Due to the ~~term~~COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 16, 2020, the Federal Open Market Committee reduced the target federal funds rate range to 0.00% to 0.25%, at which it remains as of September 30, 2021. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations, as well as business and consumer confidence. As a result of the spread of COVID-19 and its variants, economic uncertainties have arisen which can negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impact remains unknown at this time.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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


September 30, 2021	2021		2020		2019			2018			2017			Prior			Revolving Loans Amortized Cost			Total
Commercial and industrial:
Pass	$	199,537	$	40,901	$	20,982		$	9,595		$	4,333		$	17,616		$	86,768		$	379,732
Special mention		0		96		—			—			21			—			—			117
Substandard		—		278		60			196			43			5			—			582
Nonaccrual		—		—		0			25			—			14			0			39
Total commercial and industrial loans	$	199,537	$	41,275	$	21,042		$	9,816		$	4,397		$	17,635		$	86,768		$	380,470

Charge-offs	$	—	$	—	$	(167	)	$	(67	)	$	(19	)	$	—		$	(47	)	$	(300	)
Recoveries		—		—		—			—			—			0			15			15
Current period net	$	—	$	—	$	(167	)	$	(67	)	$	(19	)	$	0		$	(32	)	$	(285	)

Construction and development:
Pass	$	153,740	$	78,121	$	29,164		$	7,149		$	16,405		$	14,347		$	8,313		$	307,239
Special mention		—		710		—			—			955			—			—			1,665
Substandard		—		—		609			3			—			—			—			612
Nonaccrual		—		—		230			—			—			—			—			230
Total construction and development loans	$	153,740	$	78,831	$	30,003		$	7,152		$	17,360		$	14,347		$	8,313		$	309,746

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

Commercial real estate:
Pass	$	100,853	$	98,665	$	80,197		$	64,919		$	44,565		$	176,005		$	14,699		$	579,903
Special mention		398		—		0			2,439			4,591			1,629			—			9,057
Substandard		—		7,040		0			10,124			13,110			13,732			—			44,006
Nonaccrual		—		60		—			73			33			221			—			387
Total commercial real estate loans	$	101,251	$	105,765	$	80,197		$	77,555		$	62,299		$	191,587		$	14,699		$	633,353

Charge-offs	$	—	$	—	$	(17	)	$	(56	)	$	(472	)	$	(271	)	$	—		$	(816	)
Recoveries		—		—		—			—			11			—			—			11
Current period net	$	—	$	—	$	(17	)	$	(56	)	$	(461	)	$	(271	)	$	—		$	(805	)

Farmland:
Pass	$	72,382	$	12,776	$	8,683		$	8,541		$	5,345		$	21,626		$	5,777		$	135,130
Special mention		—		—		—			—			—			28			—			28
Substandard		—		—		—			—			—			118			—			118
Nonaccrual		—		—		—			—			—			109			28			137
Total farmland loans	$	72,382	$	12,776	$	8,683		$	8,541		$	5,345		$	21,881		$	5,805		$	135,413

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

(Continued)

22.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


September 30, 2021	2021			2020			2019			2018			2017			Prior			Revolving Loans Amortized Cost			Total
1-4 family residential:
Pass	$	101,523		$	72,986		$	48,075		$	38,577		$	29,077		$	97,575		$	13,368		$	401,181
Special mention		—			—			—			—			0			57			—			57
Substandard		—			—			—			—			—			—			—			—
Nonaccrual		—			—			184			383			254			1,344			—			2,165
Total 1-4 family residential loans	$	101,523		$	72,986		$	48,259		$	38,960		$	29,331		$	98,976		$	13,368		$	403,403

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

Multi-family residential:
Pass	$	13,113		$	4,312		$	4,392		$	15,448		$	545		$	2,194		$	131		$	40,135
Special mention		—			—			—			—			—			—			—			—
Substandard		—			—			—			—			675			—			—			675
Nonaccrual		—			—			—			—			—			—			—			—
Total multi-family residential loans	$	13,113		$	4,312		$	4,392		$	15,448		$	1,220		$	2,194		$	131		$	40,810

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

Consumer and overdrafts:
Pass	$	21,949		$	14,015		$	5,654		$	5,400		$	820		$	656		$	4,838		$	53,332
Special mention		—			1			9			—			—			—			—			10
Substandard		—			—			—			—			—			—			—			—
Nonaccrual		8			25			22			70			9			11			—			145
Total consumer loans and overdrafts	$	21,957		$	14,041		$	5,685		$	5,470		$	829		$	667		$	4,838		$	53,487

Charge-offs	$	(180	)	$	(34	)	$	(38	)	$	(32	)	$	(2	)	$	—		$	—		$	(286	)
Recoveries		45			3			—			8			2			19			—			77
Current period net	$	(135	)	$	(31	)	$	(38	)	$	(24	)	$	0		$	19		$	—		$	(209	)

Agricultural:
Pass	$	2,611		$	2,081		$	1,052		$	1,082		$	275		$	592		$	6,366		$	14,059
Special mention		—			—			—			—			20			—			—			20
Substandard		—			—			5			31			39			13			—			88
Nonaccrual		—			20			—			9			3			—			—			32
Total agricultural loans	$	2,611		$	2,101		$	1,057		$	1,122		$	337		$	605		$	6,366		$	14,199

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

Total loans:
Pass	$	665,708		$	323,857		$	198,199		$	150,711		$	101,365		$	330,611		$	140,260		$	1,910,711
Special mention		398			807			9			2,439			5,587			1,714			—			10,954
Substandard		—			7,318			674			10,354			13,867			13,868			—			46,081
Nonaccrual		8			105			436			560			299			1,699			28			3,135
Total loans	$	666,114		$	332,087		$	199,318		$	164,064		$	121,118		$	347,892		$	140,288		$	1,970,881

Charge-offs	$	(180	)	$	(34	)	$	(222	)	$	(155	)	$	(493	)	$	(271	)	$	(47	)	$	(1,402	)
Recoveries		45			3			—			8			13			20			15			104
Total current period net (charge-offs) recoveries	$	(135	)	$	(31	)	$	(222	)	$	(147	)	$	(480	)	$	(251	)	$	(32	)	$	(1,298	)

(Continued)

23.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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


December 31, 2020	2020		2019		2018			2017		2016		Prior		Revolving Loans Amortized Cost			Total
Commercial and industrial:
Pass	$	278,687	$	30,563	$	12,860		$	4,366	$	6,131	$	16,294	$	90,074		$	438,975
Special mention		124		119		222			4,040		1,324		—		—			5,829
Substandard		—		307		540			50		43		—		—			940
Nonaccrual		—		—		13			—		14		—		—			27
Total commercial and industrial loans	$	278,811	$	30,989	$	13,635		$	8,456	$	7,512	$	16,294	$	90,074		$	445,771

Charge-offs	$	—	$	—	$	(43	)	$	—	$	—	$	—	$	(25	)	$	(68	)
Recoveries		—		—		43			—		—		14		44			101
Current period net	$	—	$	—	$	—		$	—	$	—	$	14	$	19		$	33

Construction and development:
Pass	$	118,590	$	76,926	$	26,212		$	24,524	$	7,742	$	10,507	$	3,266		$	267,767
Special mention		356		—		—			990		—		—		—			1,346
Substandard		—		609		5			—		680		—		—			1,294
Nonaccrual		—		—		—			—		—		—		—			—
Total construction and development loans	$	118,946	$	77,535	$	26,217		$	25,514	$	8,422	$	10,507	$	3,266		$	270,407

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

Commercial real estate:
Pass	$	91,819	$	80,753	$	89,542		$	72,311	$	86,946	$	123,463	$	5,890		$	550,724
Special mention		—		2,716		3,542			849		5,724		449		—			13,280
Substandard		—		—		2,010			4,913		4,445		8,240		—			19,608
Nonaccrual		—		1,140		151			4,158		4,769		386		—			10,604
Total commercial real estate loans	$	91,819	$	84,609	$	95,245		$	82,231	$	101,884	$	132,538	$	5,890		$	594,216

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

Farmland:
Pass	$	17,444	$	12,668	$	10,327		$	6,620	$	9,904	$	15,402	$	5,864		$	78,229
Special mention		—		—		—			—		—		35		—			35
Substandard		—		—		—			—		—		129		—			129
Nonaccrual		—		—		—			—		—		115		—			115
Total farmland loans	$	17,444	$	12,668	$	10,327		$	6,620	$	9,904	$	15,681	$	5,864		$	78,508

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

(Continued)

24.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


December 31, 2020	2020			2019			2018			2017			2016			Prior			Revolving Loans Amortized Cost			Total
1-4 family residential:
Pass	$	87,578		$	62,937		$	52,087		$	37,224		$	43,858		$	93,486		$	10,091		$	387,261
Special mention		—			—			—			—			—			168			—			168
Substandard		—			—			—			—			—			—			—			—
Nonaccrual		—			—			326			44			163			1,134			—			1,667
Total 1-4 family residential loans	$	87,578		$	62,937		$	52,413		$	37,268		$	44,021		$	94,788		$	10,091		$	389,096

Charge-offs	$	—		$	—		$	—		$	—		$	(9	)	$	(59	)	$	—		$	(68	)
Recoveries		—			—			—			—			—			2			—			2
Current period net	$	—		$	—		$	—		$	—		$	(9	)	$	(57	)	$	—		$	(66	)

Multi-family residential:
Pass	$	5,889		$	4,498		$	3,617		$	1,371		$	1,737		$	4,391		$	198		$	21,701
Special mention		—			—			—			—			—			—			—			—
Substandard		—			—			—			—			—			—			—			—
Nonaccrual		—			—			—			—			—			—			—			—
Total multi-family residential loans	$	5,889		$	4,498		$	3,617		$	1,371		$	1,737		$	4,391		$	198		$	21,701

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

Consumer and overdrafts:
Pass	$	24,740		$	11,176		$	9,369		$	1,701		$	735		$	513		$	2,825		$	51,059
Special mention		16			83			9			7			—			—			—			115
Substandard		—			—			—			—			—			—			—			—
Nonaccrual		24			36			131			20			1			—			—			212
Total consumer loans and overdrafts	$	24,780		$	11,295		$	9,509		$	1,728		$	736		$	513		$	2,825		$	51,386

Charge-offs	$	(243	)	$	(63	)	$	(31	)	$	(43	)	$	(3	)	$	(6	)	$	—		$	(389	)
Recoveries		49			2			12			8			4			13			—			88
Current period net	$	(194	)	$	(61	)	$	(19	)	$	(35	)	$	1		$	7		$	—		$	(301	)

Agricultural:
Pass	$	3,489		$	1,718		$	1,893		$	607		$	273		$	189		$	7,408		$	15,577
Special mention		—			—			—			36			—			—			—			36
Substandard		—			7			10			—			24			—			—			41
Nonaccrual		—			—			33			—			45			2			—			80
Total agricultural loans	$	3,489		$	1,725		$	1,936		$	643		$	342		$	191		$	7,408		$	15,734

Charge-offs	$	—		$	—		$	(18	)	$	—		$	—		$	—		$	—		$	(18	)
Recoveries		—			—			—			—			20			—			—			20
Current period net	$	—		$	—		$	(18	)	$	—		$	20		$	—		$	—		$	2

Total loans:
Pass	$	628,236		$	281,239		$	205,907		$	148,724		$	157,326		$	264,245		$	125,616		$	1,811,293
Special mention		496			2,918			3,773			5,922			7,048			652			—			20,809
Substandard		—			923			2,565			4,963			5,192			8,369			—			22,012
Nonaccrual		24			1,176			654			4,222			4,992			1,637			—			12,705
Total loans	$	628,756		$	286,256		$	212,899		$	163,831		$	174,558		$	274,903		$	125,616		$	1,866,819

