mortgage-backed securities	107,666		327		1,427		106,566		119,985		344		995		119,334
Collateralized mortgage obligations	113,105		485		1,059		112,531		134,418		848		726		134,540
Total	$	402,331	$	2,313	$	5,769	$	398,875	$	429,078	$	4,241	$	2,559	$	430,760



	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Corporate bonds	$	25,254	$	6	$	377	$	24,883
Municipal securities	157,261		901		4,511		153,651
Mortgage-backed securities	89,748		318		1,898		88,168
Collateralized mortgage obligations	77,290		275		1,187		76,378
Total	$	349,553	$	1,500	$	7,973	$	343,080

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 ~~March 31,~~June 30, 2017 and December 31, 2016,, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages. The Bank owns no non-U.S. agency mortgage-backed securities and only one non-U.S. agency corporate collateralized mortgage obligation, which is categorized as held to maturity and had a $1.5 million carrying value as of ~~March 31,~~June 30, 2017.

Our management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In 2013, we recognized other-than-temporary impairment with respect to the non-U.S. agency corporate collateralized mortgage obligation that we hold. As of ~~March 31,~~June 30, 2017, ~~$370,612~~$416,239 of other-than-temporary impairment was recorded.

The following tables sets forth the amortized cost of held to maturity securities and the fair value of available for sale securities, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of our securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.


	As of March 31, 2017																				As of June 30, 2017
	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
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)																				(Dollars in thousands)
Corporate bonds	$	—	—	%	$	7,478	2.30	%	$	17,695	2.93	%	$	—	—	%	$	25,173	2.75	%	$	—	—	%	$	1,104	2.59	%	$	17,929	2.93	%	$	—	—	%	$	19,033	2.91	%
Municipal securities	1,050		2.98	%	5,577		3.54	%	40,910		3.52	%	108,261		3.63	%	155,798		3.59	%	2,831		2.27	%	5,553		3.56	%	40,659		3.63	%	106,471		3.63	%	$	155,514	3.60	%
Mortgage-backed securities	—		—	%	82,316		2.16	%	24,129		2.90	%	—		—	%	106,445		2.22	%	—		—	%	60,541		2.25	%	58,566		2.54	%	—		—	%	$	119,107	2.39	%
Collateralized mortgage obligations	—		—	%	21,805		3.02	%	63,999		2.69	%	27,080		2.91	%	112,884		2.81	%	—		—	%	70,967		2.55	%	43,622		2.67	%	20,238		2.69	%	$	134,827	2.61	%
Total	$	1,050	2.98	%	$	117,176	2.40	%	$	146,733	2.91	%	$	135,341	3.48	%	$	400,300	2.95	%	$	2,831	2.27	%	$	138,165	2.46	%	$	160,776	2.89	%	$	126,709	3.48	%	$	428,481	2.92	%

~~56.~~61.


	As of December 31, 2016																				As of December 31, 2016
	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
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)																				(Dollars in thousands)
Corporate bonds	$	—	—	%	$	7,453	2.30	%	$	17,430	2.93	%	$	—	—	%	$	24,883	2.75	%	$	—	—	%	$	7,453	2.30	%	$	17,430	2.93	%	$	—	—	%	$	24,883	2.75	%
Municipal securities	732		3.98	%	6,103		3.45	%	38,634		3.49	%	111,170		3.62	%	156,639		3.58	%	732		3.98	%	6,103		3.45	%	38,634		3.49	%	111,170		3.62	%	$	156,639	3.58	%
Mortgage-backed securities	—		—	%	74,047		2.02	%	14,093		2.27	%	—		—	%	88,140		2.06	%	—		—	%	74,047		2.02	%	14,093		2.27	%	—		—	%	$	88,140	2.06	%
Collateralized mortgage obligations	—		—	%	27,668		2.92	%	26,184		2.68	%	22,782		2.98	%	76,634		2.81	%	—		—	%	27,668		2.92	%	26,184		2.68	%	22,782		2.98	%	$	76,634	2.81	%
Total	$	732	3.98	%	$	115,271	2.33	%	$	96,341	3.00	%	$	133,952	3.50	%	$	346,296	2.97	%	$	732	3.98	%	$	115,271	2.33	%	$	96,341	3.00	%	$	133,952	3.50	%	$	346,296	2.97	%

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 tend to 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 ~~7.97~~8.01 years with an estimated effective duration of ~~5.11~~4.67 years as of ~~March 31,~~June 30, 2017.