Charge-offs	$	(243	)	$	(63	)	$	(92	)	$	(43	)	$	(12	)	$	(65	)	$	(25	)	$	(543	)
Recoveries		49			2			55			8			24			30			44			212
Total current period net (charge-offs) recoveries	$	(194	)	$	(61	)	$	(37	)	$	(35	)	$	12		$	(35	)	$	19		$	(331	)

(Continued)

25.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of September 30, 2021:


	Real Estate		Non-RE		Total		Allowance for Credit Losses Allocation
Commercial and industrial	$	119	$	—	$	119	$	40
Real estate:
Construction and development		609		—		609		207
Commercial real estate		4,540		—		4,540		603
Total	$	5,268	$	—	$	5,268	$	850

The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of December 31, 2020:


	Real Estate		Non-RE		Total		Allowance for Credit Losses Allocation
Commercial and industrial	$	129	$	—	$	129	$	44
Real estate:
Construction and development		609		—		609		208
Commercial real estate		9,989		—		9,989		2,048
Total	$	10,727	$	—	$	10,727	$	2,300

December 31, 2016
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
Special mention 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
Doubtful 17
—
—
—
37
—
82
—
136
Total $ 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 and loans 90 days or more past due continuing to accrue interest ~~and loans classified as nonperforming~~ as of:

September 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 $ 246
$ 60
$ 30
$ 336
$ 192,327
$ 192,663
$ —
Real estate:
   Construction and development 77
—
—
77
200,990
201,067
—
   Commercial real estate —
38
1,521
1,559
391,755
393,314
—
   Farmland 2
—
6
8
54,341
54,349
—
   1-4 family residential 2,701
838
1,894
5,433
360,456
365,889
—
   Multi-family residential —
—
228
228
23,007
23,235
—
Consumer 617
201
94
912
50,799
51,711
—
Agricultural 66
—
4
70
24,379
24,449
—
Overdrafts —
—
—
—
698
698
—
Total $ 3,709
$ 1,137
$ 3,777
$ 8,623
$ 1,298,752
$ 1,307,375
$ —

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


September 30, 2021	30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days and Greater Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial and industrial	$	874	$	0	$	38	$	912	$	379,558	$	380,470	$	—
Real estate:
Construction and development		0		0		230		230		309,516		309,746		—
Commercial real estate		197		777		258		1,232		632,121		633,353		—
Farmland		149		195		28		372		135,041		135,413		—
1-4 family residential		1,407		465		569		2,441		400,962		403,403		—
Multi-family residential		—		—		—		—		40,810		40,810		—
Consumer		206		33		47		286		52,706		52,992		—
Agricultural		31		9		20		60		14,139		14,199		—
Overdrafts		—		—		—		—		495		495		—
Total	$	2,864	$	1,479	$	1,190	$	5,533	$	1,965,348	$	1,970,881	$	—

(Continued)

~~21.~~

26.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


December 31, 2020	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	$	385	$	25	$	22	$	432	$	445,339	$	445,771	$	—
Real estate:
Construction and development		256		—		—		256		270,151		270,407		—
Commercial real estate		1,094		0		10,105		11,199		583,017		594,216		—
Farmland		117		3		—		120		78,388		78,508		—
1-4 family residential		2,097		556		127		2,780		386,316		389,096		—
Multi-family residential		—		—		—		—		21,701		21,701		—
Consumer		383		124		97		604		50,440		51,044		—
Agricultural		50		46		45		141		15,593		15,734		—
Overdrafts		—		—		—		—		342		342		—
Total	$	4,382	$	754	$	10,396	$	15,532	$	1,851,287	$	1,866,819	$	—

~~The following table presents information regarding nonaccrual loans as of:~~

September 30, 2017 December 31, 2016
Commercial and industrial $ 57
$ 82
Real estate:
   Construction and development —
1,825
   Commercial real estate 2,113
415
   Farmland 162
176
   1-4 family residential 2,716
1,699
   Multi-family residential 228
5
Consumer 164
192
Agricultural 315
15
Total $ 5,755
$ 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 TDRs.

The outstanding balances of TDRs are shown below:

September 30, 2017 December 31, 2016
Nonaccrual TDRs $ —
$ 43
Performing TDRs 316
462
Total $ 316
$ 505
Specific reserves on TDRs $ 19
$ 4

~~The following tables present loans by class~~


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

There was 1 loan modified as ~~TDRs that occurred~~a TDR during the nine months ended September 30, ~~2017 and 2016:~~

Nine Months Ended September 30, 2017
Number
of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment
Commercial and industrial 1 $ 34
$ 15
1-4 family residential 1 11
11
Total 2 $ 45
$ 26

~~There were no~~2021. No TDRs ~~that~~ have subsequently defaulted ~~through September 30, 2017. The~~during 2021, and the TDRs described above ~~increased~~did 0t increase the allowance for ~~loan~~credit losses ~~by $19~~ and ~~resulted~~did 0t result in noany charge-offs during the nine months ended September 30, ~~2017.~~

2021.

The following table presents the loan, by class, modified as a TDR during the nine months ended September 30, 2021:


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

The following table presents loans, by class, modified as TDRs during the year ended December 31, 2020:


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

(Continued)

~~22.~~

27.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Nine Months Ended September 30, 2016
Number
of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment
Commercial and industrial 1
$ 90
$ 90
Commercial real estate 1
796
796
1-4 family residential 2 189
189
Total 4 $ 1,075
$ 1,075

There were no TDRs that subsequently defaulted ~~in 2016. The~~during 2020, and the TDRs described above did ~~not~~0t increase the allowance for ~~loan~~credit losses and resulted in no0 charge-offs during the ~~nine months~~year ended ~~September 30, 2016.~~

December 31, 2020.

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

September 30, 2017 Unpaid
Principal
Balance Recorded
Investment Related
Allowance Average
Recorded
Investment
With no related allowance recorded:
Commercial and industrial $ 325
$ 325
$ —
$ 381
Real estate:
Construction and development —
—
—
415
Commercial real estate 3,746
3,746
—
4,363
Farmland 120
120
—
106
1-4 family residential 231
231
—
1,288
Multi-family residential 228
228
—
166
Consumer —
—
—
81
Agricultural 397
397
—
380
Subtotal 5,047
5,047
—
7,180
With allowance recorded:
Commercial and industrial 29
29
19
411
Real estate:
Construction and development —
—
—
10
Commercial real estate 283
283
31
580
Farmland 156
156
85
122
1-4 family residential 866
866
145
867
Multi-family residential —
—
—
26
Consumer —
—
—
56
Agricultural 299
299
240
176
Subtotal 1,633
1,633
520
2,248
Total $ 6,680
$ 6,680
$ 520
$ 9,428

~~(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:~~

December 31, 2016 Unpaid
Principal
Balance Recorded
Investment
Related
Allowance

Average
Recorded
Investment
With no related allowance recorded:
Commercial and industrial $ 28
$ 28
$ —
$ 809
Real estate:
Construction and development 1,825
1,825
—
172
Commercial real estate 1,196
1,196
—
871
Farmland 89
89
—
109
1-4 family residential 1,799
1,799
—
1,575
Multi-family residential 5
5
—
2
Consumer 105
105
—
89
Agricultural 15
15
—
68
Subtotal 5,062
5,062
—
3,695
With allowance recorded:
Commercial and industrial 203
203
64
3,153
Real estate:
Farmland 169
169
47
169
1-4 family residential 789
789
108
639
Consumer 95
95
34
155
Agricultural —
—
—
2
Subtotal 1,256
1,256
253
4,118
Total $ 6,318
$ 6,318
$ 253
$ 7,813

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

NOTE 54 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER DEBT

At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, securities sold under agreements to repurchase totaled ~~$12,920~~$11,195 and ~~$10,859,~~$15,631, respectively.

The Company has ~~a $25.0 million~~an unsecured $25,000 revolving line of credit, which had ana $3,000 outstanding balance ~~of $0~~ at ~~quarter end,~~September 30, 2021, bears interest at the greater of (i) the prime rate, ~~plus 0.50%~~which was 3.25% at September 30, 2021, or (ii) the rate floor of 3.50%, with interest payable quarterly, and matures in March ~~2018.~~

~~(Continued)~~

~~24.~~

~~Table~~2022.

Federal Home Loan Bank (FHLB) advances, as of ~~Contents~~September 30, 2021, were as follows:

Fixed rate advances, with monthly interest payments, principal due in:


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

There are no fixed rate advances, with monthly principal and interest payments outstanding as of September 30, 2021.

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

NOTE 65 - SUBORDINATED DEBENTURES

Subordinated debentures ~~are~~were made up of the following as of:


	September 30, 2021		December 31, 2020
Trust II Debentures	$	3,093	$	3,093
Trust III Debentures		2,062		2,062
DCB Trust I Debentures		5,155		5,155
Other debentures		9,500		9,500
	$	19,810	$	19,810

September 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 3,500
9,000
$ 13,810
$ 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 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).

(Continued)

28.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


	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

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 1 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 1 capital, net of goodwill, the full amount is includable in Tier 1 capital at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020. Additionally, the terms provide that trust preferred securities would no longer qualify for Tier 1 capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the 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.

Trust II Debentures

Trust III Debentures

DCB Trust I
Debentures

Original amount

3,093

2,062

5,155

Maturity date

October 30, 2032

October 1, 2036

June 15, 2037

Interest due

Quarterly

Trust II Debentures Trust III Debentures DCB Trust I Debentures
Original amount $ 3,093
$ 2,062
$ 5,155
Maturity date October 30, 2032
October 1, 2036
June 15, 2037
Interest due Quarterly Quarterly Quarterly

~~(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

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 are redeemable for cash at the option of the Company, on at least 30, but not more than 60 ~~days’~~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

Interest ~~was~~is 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 are redeemable for cash at the option of the Company, on at least 30, but not more than 60 ~~days’~~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

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 debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 ~~days’~~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.

(Continued)

29.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Other ~~debentures~~

Debentures

In ~~July 2015,~~May 2020, the Company issued ~~$4,000~~$10,000 in debentures ~~of which $3,000 were issued~~ to directors and other related parties. The ~~$3,000 of~~ debentures ~~to related parties~~ were ~~repaid in May 2017 and~~issued at a ~~$500~~ par value ~~debenture, which carried a rate~~ of ~~2.5%, matured~~$500 each with fixed annual rates between 1.00% and ~~was repaid in July 2017. The remaining $500 debenture has a rate of~~ 4.00% and a maturity ~~date~~dates between November 1, 2020 and November 1, 2024. $500 matured in November of ~~January 1, 2019.~~2020 and $9,500 remain as of September 30, 2021. 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.

~~In December 2015, the Company issued $5,000 in~~

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

are as follows:


Year	Current Weighted Average Rate			Principal Due
2022		2.45	%	$	2,000
2023		2.85	%		3,500
2024		3.74	%		4,000
				$	9,500

~~(Continued)~~

~~26.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

NOTE ~~7 - STOCK OPTIONS~~

6 – EQUITY AWARDS

The Company’s 2015 Equity Incentive Plan (the “Plan”) ~~which~~ was adopted by the Company and approved by its shareholders in April ~~2015, amended and restated the Company’s 2014 Stock Option Plan.~~2015. The maximum number of shares of common stock that may be issued pursuant to stock-based awards under the Plan equals ~~1,000,000~~1,100,000 shares, all of which may be subject to incentive stock option treatment. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of ~~grant. Currently outstanding~~grant; those option awards have vesting periods ranging from 5 to 10 years and have 10-year contractual terms.