As of ~~March 31,~~June 30, 2017 and December 31, 2016, 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.

The average yield of our securities portfolio was ~~2.95%~~2.92% as of ~~March 31,~~June 30, 2017 compared to 2.97% as of December 31, 2016. The decrease in average yield as of ~~March 31,~~June 30, 2017, compared to December 31, 2016, was primarily due to decrease in municipal securities as a percentage of the portfolio, as municipal securities typically have a higher yield than do the other types of investment securities we hold. Municipal securities decreased from $156.6 million at a yield of 3.58%, as of December 31, 2016, to ~~$155.8~~$155.5 million at a yield of ~~3.59%~~3.60%, as of ~~March 31,~~June 30, 2017, representing ~~38.92%~~36.3% and ~~45.23%~~45.2% of the total investment portfolio as of ~~March 31,~~June 30, 2017 and December 31, 2016, respectively.

Deposits

We offer a variety of deposit products, which have a wide range of interest rates and terms, including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.

Total deposits as of ~~March 31,~~June 30, 2017 were ~~$1.7~~$1.65 billion, an increase of ~~$94.4~~$69.6 million, or ~~6.0%~~4.4%, compared to ~~$1.6~~$1.58 billion as of December 31, 2016.

~~57.~~62.

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


	As of March 31, 2017		As of December 31, 2016		Dollar Change			Percent Change		For the Six Months Ended June 30, 2017		For the Year Ended December 31, 2016		Dollar Change			Percent Change
	(Dollars in thousands)									(Dollars in thousands)
Now and interest-bearing demand accounts	$	288,023	$	278,521	$	9,502		3.41	%	$	274,117	$	278,521	$	(4,404	)	(1.58	)%
Savings accounts	64,298		59,961		4,337			7.23	%	64,857		59,961		4,896			8.17	%
Money market accounts	563,800		482,089		81,711			16.95	%	582,478		482,089		100,389			20.82	%
Certificates and other time deposits	338,195		354,949		(16,754		)	(4.72	)%	331,510		354,949		(23,439		)	(6.60	)%
Total interest-bearing deposits	1,254,316		1,175,520		78,796			6.70	%	1,252,962		1,175,520		77,442			6.59	%
Noninterest-bearing demand accounts	358,581		340,240		18,341			5.39	%	368,341		340,240		28,101			8.26	%
Total deposits	$	1,612,897	$	1,515,760	$	97,137		6.41	%	$	1,621,303	$	1,515,760	$	105,543		6.96	%

The aggregate amount of time deposits in denominations of $100,000 or more as of ~~March 31,~~June 30, 2017 and December 31, 2016 was ~~$214,589~~$201.0 million and ~~$218,583,~~$218.6 million, respectively.

The scheduled maturities of time deposits greater than $100,000 were as follows:


	As of March 31, 2017				As of June 30, 2017
	Amount		Weighted Average Interest Rate		Amount		Weighted Average Interest Rate
	(Dollars in thousands)				(Dollars in thousands)
Under 3 months	$	50,680	0.96	%	$	55,896	0.83	%
3 to 6 months	46,755		0.84	%	33,493		0.90	%
6 to 12 months	65,364		0.90	%	58,971		0.95	%
12 to 24 months	31,342		1.22	%	31,954		1.18	%
24 to 36 months	8,477		1.37	%	7,940		1.37	%
36 to 48 months	7,062		1.60	%	7,282		1.60	%
Over 48 months	4,909		1.58	%	5,498		1.57	%
Total	$	214,589	1.00	%	201,034		1.00	%

Borrowings

We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.

Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of ~~March 31,~~June 30, 2017 and December 31, 2016, total borrowing capacity of ~~$402.4~~$405.8 million and $400.4 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within 5 years. As of ~~March 31,~~June 30, 2017, approximately ~~$969.9~~$974.0 million in real estate loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio. The following table presents our FHLB borrowings by maturity and weighted average rate as of ~~March 31,~~June 30, 2017:

Balance Weighted Average Rate
(Dollars in thousands)
One to three years $ 25,000
0.82 %
After three to five years 165
1.38 %
Total $ 25,165
0.83 %

~~58.~~



	Balance		Weighted Average Rate
	(Dollars in thousands)
90 days to less than one year	$	25,000	1.06	%
After three to five years	161		1.38	%
Total	$	25,161	1.06	%

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

63.

loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As of ~~March 31,~~June 30, 2017 and December 31, 2016, ~~$156.5~~$150.4 million and $168.3 million, respectively, were available under this arrangement. As of ~~March 31,~~June 30, 2017, approximately ~~$204.8~~$197.0 million in consumer and commercial and industrial loans were pledged as collateral. As of ~~March 31,~~June 30, 2017 and December 31, 2016, no borrowings were outstanding under this arrangement.

Trust Preferred Securities and Other ~~Borrowings.~~ Debentures.The Company has 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. As of December 31, 2016, we had a $15.0 million revolving line of credit and $10.0 million amortizing note with our correspondent bank. In March 2017, we renegotiated the loan agreement such that the outstanding balance of our revolving line of credit and amortizing note was converted to a $25.0 million unsecured revolving line of credit. The line of credit bears interest at the prime rate plus 0.50%, with quarterly interest payments, and matures in March 2018. As of March 31, 2017, the outstanding balance on the line of credit was $18.9 million.

~~59.~~

~~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. For the three months ended March 31, 2017 and the year ended December 31, 2016, 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 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 March 31, 2017 and December 31, 2016, we maintained three federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate $70 million in federal funds. There were no funds under these lines of credit outstanding as of March 31, 2017 and December 31, 2016. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above provides an additional source of liquidity.

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 $1.9 billion for the three months ended March 31, 2017, $1.7 billion for the three months ended March 31, 2016 and $1.8 billion for the year ended December 31, 2016.

For the Three Months Ended For the Year Ended
March 31, 2017 December 31, 2016
Average Rate Average Rate
Sources of Funds:
Deposits:
Noninterest-bearing 19.25 % 19.15 %
Interest-bearing 67.35 % 66.16 %
Federal funds purchased — % 0.01 %
Advances from FHLB 2.65 % 3.53 %
Other debt 1.00 % 0.74 %
Subordinated denentures 1.04 % 1.14 %
Securities sold under agreements to repurchase 0.59 % 0.73 %
Accrued interest and other liabilities 0.35 % 0.36 %
Shareholders’ equity 7.77 % 8.18 %
Total 100.00 % 100.00 %

Uses of Funds:
Loans 65.60 % 65.80 %
Securities available for sale 10.08 % 11.17 %
Securities held to maturity 10.07 % 10.29 %
Nonmarketable equity securities 0.47 % 0.48 %
Federal funds sold 4.67 % 2.96 %
Interest-bearing deposits in other banks 1.37 % 1.44 %
Other noninterest-earning assets 7.74 % 7.86 %
Total 100.00 % 100.00 %

Average noninterest-bearing deposits to average deposits 22.23 % 22.45 %
Average loans to average deposits 76.45 % 77.84 %

~~60.~~

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 $141.9 million or 13.0% for the three months ended March 31, 2017 compared to the same period in 2016. 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 March 31, 2017, we had $350.3 million in outstanding commitments to extend credit and $9.1 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2016, we had $297.6 million in outstanding commitments to extend credit and $8.9 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 March 31, 2017 and December 31, 2016, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature, except for the put option associated with shares distributed from our KSOP, which terminated upon consummation of our initial public offering and listing on the NASDAQ Global Select Market in May 2017. As of March 31, 2017, we had cash and cash equivalents of $143.8 million, compared to $127.5 million as of December 31, 2016. The increase was primarily due to an increase in federal funds sold of $22.6 million.

~~Capital Resources~~

Total shareholders’ equity, including KSOP-owned shares, increased to $112.1 million as of March 31, 2017, compared to $110.3 million as of December 31, 2016, an increase of $1.8 million, or 1.6%. The increase from December 31, 2016 was primarily the result of $3.5 million in net earnings for the first quarter of 2017, partially offset by the decrease in accumulated other comprehensive loss of $852,000 related primarily to decreased value in the unrealized gains on securities held for sale.

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 March 31, 2017 and December 31, 2016, the Company and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

~~61.~~

~~The following table presents the regulatory capital ratios for our Company and the Bank as of:~~

March 31, 2017 December 31, 2016
Amount Ratio Amount Ratio
(Dollars in thousands)
Guaranty Bancshares, Inc.