Restricted stock awards vest under the period of restriction specified within their respective award agreements as determined by the Company. Forfeitures are recognized as they occur, subject to a 90-day grace period for vested options.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer group averages. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on U.S. Treasury yield curve in effect at the time of the grant.

A summary of stock option activity in the Plan during the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 follows:

Nine Months Ended September 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
   Granted 150,598
27.64
9.62 657
   Exercised (7,033 ) 11.94
4.48 141
   Forfeited (6,000 ) 23.17
7.13 53
Balance, September 30, 2017 477,942
$ 24.93
7.57 $ 3,376

Exercisable at end of period 98,044
$ 23.45
6.17 $ 838

Nine Months Ended September 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
Granted 37,500
23.44
9.50 21
Forfeited (19,000 ) 23.16
8.15 16
Balance, September 30, 2016 332,891
$ 23.31
7.45 $ 230

Exercisable at end of period 58,491
$ 21.24
6.53 $ 161


Nine Months Ended September 30, 2021	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		506,200		$	26.81		5.82	$	1,805
Effect of 10% stock dividend		50,770
Granted		45,500			33.49		9.59		107
Exercised		(48,630	)		22.89		3.82		630
Forfeited		(19,020	)		26.01		6.84		187
Balance, September 30, 2021		534,820		$	25.22		5.53	$	5,684

Exercisable at end of period		307,786		$	23.78		4.33	$	3,715

(Continued)

~~27.~~

30.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


Nine Months Ended September 30, 2020	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		508,000		$	26.68		6.24	$	3,159
Granted		39,000			27.43		9.51		24
Exercised		(3,000	)		24.00		2.04		3
Forfeited		(37,600	)		29.68		8.12		24
Balance, September 30, 2020		506,400		$	26.53		5.62	$	304

Exercisable at end of period		302,220		$	25.55		4.77	$	244

A summary of nonvested stock option activity in the Plan during the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 follows:


Nine Months Ended September 30, 2021	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		214,680		$	4.46
Effect of 10% stock dividend		23,218
Granted		45,500			5.82
Vested		(47,344	)		(5.72	)
Forfeited		(9,020	)		(8.06	)
Balance, September 30, 2021		227,034		$	5.11


Nine Months Ended September 30, 2020	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		251,120		$	4.97
Granted		39,000			3.86
Vested		(53,340	)		(6.07	)
Forfeited		(32,600	)		(2.20	)
Balance, September 30, 2020		204,180		$	5.54

Nine Months Ended September 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 150,598
27.64
9.62 657
   Vested (17,400 ) 23.13
7.91 154
   Forfeited (4,000 ) 23.17
7.13 53
Balance, September 30, 2017 379,898
$ 25.31
7.93 $ 2,538

Nine Months Ended September 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 $ 76
   Granted 37,500
23.44
9.50 21
   Vested (13,500 ) 23.00
8.59 14
   Forfeited (16,800 ) 23.16
8.15 16
Balance, September 30, 2016 274,400
$ 23.75
7.65 $ 69

Information related to stock options in the Plan is as follows for the nine months ended:


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

(Continued)

31.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Restricted Stock Awards and Units

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


Nine Months Ended September 30, 2021	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		35,300		$	29.72
Effect of 10% stock dividend		3,530			—
Granted		3,500			33.09
Vested		(7,850	)		27.26
Forfeited		0			0
Balance, September 30, 2021		34,480		$	27.41


Nine Months Ended September 30, 2020	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		31,459		$	30.29
Granted		0			0
Vested		(13,380	)		30.30
Forfeited		0			0
Balance, September 30, 2020		18,079		$	30.28

September 30, 2017
Intrinsic value of options exercised $ 141
Cash received from options exercised 84
Tax benefit realized from options exercised —
Weighted average fair value of options granted 5.40

Restricted stock granted to employees typically vests over five years, but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date.

As of September 30, ~~2017,~~2021, there was ~~$1,963~~$1,831 of total unrecognized compensation expense related to unvested stock options granted under the Plan. The expense is expected to be recognized over a weighted-average period of ~~4.43~~3.16 years.

The Company granted options and restricted stock under the Plan during the first nine months of ~~2016~~2021 and ~~2017.~~2020. Expense of ~~$247~~$512 and ~~$162~~$494 was recorded during the nine months ended September 30, ~~2017~~2021 and ~~2016, respectively.~~2020, respectively, which represents the fair value of shares vested during those periods.

NOTE 87 - 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 December 31, 2016, the plan included a repurchase obligation, or “put option”, which is a right to demand that the sponsor repurchase shares of employer stock distributed to the participant under the terms of the plan, for which there was no public market for such shares, of an established cash price. This put option was terminated upon completion of Guaranty’s initial public offering and listing of its common stock on the NASDAQ Global Select Market in May 2017. Guaranty’s total contributions accrued or paid during the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 totaled ~~$739~~$1,146 and ~~$727,~~$1,031, respectively.

~~Benefits~~

Upon separation from service or other distributable event, a participant’s account under the KSOP ~~generally are~~may be distributed ~~to participants~~in kind in the form of ~~cash, although participants have~~ the ~~right~~GNTY common shares allocated to ~~receive distributions~~his or her account (with the balance payable in cash), or the ~~form of shares of common stock.~~

~~(Continued)~~

~~28.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollars~~entire account can be liquidated and distributed 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. 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 $31,661 as of December 31, 2016.

cash.

As of September 30, ~~2017 and December 31, 2016,~~2021, the number of shares held by the KSOP ~~were 1,314,277 and 1,319,225, respectively.~~was 1,287,897. There were no0 unallocated shares to plan participants as of September 30, ~~2017~~2021, and there were 50,000 shares unallocated to plan participants as of December 31, 2016. During the nine months ended September 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. Allall shares held by the KSOP were treated as ~~outstanding at each of the respective period ends.~~

outstanding.

(Continued)

32.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Executive Incentive Retirement Plan

The Company established a non-qualified, non-contributory executive incentive retirement plan covering a selected group of key personnel to provide benefits equal to amounts computed under an “award criteria” at various targeted salary levels as adjusted for annual earnings performance of the Company. The plan is non-funded.

In connection with the Executive Incentive Retirement Plan, the Company has purchased life insurance policies on the respective officers. The cash surrender value of life insurance policies held by the Company totaled ~~$18,376~~$36,582 and ~~$17,804~~$35,510 as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.

~~Expense related to~~ A gain of $277,000 on proceeds from these ~~plans totaled $381 and $329~~life insurance policies resulting from the death of a former bank officer was recorded for the nine months ended September 30, ~~2017~~2021. NaN such gains were recorded during the nine months ended September 31, 2020.

Expense related to these plans totaled $588 and ~~2016,~~$500 for the nine months ended September 30, 2021 and 2020, respectively, and $592 for the year ended December 31, 2020. This expense is included in employee compensation and benefits on the Company’s consolidated statements of earnings. The recorded liability totaled approximately ~~$2,361~~$4,861 and ~~$2,002~~$4,383 as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively and is included in accrued interest and other liabilities on the Company’s consolidated balance sheets.

Bonus Plan

The Company has a bonus plan that rewards officers and employees based on performance of individual business units of the Company. Earnings and growth performance goals for each business unit and for the Company as a whole are established at the beginning of the calendar year and approved annually by Guaranty’s board of directors. The ~~Bonus Plan~~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 Guaranty’s board of directors. The bonus expense under this plan for the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 totaled ~~$1,718~~$3,529 and ~~$1,451, respectively and~~$1,610, respectively. This expense is included in employee compensation and benefits on the consolidated statements of earnings.

NOTE 8 – LEASES

The Company has operating leases for bank locations, ATMs, corporate offices, and certain other arrangements, which have remaining lease terms of 1 year to 14 years. Some of the Company’s operating leases include options to extend the leases for up to 10 years.

Operating leases in which we are the lessee must be recorded as right-of-use assets with corresponding lease liabilities. The right-of-use asset represents our right to utilize the underlying asset during the lease term, while the lease liability represents the present value of the obligation of the Company to make periodic lease payments over the life of the lease. The associated operating lease costs are comprised of the amortization of the right-of-use asset and the implicit interest accreted on the lease liability, which is recognized on a straight-line basis over the life of the lease. As of September 30, 2021, operating lease right-of-use assets were $14,810 and liabilities were $15,243, and as of December 31, 2020, lease assets and liabilities were $13,291 and $13,539, respectively, and were included within the accompanying consolidated balance sheets as components of other assets and accrued interest and other liabilities, respectively.

Operating lease expense for operating leases accounted for under ASC 842 for the nine months ended September 30, 2021 and 2020 was approximately $1,715 and $1,416, respectively, and is included as a component of occupancy expenses within the accompanying consolidated statements of earnings.

(Continued)

33.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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


	September 30, 2021			December 31, 2020
Operating leases
Operating lease right-of-use assets	$	14,810		$	13,291
Operating lease liabilities		15,243			13,539

Weighted average remaining lease term
Operating leases	9 years			9 years
Weighted average discount rate
Operating leases		1.95	%		2.19	%

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


Year Ended December 31,	Amount
2021	$	554
2022		2,152
2023		2,090
2024		2,035
2025		1,868
Thereafter		7,441
Total lease payments		16,140
Less: interest		(897	)
Present value of lease liabilities	$	15,243

NOTE 9 - INCOME TAXES

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


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

Nine Months Ended September 30,
2017 2016
Income tax expense for the period $ 4,644
$ 3,290
Effective tax rate 28.54 % 27.79 %

The effective tax rates differ from the statutory federal tax rate of ~~35%~~21% for the three and nine months ended September 30, 2021 and 2020, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank owned life insurance.

~~(Continued)~~

~~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 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~~sheets in other liabilities.

(Continued)

34.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The Company is exposed to credit related losses in the event of nonperformance by the counterparties to those agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to perform their respective obligations.

The Company entered into interest rate swaps to receive payments at a fixed rate in exchange for paying a floating rate on the debentures discussed in Note 6.5. Management ~~believes~~believed that entering into the interest rate swaps exposed the Company to variability in their fair value due to changes in the level of interest rates. It iswas the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that ~~are~~were appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in ~~this~~the liability to other liabilities of the Company. ~~To meet this objective,~~During the ~~Company utilizes~~quarter ended September 30, 2021, Guaranty terminated these interest ~~rate swaps as an asset/liability management strategy to hedge the change in value of the cash flows due to changes in expected interest rate assumptions.~~

~~Interest~~ rate swaps with notional amounts totaling $5,000 as of December 31, 2020, as the risk exposure declined to acceptable levels. The swaps were cancelled at an expense of $466, which is included in non-interest expense in the Consolidated Statement of Earnings.

The Company also entered into interest rate swaps to receive payments at a floating rate in exchange for paying a fixed rate, the objective of which is to reduce the overall cost of short-term 3-month FHLB advances that will be renewed consistent with the reset terms on the interest rate swap and that are included in the amounts in Note 4. Interest rate swaps with notional amounts totaling $40,000 as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020 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~~FHLB advances.