  Total capital (to risk weighted assets) $ 152,967
10.84 % $ 149,468
10.86 %
  Tier 1 capital (to risk weighted assets) 141,039
10.00 % 137,984
10.03 %
  Tier 1 capital (to average assets) 141,039
7.66 % 137,984
7.71 %
  Common equity tier 1 risk-based capital 130,729
9.27 % 127,674
9.28 %

Guaranty Bank & Trust

  Total capital (to risk weighted assets) $ 177,589
12.60 % $ 173,528
12.63 %
  Tier 1 capital (to risk weighted assets) 165,661
11.75 % 162,044
11.79 %
  Tier 1 capital (to average assets) 165,661
9.01 % 162,044
9.06 %
  Common equity tier 1 risk-based capital 165,661
11.75 % 162,044
11.79 %

~~Contractual Obligations~~

We have issued subordinated debentures relating to the issuance of trust preferred securities. In October 2002, we formed Guaranty (TX) Capital Trust II, which issued $3.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $93,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $3.1 million of the Company’s junior subordinated debentures, which will mature on October 30, 2032. 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 ~~Financial~~ Trust I, which issued $5.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $155,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $5.2 million of the Company’s junior subordinated debentures, which will mature on June 15, 2037.

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 of the Company.~~indebtedness. The terms of the debentures are such that they qualify as Tier 1 capital under the Federal Reserve’s regulatory capital guidelines applicable to bank holding companies. Interest on Trust II Debentures is payable at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 3.35%, thereafter. Interest on the Trust III ~~debentures~~Debentures was payable at a fixed rate per annum equal to 7.43% until October 1, 2016 and is a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.67%, thereafter. Interest on the DCB ~~Financial~~ Trust I ~~debenture~~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 ~~Financial debentures,~~Trust I Debentures, (2) October 30, 2012 for the Trust II ~~debentures~~Debentures and (3) October 1, 2016 for the Trust III ~~debentures,~~Debentures, and before their respective maturity dates, the debentures are redeemable, in whole or in part, for cash at ~~the~~our option ~~of the Company~~ 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.

~~62.~~

Beginning in ~~April 2013, the Company has~~July 2015, we have from time to time issued subordinated debentures. All of the debentures pay interest semi-annually and are redeemable before their maturity date at ~~the Company’s~~our option, with 30 days’ notice to the holder, for a cash amount equal to the principal amount and all accrued interest. In April 2013, the Company issued $4.0 million in debentures, of which $1.0 million were issued to directors and other related parties. During the year ended 2016, $2.0 million of the debentures matured. The debentures were issued in the principal amount of $500,000 each with rates ranging from 2.00% to 3.50% depending on maturity date, which ranged from April 1, 2015 to October 1, 2016. In July 2015, ~~the Company~~we issued $4.0 million in debentures, of which $3.0 million were issued to directors and other related parties. The $3.0 million of debentures to related parties ~~which will mature~~were repaid in ~~2017, 2018 and 2019.~~May 2017. The remaining $1.0 million in debentures were issued in the principal amount of $500,000 each, with rates ~~ranging from~~of 2.50% toand 4.00% ~~depending on maturity date, which ranged from~~, and maturing in July 1, 2017 toand January ~~1, 2019.~~2019, respectively. In December 2015, ~~the Company~~we issued $5.0 million in debentures, of which $2.5 million were issued to directors and other related parties. In May 2017, $2.0 million of the $2.5 million of debentures issued to related parties ~~which wil mature~~were repaid. The remaining $3.0 million in ~~2018, 2019 and 2020. The~~ debentures were issued in the principal amount of $500,000 each with rates ranging from 3.00% to 5.00% depending on maturity ~~date,~~dates, which ~~ranged~~range from July 1, 2018 to July 1, 2020.

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. As of December 31, 2016, we had a $15.0 million revolving line of credit and $10.0 million amortizing note with our correspondent bank. In March 2017, we renegotiated the loan agreement such that the outstanding balance of our revolving line of credit and amortizing note was converted to a $25.0 million unsecured revolving line of credit. The line of credit bears interest at the prime rate plus 0.50%, with quarterly interest payments, and matures in March 2018. During the second quarter of 2017, we used a portion of the proceeds from our initial

64.

public offering to repay the outstanding balance of the revolving line of credit. Therefore, as of June 30, 2017, 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. For the six months ended June 30, 2017 and the year ended December 31, 2016, 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 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 June 30, 2017 and December 31, 2016, we maintained three federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate $70 million in federal funds. There were no funds under these lines of credit outstanding as of June 30, 2017 and December 31, 2016. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above provides an additional source of liquidity.

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 $1.9 billion for the six months ended June 30, 2017 and $1.8 billion for the year ended December 31, 2016.

65.



	For the Six Months Ended		For the Year Ended
	June 30, 2017		December 31, 2016
Sources of Funds:
Deposits:
Noninterest-bearing	19.68	%	19.15	%
Interest-bearing	66.96	%	66.16	%
Federal funds purchased	—	%	0.01	%
Advances from FHLB	1.99	%	3.53	%
Other debt	0.72	%	0.74	%
Subordinated denentures	0.96	%	1.14	%
Securities sold under agreements to repurchase	0.66	%	0.73	%
Accrued interest and other liabilities	0.36	%	0.36	%
Shareholders’ equity	8.67	%	8.18	%
Total	100.00	%	100.00	%

Uses of Funds:
Loans	66.37	%	65.80	%
Securities available for sale	10.82	%	11.17	%
Securities held to maturity	9.94	%	10.29	%
Nonmarketable equity securities	0.39	%	0.48	%
Federal funds sold	3.45	%	2.96	%
Interest-bearing deposits in other banks	1.32	%	1.44	%
Other noninterest-earning assets	7.71	%	7.86	%
Total	100.00	%	100.00	%

Average noninterest-bearing deposits to average deposits	22.72	%	22.45	%
Average loans to average deposits	77.32	%	77.84	%

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 $127.6 million, or 11.3% for the six months ended June 30, 2017 compared to the same period in 2016. 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 June 30, 2017, we had $343.5 million in outstanding commitments to extend credit and $8.8 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2016, we had $297.6 million in outstanding commitments to extend credit and $8.9 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 June 30, 2017 and December 31, 2016, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature, except for the put option associated with shares distributed from our KSOP, which terminated upon consummation of our initial public offering and listing on the NASDAQ Global Select Market in May 2017. As of June 30, 2017, we had cash and cash equivalents of $83.3 million, compared to $127.5 million as of December 31, 2016. The decrease was primarily due to a decrease in federal funds sold of $42.9 million.

66.

Capital Resources

Total shareholders’ equity increased to $204.6 million as of June 30, 2017, compared to $141.9 million as of December 31, 2016 (including KSOP-owned shares), an increase of $62.6 million, or 44.1%. The increase from December 31, 2016 was primarily the result of the issuance of new shares of common stock in connection with our initial public offering in May 2017, as well as $7.5 million in net earnings for the six months ended June 30, 2017, partially offset by the decrease in accumulated other comprehensive loss of $1.8 million, related primarily to decreased value in the unrealized gains on securities held for sale and the payment of dividends of $2.6 million.

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 June 30, 2017 and December 31, 2016, we were in compliance with all applicable regulatory capital requirements at the bank and bank holding company levels, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

67.

The following table presents our regulatory capital ratios as of:



	June 30, 2017				December 31, 2016
	Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Guaranty Bancshares, Inc.

Total capital (to risk weighted assets)	$	210,959	14.95	%	$	149,468	10.86	%
Tier 1 capital (to risk weighted assets)	198,434		14.06	%	137,984		10.03	%
Tier 1 capital (to average assets)	198,434		10.78	%	137,984		7.71	%
Common equity tier 1 risk-based capital	188,124		13.33	%	127,674		9.28	%

Guaranty Bank & Trust

Total capital (to risk weighted assets)	$	197,899	13.64	%	$	173,528	12.63	%
Tier 1 capital (to risk weighted assets)	185,374		12.77	%	162,044		11.79	%
Tier 1 capital (to average assets)	185,374		9.98	%	162,044		9.06	%
Common equity tier 1 risk-based capital	185,374		12.77	%	162,044		11.79	%

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments as of ~~March 31,~~June 30, 2017 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.