The aggregate fair value of the swaps is recorded in accrued interest and other liabilities within the Company’s 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 and FHLB advances was as follows as of:


September 30, 2021
Notional Amount		Pay Rate			Receive Rate	Effective Date	Maturity in Years		Unrealized Losses
$	15,000		0.668	%	3 month LIBOR	3/18/2020		1.47	$	93
	15,000		0.790	%	3 month LIBOR	3/18/2020		3.47		17
	10,000		0.530	%	3 month LIBOR	3/23/2020		1.48		41


December 31, 2020
Notional Amount		Pay Rate			Receive Rate	Effective Date	Maturity in Years		Unrealized Losses
$	2,000		5.979	%	3 month LIBOR plus 1.67%	10/1/2016		5.25	$	408
	3,000		7.505	%	3 month LIBOR plus 3.35%	10/30/2012		1.83		221
	15,000		0.668	%	3 month LIBOR	3/18/2020		2.22		159
	15,000		0.790	%	3 month LIBOR	3/18/2020		4.22		288
	10,000		0.530	%	3 month LIBOR	3/23/2020		2.23		75

September 30, 2017:
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 8.51 $ 340
$ 3,000
7.505 % 3 month LIBOR plus 3.35% October 30, 2012 5.08 $ 326

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 ~~$559~~$483 and ~~$656~~$509 during the nine months ended September 30, ~~2017~~2021 and ~~2016, respectively, and~~2020, respectively. This expense is reported as a component of interest expense on the ~~debentures.~~debentures and the FHLB advances and federal funds purchased. At September 30, ~~2017,~~2021, the Company expected ~~none~~NaN of the unrealized loss to be reclassified as a reduction of interest expense during the remainder of ~~2017.~~2021.

~~(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 GAAP, are not included in its consolidated balance sheets. These transactions are referred to as “off-balance sheet commitments.” The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit, which involve elements of credit risk in excess of the amounts recognized

(Continued)

35.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management ~~assesses~~considers the likelihood of commitments and letters of credit to be funded, along with credit related conditions present in the loan agreements when estimating an ACL for off-balance sheet commitments. Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management has determined that credit risk ~~associated with certain commitments to extend credit in determining the level~~is minimal and there is 0 recorded ACL as of ~~the allowance for credit losses.~~

September 30, 2021 and December 31, 2020.

Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below. If the commitment were funded, the Company would be entitled to seek recovery from the customer. As of September 30, ~~2017~~2021 and December 31, ~~2016, no~~2020, 0 amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

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


	Contract or Notional Amount
	September 30, 2021		December 31, 2020
Commitments to extend credit	$	392,332	$	324,277
Letters of credit		9,922		8,488

Contract or Notional Amount
September 30, 2017 December 31, 2016
Commitments to extend credit $ 339,872
$ 297,607
Letters of credit 9,334
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

At September 30, ~~2017,~~2021, the Company had letters of credit of ~~$52,000~~$35,833 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.

NOTE 12 - REGULATORY MATTERS

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

(Continued)

36.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

~~(Continued)~~

~~31.~~

~~Table~~

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015, with certain transition provisions that were fully phased in on January 1, 2019. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of ~~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~~minimum amounts and ratios ~~to required capital amounts and ratios are presented~~(set forth in the ~~following tables~~table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and or Tier 1 capital to adjusted quarterly average assets (as defined). Management believes, as ~~of:~~

Actual Minimum Required For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
September 30, 2017
Total capital to risk-weighted assets:
      Consolidated $ 213,905
14.62 % $ 117,065
8.00 % n/a
      Bank 202,722
13.85 % 117,078
8.00 % $ 146,348
10.00 %
Tier 1 capital to risk-weighted assets:
      Consolidated 201,377
13.76 % 87,799
6.00 % n/a
      Bank 190,194
13.00 % 87,809
6.00 % 117,078
8.00 %
Tier 1 capital to average assets:
      Consolidated 201,377
10.68 % 75,457
4.00 % n/a
      Bank 190,194
10.08 % 75,465
4.00 % 94,331
5.00 %
Common equity tier 1 capital to risk-weighted assets:
      Consolidated 191,067
13.06 % 65,849
4.50 % n/a
      Bank 190,195
13.11 % 65,307
4.50 % 94,333
6.50 %

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

~~In July 2013,~~of September 30, 2021 and December 31, 2020, that the ~~Federal Reserve published final rules for the adoption of the Basel III regulatory~~Bank met all capital ~~framework (the “Basel III Capital Rules”).~~ adequacy requirements to which it was subject.

The Basel III Capital Rules, among other things, ~~(1) introduce~~have (i) introduced a new capital measure called “Common Equity Tier 1” (“~~CETI”~~CET1”), ~~(2) specify~~(ii) specified that Tier 1 capital consist of ~~Common Equity Tier 1~~CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, ~~(3) define Common Equity Tier 1~~(iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to ~~Common Equity Tier 1~~CET1 and not to the other components of capital, ~~and (4) expand~~(iv) expanded the scope of the deductions/adjustments as compared to existing ~~regulations. The Basel III Capital Rules became effective for the Company~~regulations, and (v) imposed a "capital conservation buffer" of 2.5% above minimum risk-based capital requirements, below which an institution would be subject to limitations on ~~January 1, 2015, with~~ certain ~~transition provisions to be fully phased in by January 1, 2019.~~

~~Starting in January 2016, the implementation~~activities including payment of the capital conservation buffer became effective for the Company starting at the 0.625% level and increases 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

~~(Continued)~~

~~32.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

the 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 Company to maintain minimum amounts and ratios (set forth in the table above) of total, CETI and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of September 30, 2017 and December 31, 2016 that the Company met all capital adequacy requirements to which it was subject.

As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the ~~Bank’s~~Company’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the ~~Bank~~Company must maintain minimum total risk-based, ~~CETI,~~CET1, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the ~~table above.~~table. There are no conditions or events since September 30, ~~2017~~2021 that management believes have changed the ~~Bank’s capital category under the regulatory framework for prompt corrective action.~~

Company’s category.

The Federal Reserve’s guidelines regarding the capital treatment of trust preferred securities limits restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred securities is less than the limit of 25% of Tier 1 capital, net of goodwill, the rules permit the inclusion of $10,310 of trust preferred securities in Tier 1capital atas of September 30, ~~2017~~2021 and December 31, ~~2016.~~2020. Additionally, the rules provide that trust preferred securities would no longer qualify for Tier 1 capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the subordinated debentures.

(Continued)

37.

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			Minimum Required Under Basel III (Including Buffer)			To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
September 30, 2021
Total capital to risk-weighted assets:
Consolidated	$	289,390	14.13%	$	163,886	8.00%	$	215,100	10.50%	n/a
Bank		301,528	14.71%		164,015	8.00%		215,270	10.50%	$	205,019	10.00%
Tier 1 capital to risk-weighted assets:
Consolidated		263,721	12.87%		122,914	6.00%		174,129	8.50%	n/a
Bank		275,839	13.45%		123,011	6.00%		174,266	8.50%		164,015	8.00%
Tier 1 capital to average assets:(1)
Consolidated		263,721	9.06%		116,422	4.00%		116,422	4.00%	n/a
Bank		275,839	9.48%		116,418	4.00%		116,418	4.00%		145,523	5.00%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		253,411	12.37%		92,186	4.50%		143,400	7.00%	n/a
Bank		275,839	13.45%		92,259	4.50%		143,513	7.00%		133,262	6.50%
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.


	Actual			Minimum Required For Capital Adequacy Purposes			Minimum Required Under Basel III (Including Buffer)			To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
December 31, 2020
Total capital to risk-weighted assets:
Consolidated	$	263,144	13.20%	$	159,496	8.00%	$	209,338	10.50%	n/a
Bank		285,490	14.32%		159,514	8.00%		209,362	10.50%	$	199,392	10.00%
Tier 1 capital to risk-weighted assets:
Consolidated		238,115	11.94%		119,622	6.00%		169,464	8.50%	n/a
Bank		260,459	13.06%		119,635	6.00%		169,483	8.50%		159,514	8.00%
Tier 1 capital to average assets:(1)
Consolidated		238,115	9.13%		104,293	4.00%		104,293	4.00%	n/a
Bank		260,459	9.99%		104,293	4.00%		104,293	4.00%		130,366	5.00%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		227,805	11.43%		89,716	4.50%		139,559	7.00%	n/a
Bank		260,459	13.06%		89,726	4.50%		139,574	7.00%		129,605	6.50%
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.

Dividends paid by Guaranty are mainly provided by dividends from its subsidiaries. However, certain regulatory restrictions exist regarding the ability of its bank subsidiary to transfer funds to Guaranty in the form of cash dividends, loans or advances. The amount of dividends that a subsidiary bank organized as a national banking association, such as the Bank, may declare in a calendar year is the subsidiary bank’s net profits for that year combined with its retained net profits for the preceding two years.

(Continued)

~~33.~~

38.

~~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:~~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~~

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

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

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

(Continued)

~~34.~~

39.

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

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


As of December 31, 2020	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Other Unobservable Inputs (Level 3)
Assets (liabilities) at fair value on a recurring basis:
Available for sale securities:
Mortgage-backed securities	$	107,164		$	0	$	107,164		$	0
Collateralized mortgage obligations		66,945			0		66,945			0
Municipal securities		175,704			0		175,704			0
Corporate bonds		30,982			0		30,982			0
Loans held for sale		5,542			0		0			5,542
Cash surrender value of life insurance		35,510			0		35,510			0
SBA servicing assets		763			0		0			763
Derivative instrument assets		629			0		629			0
Derivative instrument liabilities		(1,151	)		0		(1,151	)		0

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

As of September 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 $ 90,958
$ —
$ 90,958
$ —
Collateralized mortgage obligations 120,691
—
120,691
—
Municipal securities 7,464
—
7,464
—
Corporate bonds 19,020
—
19,020
—
Derivative instruments (666 ) —
(666 ) —

Assets at fair value on a nonrecurring basis:
Impaired loans 6,160
—
—
6,160
Other real estate owned 1,929
—
—
1,929

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)
Assets (liabilities) at fair value on a recurring basis:
Available for sale securities
Mortgage-backed securities $ 59,690
$ —
$ 59,690
$ —
Collateralized mortgage obligations 65,133
—
65,133
—
Municipal securities 7,219
—
7,219
—
Corporate bonds 24,883
—
24,883
—
U.S. treasury securities —
—
—
—
Derivative instruments (695 ) —
(695 ) —

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

There were no transfers between Level 2 and Level 3 during the nine months ended September 30, ~~2017~~2021 or for the year ended December 31, ~~2016.~~

2020.

Nonfinancial Assets and Nonfinancial Liabilities

Nonfinancial assets measured at fair value on a nonrecurring basis during the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for ~~loan~~credit losses and certain foreclosed assets which, subsequent to their initial recognition,

(Continued)

40.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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:


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

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

September 30, 2017 December 31, 2016 September 30, 2016
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement $ 544
$ 78
$ 67
Charge-offs recognized in the allowance for loan losses (175 ) (11 ) (11 )
Fair value of foreclosed assets remeasured at initial recognition $ 369
$ 67
$ 56

Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement $ —
$ 170
$ 180
Write-downs included in collection and other real estate owned expense —
(69 ) (79 )
Fair value of foreclosed assets remeasured subsequent to initial recognition $ —
$ 101
$ 101

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


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


December 31, 2020	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Other real estate owned	$	404	Appraisal value of collateral	Selling costs or other normal adjustments	10%-20% (16%)

Fair Value
Valuation
Technique(s)
Unobservable Input(s) Range (Weighted Average)
September 30, 2017
Impaired loans $ 6,160
Fair value of collateral - sales comparison approach Selling costs or other normal adjustments: Real estate Equipment 10%-20% (16%) 10%-20% (5.3%)
Other real estate owned $ 1,929
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~~

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


	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total Fair Value
Commercial and industrial	$	—	$	—	$	79	$	79
Real estate:
Construction and development		—		—		402		402
Commercial real estate		—		—		3,937		3,937
Total	$	—	$	—	$	4,418	$	4,418

(Continued)

41.