	As of March 31, 2017										As of June 30, 2017
	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
	(Dollars in thousands)										(Dollars in thousands)
Time deposits	$	255,681	$	60,518	$	19,516	$	—	$	335,715	$	236,436	$	59,255	$	20,376	$	—	$	316,067
Advances from FHLB	—		25,000		165		—		25,165		25,000		—		161		—		25,161
Other debt	11,429		2,858		2,858		1,784		18,929		—		—		—		—		—
Subordinated debentures	2,000		6,000		1,000		10,310		19,310		1,500		2,500		—		10,310		14,310
Total	$	269,110	$	94,376	$	23,539	$	12,094	$	399,119	$	262,936	$	61,755	$	20,537	$	10,310	$	355,538

Off-Balance Sheet Items

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of the date indicated 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.

68.


	As of March 31, 2017										As of June 30, 2017
	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
	(Dollars in thousands)										(Dollars in thousands)
Standby and commercial letters of credit	$	3,087	$	4,374	$	91	$	1,561	$	9,113	$	2,782	$	4,329	$	91	$	1,566	$	8,768
Commitments to extend credit	159,414		43,530		78,816		68,563		350,323		143,828		45,008		79,797		74,817		343,450
Total	$	162,501	$	47,904	$	78,907	$	70,124	$	359,436	$	146,610	$	49,337	$	79,888	$	76,383	$	352,218

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,

~~63.~~

cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

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

69.

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

~~64.~~

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:


	March 31, 2017				December 31, 2016				June 30, 2017				December 31, 2016
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	(0.57	)%	(28.52	)%	1.44	%	(18.99	)%	(2.71%)		(26.42%)		1.44	%	(18.99%)
+200	0.96	%	(16.04	)%	1.42	%	(9.58	)%	(1.09%)		(14.72%)		1.42	%	(9.58%)
+100	2.36	%	(6.48	)%	1.19	%	(3.45	)%	0.21	%	(5.79%)		1.19	%	(3.45%)
Base	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%
-100	1.58	%	(0.88	)%	(0.29	)%	(1.80	)%	0.48	%	(1.55%)		(0.29%)		(1.80%)

The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

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 recession.

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.

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

70.

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.

~~65.~~

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, 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.

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


	As of March 31,						As of December 31,			As of June 30,						As of December 31,
	2017			2016			2016			2017			2016			2016
	(Dollars in thousands, except per share data)									(Dollars in thousands, except per share data)
Tangible Common Equity
Total shareholders’ equity, including KSOP-owned shares	$	146,366		$	150,405		$	141,914		$	204,551		$	144,707		$	141,914
Adjustments:
Goodwill	(18,742		)	(18,601		)	(18,742		)	(18,742		)	(18,601		)	(18,742		)
Core deposit and other intangibles	(3,162		)	(2,221		)	(3,308		)	(3,016		)	(3,557		)	(3,308		)
Total tangible common equity	$	124,462		$	129,583		$	119,864		$	182,793		$	122,549		$	119,864
Common shares outstanding⁽¹⁾	8,753,933			9,257,995			8,751,923			11,058,956			8,955,476			8,751,923
Book value per common share	$	16.72		$	16.25		$	16.22		$	18.50		$	16.16		$	16.22
Tangible book value per common share	$	14.22		$	14.00		$	13.70		$	16.53		$	13.68		$	13.70

(1) Excludes the dilutive effect, if any, of ~~32,465, 9,914~~60,273, 9,781 and 8,066 shares of common stock issuable upon exercise of outstanding stock options as of ~~March 31,~~June 30, 2017, ~~March 31,~~June 30, 2016 and December 31, 2016, 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 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 and assets while not increasing our tangible common equity or tangible assets.

~~66.~~71.

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


	As of March 31, 2017			As of December 31, 2016			As of June 30, 2017			As of December 31, 2016
	(Dollars in thousands, except per share data)						(Dollars in thousands)
Tangible Common Equity
Total shareholders’ equity, including KSOP-owned shares	$	146,366		$	141,914		$	204,551		$	141,914
Adjustments:
Goodwill	(18,742		)	(18,742		)	(18,742		)	(18,742		)
Core deposit and other intangibles	(3,162		)	(3,308		)	(3,016		)	(3,308		)
Total tangible common equity	$	124,462		$	119,864		$	182,793		$	119,864
Tangible Assets
Total assets	$	1,901,199		$	1,828,336		$	1,912,469		$	1,828,336
Adjustments:
Goodwill	(18,742		)	(18,742		)	(18,742		)	(18,742		)
Core deposit and other intangibles	(3,162		)	(3,308		)	$	(3,016	)	$	(3,308	)
Total tangible assets	$	1,879,295		$	1,806,286		$	1,890,711		$	1,806,286
Tangible Common Equity to Tangible Assets	6.62		%	6.64		%

Cautionary Notice Regarding Forward-Looking Statements

This quarterly report on Form 10-Q, 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 loan losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposes 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.

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:

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 loan losses reserve and other estimates;

~~67.~~

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

72.

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 cyber attacks), an outbreak of hostilities or other international or domestic calamities, catastrophic events including storms, droughts, tornados and flooding, and other matters beyond our control;

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;

the other factors that are described or referenced in our IPO Prospectus under the caption “Risk Factors”;

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.

~~68.~~73.

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.

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 ~~March 31,~~June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~69.~~74.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~We are~~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. ~~We intend~~The Company intends to defend ~~ourselves~~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 ~~our~~the Company combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against usthe 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 ~~our~~the Company’s reputation, even if resolved in our favor.

Item 1A. Risk Factors

In evaluating an investment in ~~our~~the Company’s common stock, investors should consider carefully, among other things, the risk factors previously disclosed in under the caption “Risk Factors” in ~~our~~the Company’s IPO Prospectus filed with the Securities and Exchange Commission on May 9, 2017 pursuant to Rule 424(b) of the Securities Act, in connection with the initial public offering of ~~our~~the Company’s common stock. ~~Our~~The Company’s business could be harmed by any of these risks. The trading price of ~~our~~the Company’s common stock could decline due to any of these risks, and you may lose all or part of your investment.

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

~~We had~~There were no sales of equity securities by the Company during the period covered by this Report that were not registered with the SEC under the Securities Act. In May 2017, ~~subsequent to~~during the period covered by this Report, wethe Company issued and sold 2,300,000 shares of our common stock, including 300,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, in ~~our~~the Company’s initial public offering at an offering price of $27.00 per share, for aggregate net proceeds of approximately $57.6 million. All of the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-217176), which was declared effective by the Securities and Exchange Commission on May 8, 2017. Sandler O’Neill + Partners, L.P. and Stephens Inc. acted as underwriters. ~~The offering commenced on May 9, 2017 and did not terminate until the sale of all of the shares offered.~~ There has been no material change in the planned use of proceeds from our initial public offering as described in our IPO Prospectus (File No. 333-217176), filed with the Securities and Exchange Commission on May 9, 2017 pursuant to Rule 424(b) of the Securities Act.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~70.~~75.

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)).

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)).

~~10.1~~		~~Revolving Promissory Note, dated March 31, 2017 (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)).~~

~~10.2~~		~~Loan Agreement, dated March 31, 2017 2017 (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)).~~

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*		The following materials from Guaranty Bancshares’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

* Filed with this Quarterly Report on Form 10-Q

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

~~71.~~76.

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: ~~June 20,~~August 11, 2017		/s/ Tyson T. Abston
		Tyson T. Abston
		Chairman of the Board & Chief Executive Officer





Date: ~~June 20,~~August 11, 2017		/s/ Clifton A. Payne
		Clifton A. Payne
		Chief Financial Officer & Director

~~72.~~77.



	For the Three Months Ended		For the Year Ended
	March 31, 2017		December 31, 2016
	Average Rate		Average Rate
Sources of Funds:
Deposits:
Noninterest-bearing	19.25	%	19.15	%
Interest-bearing	67.35	%	66.16	%
Federal funds purchased	—	%	0.01	%
Advances from FHLB	2.65	%	3.53	%
Other debt	1.00	%	0.74	%
Subordinated denentures	1.04	%	1.14	%
Securities sold under agreements to repurchase	0.59	%	0.73	%
Accrued interest and other liabilities	0.35	%	0.36	%
Shareholders’ equity	7.77	%	8.18	%
Total	100.00	%	100.00	%

Uses of Funds:
Loans	65.60	%	65.80	%
Securities available for sale	10.08	%	11.17	%
Securities held to maturity	10.07	%	10.29	%
Nonmarketable equity securities	0.47	%	0.48	%
Federal funds sold	4.67	%	2.96	%
Interest-bearing deposits in other banks	1.37	%	1.44	%
Other noninterest-earning assets	7.74	%	7.86	%
Total	100.00	%	100.00	%

Average noninterest-bearing deposits to average deposits	22.23	%	22.45	%
Average loans to average deposits	76.45	%	77.84	%