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 September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, are as follows:


	Fair value measurements as of September 30, 2021 using:
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Financial assets:
Cash, due from banks, federal funds sold and interest-bearing deposits	$	408,875	$	408,875	$	0	$	0	$	408,875
Marketable securities held to maturity		173,676		0		182,631		0		182,631
Loans, net		1,938,268		0		0		1,949,191		1,949,191
Accrued interest receivable		7,673		0		7,673		0		7,673
Nonmarketable equity securities		14,061		—		14,061		—		14,061
Financial liabilities:
Deposits	$	2,563,071	$	2,221,716	$	342,153	$	0	$	2,563,869
Securities sold under repurchase agreements		11,195		0		11,195		0		11,195
Accrued interest payable		555		0		555		0		555
Federal Home Loan Bank advances		47,500		0		47,653		0		47,653
Subordinated debentures		19,810		—		17,813		—		17,813


	Fair value measurements as of December 31, 2020 using:
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Financial assets:
Cash, due from banks, federal funds sold and interest-bearing deposits	$	351,792	$	351,792	$	0	$	0	$	351,792
Loans, net		1,831,737		0		0		1,846,868		1,846,868
Accrued interest receivable		9,834		0		9,834		0	��	9,834
Nonmarketable equity securities		14,095		0		14,095		0		14,095
Financial liabilities:
Deposits	$	2,286,390	$	1,907,587	$	380,570	$	0	$	2,288,157
Securities sold under repurchase agreements		15,631		0		15,631		0		15,631
Accrued interest payable		804		0		804		0		804
Federal Home Loan Bank advances		109,101		0		109,381		0		109,381
Subordinated debentures		19,810		0		17,406		0		17,406

Fair value measurements as of
September 30, 2017 using:
Carrying Amount
Level 1
Inputs

Level 2
Inputs

Level 3
Inputs

Total
Fair Value
Financial assets:
Cash, due from banks, federal funds sold and interest-bearing deposits $ 95,061
$ 67,986
$ 27,075
$ —
$ 95,061
Marketable securities held to maturity 179,081
—
181,151
—
181,151
Loans, net 1,294,847
—
—
1,293,992
1,293,992
Accrued interest receivable 6,440
—
6,440
—
6,440
Nonmarketable equity securities 9,379
—
9,379
—
9,379
Cash surrender value of life insurance 18,376
—
18,376
—
18,376
Financial liabilities:
Deposits $ 1,617,302
$ 1,305,206
$ 305,084
$ —
$ 1,610,290
Securities sold under repurchase agreements 12,920
—
12,920
—
12,920
Accrued interest payable 883
—
883
—
883
Federal Home Loan Bank advances 65,157
—
64,856
—
64,856
Subordinated debentures 13,810
—
11,445
—
11,445

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.~~

value (Level 2).

(Continued)

42.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Nonmarketable Equity Securities

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

Deposits and Securities Sold Under Repurchase Agreements

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 1). The fair values of deposit liabilities with defined maturities are estimated by discounting future cash flows using interest rates currently offered for deposits of similar remaining maturities (Level 2).

Other Borrowings

The fair value of borrowings, consisting of lines of credit, Federal Home Loan Bank advances and Subordinated debentures 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.~~

43.

~~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 for the:


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

Denominator:
Weighted-average shares outstanding (basic)*		12,067,769		12,113,266		12,054,426		12,271,889
Effect of dilutive securities:
Common stock equivalent shares from stock options		143,620		—		155,058		—
Weighted-average shares outstanding (diluted)*		12,211,389		12,113,266		12,209,484		12,271,889

Net earnings per share
Basic	$	0.77	$	0.84	$	2.54	$	1.43
Diluted	$	0.76	$	0.84	$	2.51	$	1.43

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Numerator:
Net earnings (basic) $ 4,139
$ 3,370
$ 11,631
$ 8,547
Net earnings (diluted) $ 4,139
$ 3,370
$ 11,631
$ 8,547

Denominator:
Weighted-average shares outstanding (basic) 11,058,956
8,955,476
9,951,767
8,991,671
Effect of dilutive securities:
Common stock equivalent shares from stock options 105,473
9,581
75,505
9,581
Weighted-average shares outstanding (diluted) 11,164,429
8,965,057
10,027,272
9,001,252

Net earnings per share
Basic $ 0.37
$ 0.38
$ 1.17
$ 0.95
Diluted $ 0.37
$ 0.38
$ 1.16
$ 0.95

(Continued)

~~39.~~

44.

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~~any subsequent Quarterly Reports on Form 10-Q, the risk factors appearing in Item 1A of Part II of this Report, and the other risks and uncertainties listed from time to time in our ~~Prospectus,~~reports and documents filed with the SEC, including our Annual Report on ~~May 9, 2017 pursuant to Rule 424(b) of~~Form 10-K for the ~~Securities Act of 1933, as amended (the “Securities Act”), relating to our initial public offering (the “IPO Prospectus”).~~year ended December 31, 2020. Unless the context indicates ~~otherwises,~~otherwise, references in this Report to “we,” “our,” “us,” and the “Company” refer to Guaranty Bancshares, Inc., a Texas ~~Corporation,~~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~~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

We were incorporated in 1990 to serve as the holding company for Guaranty Bank & Trust. Since our founding, we have built a reputation based on financial stability and community leadership. In May 2017, we consummated an initial public offering of our common stock, which is traded on the NASDAQ Global Select Market under the symbol “GNTY.”

We currently operate 2632 banking locations in the East Texas, Dallas/Fort Worth, ~~East~~Central Texas and ~~Central Texas~~Greater Houston regions of the state. ~~Our growth has been consistent and primarily organic.~~ Our principal executive office is located at ~~201 South Jefferson Street, Mount Pleasant,~~16475 Dallas Parkway, Suite 600, Addison, Texas, ~~75455,~~75001 and our telephone number is ~~(903)~~(888) 572-9881. Our website address is ~~www.gnty.com~~gnty.com. Information contained on our website does not constitute a part of this Report and is not incorporated by reference into this filing or any other report.

As a bank holding company that operates through one segment, we generate most of our revenue from interest on loans and investments, customer service and loan fees, fees related to the sale of mortgage loans, and trust and wealth management services. We incur interest expense on deposits and other borrowed funds, as well as noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the State of Texas.

Impact of COVID-19 and Quarterly Highlights

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

(Continued)

45.

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

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

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

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

Quarterly highlights of the Company include:



~~40.~~

Solid Net Earnings and Core Earnings. Net earnings have remained solid for the past four quarters. Net core earnings†, which exclude provisions for credit losses and income tax, net PPP income, and interest on PPP-related borrowings, have also remained strong over the last four quarters, demonstrating consistent core earnings stream. Net core earnings† were $9.7 million for the third quarter, compared to $9.8 million for the second quarter of 2021, and $11.1 million during the third quarter of 2020.



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



Strong Credit Quality. Non-performing assets as a percentage of total assets were 0.11% at September 30, 2021, compared to 0.13% at June 30, 2021 and 0.53% at September 30, 2020. Net charge-offs to average loans (annualized) were 0.05% for the quarter ended September 30, 2021, compared to 0.05% for the quarter ended June 30, 2021, and 0.01% for the quarter ended September 30, 2020. The decrease in non-performing assets during the third quarter of 2021 compared to the same period of 2020 resulted primarily from the resolution of three problem loans, made to two borrowers, with outstanding combined book balances of $8.7 million at December 31, 2020, that were acquired during the Westbound acquisition and which were fully reserved prior to the onset of COVID-19.



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

(Continued)

46.

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

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

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates, and the potential sensitivity of our consolidated financial statements to those judgments and assumptions, is critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate.

Loans and Allowance for ~~Loan~~Credit Losses

(ACL)

Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for ~~loan~~credit losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Fees associated with the origination of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. A loan may continue to accrue interest, even if it is more than 90 days past due, if the loan is both well collateralized and it is in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured in accordance with the terms of the loan agreement.

The allowance for ~~loan~~credit losses is ~~an estimated~~a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is ~~adequate~~confirmed. Recoveries will not exceed the aggregate of loan amounts previously charged-off and expected to ~~absorb inherent losses on existing~~be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We use the weighted-average remaining maturity method (WARM method) as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans ~~that may be uncollectible based upon review and evaluation~~in a pool or segment of our loan ~~portfolio. Management’s periodic evaluation~~portfolio at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the ~~allowance~~unadjusted historical charge-off rate is ~~based on general economic~~then adjusted for current conditions ~~the financial condition of borrowers, the value~~ and ~~liquidity of collateral, delinquency, prior loan loss experience~~for reasonable and ~~the results of periodic reviews of the portfolio.~~

~~The allowance for loan losses is comprised of two components. The first component, the general reserve, is determined in accordance with current authoritative accounting guidance that considers~~supportable forecast periods. Adjustments to historical loss ~~rates~~information are made for ~~the last five years adjusted~~differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for qualitative factors based upon general economic conditions and other qualitative risk factors both internal and external to us. Such qualitative factors include current local economic conditions and trends including unemployment, changes in ~~lending staff, policies and procedures,~~environmental conditions, such as changes in ~~credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans.~~unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. ~~For purposes of determining~~In early 2020, to address the ~~general reserve, the loan portfolio, less cash secured loans, government guaranteed loans~~uncertainties resulting from COVID-19, an additional qualitative factor was added to specifically address COVID-related economic factors and ~~impaired loans, is multiplied by~~potential credit losses, in addition to 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.

standard qualitative factors.

The allowance for ~~loan~~credit losses is ~~increased by charges to income~~measured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan portfolio segments include both regulatory call report codes and ~~decreased by charge-offs (net~~internally identified risk ratings for our

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47.

commercial loan segments and delinquency status for our consumer loan segments. We also have separate segments for our warehouse lines of ~~recoveries).~~

credit, for our internally originated SBA loans, for our SBA loans acquired from Westbound Bank, and for loans originated under the PPP program.

In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our ~~portfolios~~portfolio is impacted by delinquency status and debt service coverage generated by our borrowers’ businesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding

~~41.~~

for some period of time, a process we ~~refers~~refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for ~~loan~~credit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

Delinquency statistics are updated at least monthly.

Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial and industrial, construction, and commercial real estate loans. Internal risk ratings are a key factor ~~in identifying loans~~ that ~~are individually evaluated for impairment and impact~~impacts management’s estimates of loss factors used in determining the amount of the allowance for ~~loan~~credit losses. Internal risk ratings are updated on a continuous basis.

Loans with unique risk characteristics are ~~considered impaired when, based~~evaluated on ~~current information and events, it~~an individual basis. Loans evaluated individually are excluded from the collective evaluation. When management determines that foreclosure is probable, we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loansexpected credit losses are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

~~Our policy requires measurement of the allowance for an impaired collateral dependent loan~~ based on the fair value of the ~~collateral. Other loan impairments~~collateral at the reporting date, adjusted for selling costs as appropriate.

For off-balance sheet credit exposures, we estimate expected credit losses over the contractual period in which we are ~~measured based~~exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the ~~present value~~likelihood that funding will occur and an estimate of expected ~~future cash flows or the loan’s observable market price. As of September 30, 2017 and December 31, 2016, all significant impaired loans have been determined~~credit losses on commitments expected to be ~~collateral dependent and the allowance for loss has been measured utilizing the~~funded over its estimated ~~fair value of the collateral.~~

life.

From time to time, we modify our loan agreement with a borrower. A modified loan is considered a troubled debt restructuring (TDR) when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by us that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. We review each troubled debt restructured loan and determine on a case by case basis if the loan ~~is subject to impairment and the need~~can be grouped with its like segment for allowance consideration or whether it should be individually evaluated for a specific allowance for ~~loan~~credit loss allocation. AnIf individually evaluated, an allowance for ~~loan~~credit loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral.

Most modifications made as a direct result of COVID-19 were not TDRs pursuant to the CARES Act and the April 7, 2020 Interagency guidance and GAAP.

We have certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and industrial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate collateral. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real

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48.

estate portfolio are generally diverse in terms of type and geographic location throughout the State of Texas. This diversity helps us reduce the exposure to adverse economic events that affect any single market or industry.

We utilize methodical credit standards and analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated as well as the underlying

~~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.

From time to time, we have reclassified certain securities from available for sale to held to maturity. Such transfers are made at fair value at the date of transfer. The unrealized holding gains at the date of transfer are retained in other comprehensive income and in the carrying value of the held to maturity securities and are amortized over the remaining life of the security. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income on our balance sheet totaled $9.7 million at September 30, 2021. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.

Management evaluates securities for ~~other-than-temporary impairment (“OTTI”)~~an allowance for credit losses based on ~~at least~~whether they are classified as held to maturity or available for sale. For held to maturity securities, management measures expected credit losses on a ~~quarterly~~collective basis by major security type and ~~more frequently when economic or market~~credit rating. The estimate of expected credit losses considers historical credit loss information that is then adjusted for current conditions ~~warrant such an evaluation.~~and reasonable and supportable forecasts. For available for sale 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~~we first assess whether ~~it intends~~we intend to sell, or it is more likely than not that itwe will be required to sell athe 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~~security’s amortized cost ~~and~~basis is written down to fair value ~~is recognized as impairment~~ through ~~earnings.~~income. For ~~debt~~ securities available for sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically relate to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount ofthat the fair value is less than the amortized cost basis. Any impairment ~~is split into two components as follows: (1) OTTI related to~~that has not been recorded through an allowance for credit ~~loss, which must be recognized in the income statement and (2) OTTI related to other factors, which~~losses is recognized in other comprehensive income. ~~The~~

Changes in the allowance for credit ~~loss~~losses are recorded as provision for (or reversal of) credit losses expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is ~~defined as the difference between the present value~~confirmed or when either of the ~~cash flows expected~~criteria regarding intent or requirement to ~~be collected and the amortized cost basis.~~

sell is met.

Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.

Emerging Growth Company

The Jumpstart our Business Startups Act of 2012 (“JOBS ~~Act~~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

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49.

companies. However, we have “opted out” of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.

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50.

Discussion and Analysis of Results of Operations for the Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~

2020

Results of Operations

The following discussion and analysis ~~of our results of operations~~ compares our results of operations for the nine months ended September 30, ~~2017~~2021 with the nine months ended September 30, ~~2016.~~2020. The results of operations for the nine months ended September 30, ~~2017~~2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2017.~~

2021.

Net earnings were ~~$11.6~~$30.6 million for the nine months ended September 30, ~~2017,~~2021, as compared to ~~$8.5~~$17.5 million for the nine months ended September 30, ~~2016.~~2020. The following table presents key earnings data for the periods indicated:

~~43.~~

For the Nine Months Ended September 30,
2017 2016
(Dollars in thousands, except per share data)
Net earnings $ 11,631
$ 8,547
Net earnings per common share
-basic 1.17
0.95
-diluted 1.16
0.95
Net interest margin⁽¹⁾
3.37 % 3.25 %
Net interest rate spread⁽²⁾
3.15 % 3.06 %
Return on average assets 0.82 % 0.65 %
Return on average equity 8.74 % 7.89 %
Average equity to average total assets 9.42 % 8.19 %
Dividend payout ratio 33.33 % 27.37 %

~~(1) Net interest margin is equal to~~


	For the Nine Months Ended September 30,
(dollars in thousands, except per share data)	2021			2020
Net earnings	$	30,647		$	17,487
Net earnings per common share*
-basic		2.54			1.43
-diluted		2.51			1.43
Net interest margin(1)		3.52	%		3.72	%
Net interest rate spread(2)		3.35	%		3.41	%
Return on average assets		1.42	%		0.92	%
Return on average equity		14.32	%		8.94	%
Average equity to average total assets		9.90	%		10.28	%
Cash dividend payout ratio*		23.62	%		36.94	%

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

Large provisions for credit losses in the prior period, resulting from effects of COVID-19, and participation in the PPP program, have created temporary extraordinary results in the calculation of net ~~interest~~earnings and related performance ratios. The following table illustrates net earnings and net core earnings per share, which are pre-tax, pre-provision and pre-extraordinary PPP income, ~~divided by average interest-earning assets.~~

~~(2) Net interest rate spread is~~as well as net core performance ratios for the ~~average yield on interest-earning assets minus the average rate on interest-bearing liabilities.~~

nine months ended September 30, 2021 and 2020.

(Continued)

51.


	For the Nine Months Ended September 30,
(dollars in thousands, except per share data)	2021			2020
Net earnings	$	30,647		$	17,487
Adjustments:
Provision for credit losses		(1,700	)		13,200
Income tax provision		6,827			3,605
PPP interest income, including fees		(6,864	)		(3,616	)
Net interest expense on PPP-related borrowings		—			34
Net core earnings†	$	28,910		$	30,710

Total average assets	$	2,889,882		$	2,541,214
Adjustments:
PPP loans average balance		(133,309	)		(124,541	)
Excess fed funds sold due to PPP-related borrowings		—			(30,657	)
Total average assets, adjusted†	$	2,756,573		$	2,386,016
Total average equity		286,228			261,205

PERFORMANCE RATIOS
Net earnings to average assets (annualized)		1.42	%		0.92	%
Net earnings to average equity (annualized)		14.32			8.94
Net core earnings to average assets, as adjusted (annualized)†		1.40			1.72
Net core earnings to average equity (annualized)†		13.50			15.70

PER COMMON SHARE DATA
Weighted-average common shares outstanding, basic*		12,054,426			12,271,889
Earnings per common share, basic*	$	2.54		$	1.43
Net core earnings per common share, basic*†		2.40			2.50

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in "—Non-GAAP Financial Measures".

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52.

Net Interest Income

Our operating results depend primarily on our net interest income. Fluctuations in market interest rates impact the yield and rates paid on interest-earning assets and interest-bearing liabilities, respectively. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact our net interest income. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Net interest income, before the reverse provision for ~~the nine months ended September 30, 2017~~credit losses, was ~~$44.1~~$71.5 million compared to ~~$39.8~~$66.0 million for the nine months ended September 30, ~~2016,~~2020, an increase of ~~$4.3~~$5.5 million, or ~~10.9%~~8.3%. The increase in net interest income ~~was comprised of~~before the provision (or reverse provision) for credit losses resulted primarily from a ~~$5.1~~$5.3 million, or ~~10.6%~~48.9%, ~~increase in interest income offset by a $775,000, or 9.5%, increase~~decrease in interest expense. ~~The growth in interest income~~Although there was ~~primarily attributable to~~ a ~~$110.6~~$55.8 million, or ~~9.5%~~3.0%, increase in average loans outstanding for the nine months ended September 30, ~~2017,~~2021, compared to the nine months ended September 30, ~~2016, further improved~~2020, that increase was offset by a ~~0.04% increase~~12 basis point decrease in the average yield on total ~~loans.~~ loans driven by lower rates on PPP loans and new and variable rate loans, partially offset by recognition of PPP origination fees, which are described in more detail in a table below.

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~~from the same quarter in the ~~Dallas/Fort Worth metroplex and Bryan/College Station markets.~~prior year. Excluding PPP loans, the average loans outstanding for the nine months ending September 30, 2021 increased $47.0 million, or 2.7%, from the same period in the prior year. The ~~$775,000 increase~~$5.3 million decrease in interest expense for the nine months ended September 30, ~~2017~~2021 was primarily related to a ~~$74.1~~decrease in the cost of interest-bearing deposits of 52 basis points, despite a $126.4 million, or ~~6.33%~~8.6%, increase in average interest-bearing deposits over the same period in ~~2016.~~2020. The ~~majority~~average deposit balance increase is the result of ~~this increase was due to organic growth, primarily~~continued reductions in ~~savings~~interest rates for interest-bearing deposits as markets have allowed and ~~money market accounts, driven~~general changes in ~~part by favorable rates that were offered in our Bryan/College Station and Dallas/Fort Worth metroplex markets.~~ consumer spending habits.

For the nine months ended September 30, ~~2017,~~2021, net interest margin on a taxable equivalent basis and net interest spread were ~~3.37%~~3.56% and ~~3.15%~~3.35%, respectively, compared to ~~3.25%~~3.75% and ~~3.06%~~3.41% for the same period in ~~2016,~~2020, which reflects a 53 basis point decrease in interest-earning assets, and was partially offset by a 47 basis point decrease on interest-bearing liabilities from the ~~increases in interest income discussed above relative to the increases in interest expense.~~

prior period.

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~~all major ~~category~~categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average ~~rate~~rates earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

~~44.~~

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53.

For the Nine Months Ended September 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⁾
$ 1,269,387
$ 45,115
4.75 % $ 1,158,807
$ 40,857
4.71 %
Securities available for sale 216,908
3,678
2.27 % 216,744
3,057
1.88 %
Securities held to maturity 184,269
3,340
2.42 % 179,963
3,549
2.63 %
Nonmarketable equity securities 7,012
379
7.23 % 8,452
193
3.05 %
Interest-bearing deposits in other banks 72,948
581
1.06 % 74,525
335
0.60 %
Total interest-earning assets 1,750,524
$ 53,093
4.06 % 1,638,491
$ 47,991
3.91 %
Allowance for loan losses (12,040 ) (10,654 )
Noninterest-earnings assets 144,937
137,796

Total assets $ 1,883,421
$ 1,765,633

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits $ 1,243,536
$ 7,761
0.83 % $ 1,169,468
$ 6,791
0.78 %
Advances from FHLB and fed funds purchased 41,661
294
0.94 % 65,503
240
0.49 %
Other debt 8,973
300
4.48 % 13,650
452
4.42 %
Subordinated debentures 16,607
559
4.50 % 20,642
656
4.25 %
Securities sold under agreements to repurchase 12,937
37
0.38 % 12,264
37
0.40 %
Total interest-bearing liabilities 1,323,714
$ 8,951
0.90 % 1,281,527
$ 8,176
0.85 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 375,655
333,640

Accrued interest and other liabilities 6,650
5,939

Total noninterest-bearing liabilities 382,305
339,579

Shareholders’ equity 177,402
144,527

Total liabilities and shareholders’ equity $ 1,883,421
$ 1,765,633

Net interest rate spread⁽²⁾
3.15 % 3.06 %
Net interest income $ 44,142
$ 39,815

Net interest margin⁽³⁾
3.37 % 3.25 %

~~(1) Includes average outstanding balances of~~


	For the Nine Months Ended September 30,
	2021								2020
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
ASSETS
Interest-earning assets:
Total loans(1)	$	1,906,989		$	69,664		4.88	%	$	1,851,209		$	69,337		5.00	%
Securities available for sale		372,707			5,481		1.97			326,472			5,711		2.34
Securities held to maturity		39,269			1,054		3.59			48,001			956		2.66
Nonmarketable equity securities		10,042			612		8.15			11,145			333		3.99
Interest-bearing deposits in other banks		391,096			221		0.08			136,684			452		0.44
Total interest-earning assets		2,720,103			77,032		3.79			2,373,511			76,789		4.32
Allowance for credit losses		(32,338	)							(27,552	)
Noninterest-earning assets		202,117								195,255
Total assets	$	2,889,882							$	2,541,214
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,594,219		$	4,444		0.37	%	$	1,467,838		$	9,746		0.89	%
Advances from FHLB and fed funds purchased		49,581			308		0.83			79,166			346		0.58
Line of credit		6,506			174		3.58			5,394			119		2.95
Subordinated debentures		19,810			558		3.77			16,261			511		4.20
Securities sold under agreements to repurchase		16,044			10		0.08			17,179			37		0.29
Total interest-bearing liabilities		1,686,160			5,494		0.44			1,585,838			10,759		0.91
Noninterest-bearing liabilities:
Noninterest-bearing deposits		892,260								670,947
Accrued interest and other liabilities		25,234								23,224
Total noninterest-bearing liabilities		917,494								694,171
Shareholders’ equity		286,228								261,205
Total liabilities and shareholders’ equity	$	2,889,882							$	2,541,214
Net interest rate spread(2)							3.35	%							3.41	%
Net interest income				$	71,538							$	66,030
Net interest margin(3)							3.52	%							3.72	%
Net interest margin, fully taxable equivalent(4)							3.56	%							3.75	%

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

(Continued)

54.

To illustrate core net interest margin, fully taxable equivalent, and remove the extraordinary impacts resulting from the PPP program, the table below excludes PPP loans ~~held for sale of $3.5 million~~ and ~~$3.2 million~~their associated fees and costs for the nine months ended September 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.~~

2021:


	For the Nine Months Ended September 30, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total interest-earning assets	$	2,720,103		$	77,032			3.79	%

Total loans		1,906,989			69,664			4.88
Adjustments:
PPP loans average balance and net fees(1)		(133,309	)		(6,265	)		6.28
Total loans, net of PPP effects	$	1,773,680		$	63,399			4.78	%

Total interest-earning assets, net of PPP effects†	$	2,586,794		$	70,767			3.66	%

Net interest income, fully taxable equivalent ("FTE")				$	72,336
Net interest margin, FTE								3.56	%
Net interest income, net of PPP effects†					66,071
Net interest margin, FTE, net of PPP effects†								3.41	%

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

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

~~45.~~

For the Nine Months Ended September 30, 2017 vs. 2016
Increase (Decrease)
Due to Change in Total Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest-earning assets:
Total loans $ 5,255
$ (997 ) $ 4,258
Securities available for sale 4
617
621
Securities held to maturity 104
(313 ) (209 )
Nonmarketable equity securities (104 ) 290
186
Interest-earning deposits in other banks (17 ) 263
246
Total increase (decrease) in interest income $ 5,242
$ (140 ) $ 5,102

Interest-bearing liabilities:
Interest-bearing deposits $ 618
$ 352
$ 970
Advances from FHLB and fed funds purchased (225 ) 279
54
Other debt (209 ) 58
(151 )
Subordinated debentures (182 ) 84
(98 )
Securities sold under agreements to repurchase 3
(3 ) —
Total increase in interest expense 5
770
775
Increase (decrease) in net interest income $ 5,237
$ (910 ) $ 4,327


	For the Nine Months Ended September 30, 2021 vs. 2020
	Increase (Decrease)
	Due to Change in						Total Increase
(in thousands)	Volume			Rate			(Decrease)
Interest-earning assets:
Total loans	$	2,092		$	(1,765	)	$	327
Securities available for sale		811			(1,041	)		(230	)
Securities held to maturity		(174	)		272			98
Nonmarketable equity securities		(33	)		312			279
Interest-earning deposits in other banks		840			(1,071	)		(231	)
Total increase (decrease) in interest income	$	3,536		$	(3,293	)	$	243

Interest-bearing liabilities:
Interest-bearing deposits	$	844		$	(6,146	)	$	(5,302	)
Advances from FHLB and fed funds purchased		(129	)		91			(38	)
Line of credit		25			30			55
Subordinated debentures		112			(65	)		47
Securities sold under agreements to repurchase		(2	)		(25	)		(27	)
Total increase (decrease) in interest expense		850			(6,115	)		(5,265	)
Increase in net interest income	$	2,686		$	2,822		$	5,508

Provision for ~~Loan~~Credit Losses

The provision for ~~loan~~credit losses is a charge to income in order to bring our allowance for ~~loan~~credit losses to a level deemed appropriate by management based on factors such as historical loss experience, trends in classified and past due loans, volume and growth in the loan portfolio, current economic conditions in our markets and value of the underlying collateral. Loans are charged off against the allowance for ~~loan~~credit 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~~

A reverse provision ~~for loan losses~~of $1.7 million was recorded for the nine months ended September 30, ~~2017 was $2.3 million compared~~2021 in order to ~~$3.2 million for~~capture the ~~nine months ended September 30, 2016. The decrease in~~improvements that have occurred to macroeconomic factors evaluated at the ~~provision expense was related to one large loan relationship whose repayment ability deteriorated in~~onset of the prior year, thus increasing a specific reserve allocated to the borrower during the prior year. Net charge offs were $1.2 million for the nine months ended September 30, 2017 compared to $1.3 million for the same period in 2016. The amount of net charge offs during the nine months ended September 30, 2017 resulted primarily from two relationships totaling approximately $700,000,COVID-19 pandemic, as well as ~~smaller charge off amounts~~risk rating upgrades for specific loans, which impact the reserve calculations within our model, and were offset by growth in our ~~single family~~overall loan portfolio.

(Continued)

55.

For the year ended December 31, 2020, a total allowance for credit losses provision of $13.2 million was recorded primarily to account for the estimated impact of COVID-19 on credit quality and ~~consumer~~resulted largely from changes to individual loan ~~portfolios. The amount~~risk ratings, as well as COVID-specific qualitative factors primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of ~~net charge offs~~which were impacted by the effects of COVID-19. These COVID-specific qualitative factors, established during 2020, were reduced during the ~~nine months ended September 30, 2016 resulted primarily~~first three quarters of 2021 from ~~one relationship, totaling approximately $1.2 million,~~55 basis points across the loan portfolio to 14.75 basis points across the portfolio in order to conservatively capture the improvements that ~~was charged off during~~have occurred to macroeconomic factors mentioned. Although management is cautiously optimistic about improving vaccination and hospitalization rates and economic trends, it is very likely that the ~~third quarter~~economic effects of ~~2016.~~

the pandemic will continue into 2022.

Noninterest Income

Our primary sources of recurring noninterest income are service charges on deposit accounts, merchant and debit card fees, fiduciary income, gains on the sale of both mortgage and SBA loans, and income from bank-owned life insurance. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.

The following table presents components of noninterest income for the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 and the period-over-period variations in the categories of noninterest income:

~~46.~~

For the Nine Months Ended September 30, Increase (Decrease)
2017 2016 2017 v. 2016
(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts $ 2,801
$ 2,625
$ 176
Merchant and debit card fees 2,301
2,026
275
Fiduciary income 1,055
1,058
(3 )
Gain on sales of loans 1,490
1,231
259
Bank-owned life insurance income 347
337
10
Gain on sales of investment securities 25
82
(57 )
Loan processing fee income 454
473
(19 )
Other noninterest income 2,027
1,770
257
Total noninterest income $ 10,500
$ 9,602
$ 898


	For The Nine Months Ended September 30,				Increase (Decrease)
(in thousands)	2021		2020		2021 vs. 2020
Noninterest income:
Service charges	$	2,687	$	2,196	$	491
Gain on sale of loans		4,401		4,811		(410	)
Fiduciary and custodial income		1,718		1,499		219
Bank-owned life insurance income		633		633		—
Merchant and debit card fees		5,048		4,119		929
Loan processing fee income		481		461		20
Warehouse lending fees		648		695		(47	)
Mortgage fee income		479		574		(95	)
Other noninterest income		2,443		1,623		820
Total noninterest income	$	18,538	$	16,611	$	1,927

Total noninterest income increased ~~$898,000,~~$1.9 million, or ~~9.35%~~11.6%, for the nine months ended September 30, ~~2017~~2021 compared to the same period in ~~2016.~~2020. 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~~deposit related services, and these fees typically constitute a significant and generally predictable component of our ~~noninterest~~non-interest income. Service ~~charges on deposit accounts were $2.8~~fee income was $2.7 million for the nine months ended September 30, ~~2017, which increased over~~2021 compared to $2.2 million for the same period in ~~2016 by $176,000,~~2020, an increase of $491,000, or ~~6.7%~~22.4%, resulting from the expiration of COVID-related fee waivers and consumer spending activity and habits returning to more normal, pre-pandemic, levels.

Gain on Sale of Loans. ~~This increase in service charges~~We originate long-term fixed-rate mortgage loans and Small Business Administration (SBA) loans for resale into the secondary market. We sold 402 mortgage loans for $93.0 million during the nine months ended September 30, 2021 compared to 514 mortgage loans for $119.7 million for the nine months ended September 30, 2020. Gain on sale of loans was ~~due in part~~$4.4 million for the nine months ended September 30, 2021, a decrease of $410,000, or 8.5%, compared to ~~our deposit growth during~~$4.8 million for the same period in 2020. $3.7 million and $706,000 of the gain in the current year was attributable to the sales of mortgage loans and SBA 7(a) loans, respectively, while the gain during the nine month period of the prior year consisted of $4.2 million in mortgage loan sales and $629,000 in SBA 7(a) loan sales.

Fiduciary and Custodial Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $1.7 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of $219,000, or 14.6%. The revenue increase resulted primarily from 28 new accounts that opened during the first nine months of 2021, which have generated additional income. Furthermore, revenue for our services fluctuates by month with the market value for all publicly-traded assets, which are

(Continued)

56.

primarily held in irrevocable trusts and investment management accounts that carry higher fees. Additionally, our custody-only assets are carried in a ~~new deposit service charge and~~tiered percentage rate fee schedule ~~implemented during February 2017.~~

charged against market value.

Merchant and Debit Card Fees. We earn interchange income related to the activity of our customers’ merchant debit card usage. Debit card interchange income was ~~$2.3~~$5.0 million for the nine months ended September 30, ~~2017,~~2021, compared to ~~$2.0~~$4.1 million for the same period in ~~2016,~~2020, an increase of ~~$275,000,~~$929,000, or ~~13.6%~~22.6%. The increase was primarily due to a change in contract terms, an annual earnings credit received from our debit card vendor and growth in the number of ~~demand deposit accounts~~DDAs and debit card usage volume during ~~2017.~~

~~Gain on Sales~~2021. The total number of ~~Loans.~~ ~~We originate long-term fixed-rate mortgage loans for resale into the secondary market. We sold 270 loans for $49.4 million for the nine months ended~~DDAs increased by 2,897 accounts, from 49,427 as of September 30, ~~2017 compared~~2020 to ~~224 loans for $43.2 million for the nine months ended~~52,457 as of September 30, 2016. Gain on sale of loans was $1,490,000 for the nine months ended September 30, 2017, an increase of $259,000, or 21.0%, compared to $1,231,000 for the same period in 2016, which reflects an increase in mortgage volume and the number of loans sold.

2021.

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 ~~$257,000,~~$820,000, or ~~14.5%~~50.5%, for the nine months ended September 30, ~~2017,~~2021, compared to the same period in ~~2016~~2020 due primarily to a gain of $277,000 on bank-owned life insurance proceeds resulting from the ~~growth~~death of a former bank officer, as well as the write-off of repossessed assets of $356,000 in ~~our loan portfolio and increased mortgage origination volume causing an increase~~the prior year that was not present in ~~fee income generated from loan administration fees and income from mortgage loan origination and processing fees.~~

the current year.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, professional and regulatory fees, including FDIC assessments, data processing expenses, and advertising and promotion expenses.

For the nine months ended September 30, ~~2017,~~2021, noninterest expense totaled ~~$36.1~~$54.3 million, an increase of ~~$1.8~~$6.0 million, or ~~5.17%~~12.3%, compared to ~~$34.3~~$48.3 million for the nine months ended September 30, ~~2016.~~2020. The following table presents, for the periods indicated, the major categories of noninterest expense:

~~47.~~

For the Nine Months Ended September 30, Increase (Decrease)
2017 2016 2017 v. 2016
(Dollars in thousands)
Employee compensation and benefits $ 20,156
$ 19,057
$ 1,099
Non-staff expenses:
Occupancy expenses 5,552
5,196
356
Amortization 781
719
62
Software and Technology 1,533
1,368
165
FDIC insurance assessment fees 527
900
(373 )
Legal and professional fees 1,472
1,358
114
Advertising and promotions 879
752
127
Telecommunication expense 412
438
(26 )
ATM and debit card expense 766
705
61
Director and committee fees 760
680
80
Other noninterest expense 3,279
3,167
112
Total noninterest expense $ 36,117
$ 34,340
$ 1,777


	For The Nine Months Ended September 30,				Increase (Decrease)
(in thousands)	2021		2020		2021 vs. 2020
Employee compensation and benefits	$	31,145	$	26,982	$	4,163
Non-staff expenses:
Occupancy expenses		8,258		7,624		634
Legal and professional fees		1,995		1,682		313
Software and technology		3,427		2,977		450
Amortization		932		1,009		(77	)
Director and committee fees		619		595		24
Advertising and promotions		1,288		1,142		146
ATM and debit card expense		1,802		1,406		396
Telecommunication expense		611		620		(9	)
FDIC insurance assessment fees		551		569		(18	)
Other noninterest expense		3,674		3,743		(69	)
Total noninterest expense	$	54,302	$	48,349	$	5,953

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 ~~$20.2~~$31.1 million for the nine months ended September 30, ~~2017,~~2021, an increase of ~~$1,099,000,~~$4.2 million, or ~~5.8%~~15.4%, compared to ~~$19.1~~$27.0 million for the same period in ~~2016.~~2020. Employee compensation and benefits expense increased due to higher salaries, higher insurance expense accruals due to increased claims experience, higher payroll tax expense due to bonuses paid in July and bonus accruals. The ~~increase~~bonus accrual in the prior year was ~~due primarily~~lower during the first nine months of 2020 because of lower net income resulting from the effects of the COVID-19 pandemic.

Occupancy Expenses. Occupancy expenses are mainly comprised of depreciation expense on fixed assets, and lease expense related to ~~an increase in per employee salaries, as well as~~ASC 842 accounting. Occupancy expenses increased ~~health insurance expenses, bonus expense, benefit plan expenses and payroll taxes. As of~~$634,000, or 8.3%, for the nine months

(Continued)

57.

ended September 30, ~~2017~~2021 compared to the same period of the prior year. Depreciation expense and ~~2016, we had 397~~ASC 842 lease expense increased $249,000 and ~~395 full-time equivalent employees,~~$299,000, respectively, ~~an increase of two employees.~~

~~Occupancy Expenses.~~ ~~Occupancy expenses~~compared to the prior year period.

Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were ~~$5.6~~$2.0 million and ~~$5.2~~$1.7 million for the nine months ended September 30, ~~2017~~2021 and ~~2016, respectively.~~2020, respectively, an increase of $313,000, or 18.6%. The increase was primarily the result of ~~$356,000, or 6.9%, resulted primarily from additional lease expense~~professional recruiting fees paid during the nine months ended September 30, 2021 that were not paid during the same period of ~~banking centers totaling $181,000 and an increase in ad valorem taxes of $90,000, primarily associated with repossessed assets.~~

2020.

Software and Technology. Software and technology expenses increased ~~$165,000~~,$450,000, or ~~12.06%~~15.1%, from ~~$1.37~~$3.0 million ~~for the~~ ~~nine months ended September 30, 2016~~ to ~~$1.53 million~~ for the nine months ended September 30, ~~2017. The increase is attributable primarily~~2020 to ~~incremental processing fees resulting from growth in volume of our loan and deposit accounts.~~

~~FDIC Insurance Assessment Fees.~~ ~~FDIC assessment fees were $527,000 and $900,000~~$3.4 million for the nine months ended September 30, ~~2017~~2021. The increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities, improve cybersecurity monitoring and ~~2016, respectively. The decrease of $373,000, or 41.4%, resulted from the effect of an update in our accounting methodology during 2016~~tools, and improve connectivity to support remote working and other technology capabilities.

ATM and Debit Card Expense. We pay processing fees related to ~~accrual~~the activity of ~~the assessment fees~~our customers’ ATM and ~~an increased one time expense in the prior period.~~

~~Advertising~~debit card usage. ATM and ~~Promotions.~~ ~~Advertising and promotion related~~debit card expenses were ~~$879,000 and $752,000~~$1.8 million for the nine months ended September 30, ~~2017 and 2016, respectively. The~~2021, an increase of ~~$127,000,~~$396,000, or ~~16.9%~~28.2%, ~~was primarily due~~compared to ~~increases~~$1.4 million for the same period in ~~advertising expense in~~2020 as a result of increased ATM and debit card usage by our ~~growth markets, especially Dallas/Fort Worth and Bryan/College Station.~~

customers.

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,~~other real estate owned and other assets, other real estate owned expense and write-downs, business development expenses (i.e., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense ~~increased to $3.3~~remained consistent with the prior year and decreased only $69,000, or 1.8%, from $3.7 million for the nine months ended September 30, ~~2017, compared~~2020 to ~~$3.2~~$3.7 million for the ~~same period in 2016, an increase of $112,000, or 3.5%. The increase was primarily due to additional stock appreciation rights and stock option expenses of $306,000 during the~~

~~48.~~

comparable periods, partially offset by a decrease in loan and filing fee expenses of $168,000 during the comparable periods, resulting from both processing efficiencies and a reduction in appraisal review costs by reviewing the appraisals internally, rather than through a third party vendor.

nine months ended September 30, 2021.

Income Tax Expense

The amount of income tax expense we incur is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

For the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, income tax expense totaled ~~$4.6~~$6.8 million and ~~$3.3~~$3.6 million, respectively. The increase in income tax expense was primarily due to an increase in net earnings before taxes of $16.4 million. Our effective tax rates for the nine months ended ~~September 30, 2017~~2021 and ~~2016~~2020 were ~~28.54%~~18.22% and ~~27.79%~~17.09%, respectively.

Discussion and Analysis of Results of Operations for the Three Months Ended September 30, ~~2017~~2021 and ~~2016~~

2020

Results of Operations

The following discussion and analysis of our results of operations compares our results of operations for the three months ended September 30, ~~2017~~2021 with the three months ended September 30, ~~2016.~~2020. The results of operations for the three months ended September 30, ~~2017~~2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2017.~~

2021.

Net earnings were ~~$4.1~~$9.3 million for the three months ended September 30, ~~2017,~~2021, as compared to ~~$3.4~~$10.1 million for the three months ended September 30, ~~2016.~~ 2020. Basic earnings per share were $0.77 for the three months ended September 30, 2021 compared to $0.84 during the same period in 2020.

(Continued)

58.

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

For the Three Months Ended September 30,
2017 2016
(Dollars in thousands, except per share data)
Net earnings $ 4,139
$ 3,370
Net earnings per common share
-basic 0.37
0.38
-diluted 0.37
0.38
Net interest margin⁽¹⁾
3.38 % 3.26 %
Net interest rate spread⁽²⁾
3.13 % 3.07 %
Return on average assets 0.87 % 0.75 %
Return on average equity 7.99 % 9.20 %
Average equity to average total assets 10.86 % 8.16 %

~~(1) Net interest margin is equal to~~


	For the Three Months Ended September 30,
(dollars in thousands, except per share data)	2021			2020
Net earnings	$	9,253		$	10,134
Net earnings per common share*
-basic		0.77			0.84
-diluted		0.76			0.84
Net interest margin(1)		3.36	%		3.57	%
Net interest rate spread(2)		3.21	%		3.32	%
Return on average assets		1.24	%		1.53	%
Return on average equity		12.44	%		15.21	%
Average equity to average total assets		9.99	%		10.04	%
Cash dividend payout ratio*		25.97	%		21.74	%

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

The following table illustrates net ~~interest~~earnings and net core earnings results, which are pre-tax, pre-provision and pre-extraordinary PPP 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~~as well as performance ratios for the three months ended September 30, ~~2017 was $15.1 million compared to $13.7 million~~2021 and 2020:


	For the Three Months Ended September 30,
	2021			2020
Net earnings	$	9,253		$	10,134
Adjustments:
Provision for credit losses		(700	)		(300	)
Income tax provision		2,179			2,350
PPP loans, including fees		(1,005	)		(1,076	)
Net interest expense on PPP-related borrowings		—			3
Net core earnings†	$	9,727		$	11,111

Total average assets	$	2,953,181		$	2,639,335
Adjustments:
PPP loans average balance		(107,931	)		(209,506	)
Excess fed funds sold due to PPP-related borrowings		—			(8,152	)
Total average assets, adjusted†	$	2,845,250		$	2,421,677
Total average equity	$	295,076		$	265,027

PERFORMANCE RATIOS
Net earnings to average assets (annualized)		1.24	%		1.53	%
Net earnings to average equity (annualized)		12.44			15.21
Net core earnings to average assets, as adjusted (annualized)†		1.36			1.83
Net core earnings to average equity (annualized)†		13.08			16.68

PER COMMON SHARE DATA
Weighted-average common shares outstanding, basic*		12,067,769			12,113,266
Earnings per common share, basic*	$	0.77		$	0.84
Net core earnings per common share, basic*†		0.81			0.92

* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in "—Non-GAAP Financial Measures".

Net Interest Income

Net interest income, before the provision for credit losses, for the ~~three months ended September 30, 2016,~~third quarter of 2021 and 2020 was $23.6 million and $22.3 million, respectively, an increase of ~~$1.4~~$1.3 million, or ~~10.5%.~~5.8%, resulting primarily from a decrease in deposit-related interest expense of $937,000, or 41.0%, compared to the same quarter of the prior year.

(Continued)

59.

Loan yield increased from 4.59% for the third quarter of 2020 to 4.67% for the third quarter of 2021, a change of eight basis points, while the cost of interest-bearing deposits decreased from 0.63% to 0.33% during the same period, a change of 30 basis points. The increase in net interest income was comprised of a $1.7 million, or 10.6%, increase in interest income offset by a $304,000, or 11.0%, increase in interest expense. The growth in interest income was primarily attributable to a $76.7 million, or 6.3%, increase in average loans outstanding for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, and further improved by a 0.07% increase in the averageloan 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~~increased origination fee income recognized during the ~~Dallas/Fort Worth metroplex and Bryan/College Station markets. The $304,000~~

~~49.~~

increase in interest expense for the three months ended September 30, 2017 was primarily related to a $62.9 million, or 5.4%, increase in average interest-bearing deposits over the same period in 2016, and an increase in the average rate of 0.08%. 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. current quarter.

For the three months ended September 30, ~~2017,~~2021, net interest margin on a taxable equivalent basis and net interest spread were ~~3.38%~~3.40% and ~~3.13%~~3.21%, respectively, compared to ~~3.26%~~3.61% and ~~3.07%~~3.32% for the same period in ~~2016,~~2020. The decrease in net interest margin was due to a decrease in the average yield on interest-bearing deposits in other banks, which ~~reflects~~consists primarily of fed funds sold, from 0.12% in the ~~increases~~third quarter of 2020 to 0.10% in the current quarter, while the average balance increased 228.3%, or $286,500, from the prior year average balance. The decrease in average deposit rate was primarily due to continued reductions in interest ~~income discussed above relative to the increases in interest expense.~~

rates for interest-bearing deposits as market conditions have allowed.

Average Balance Sheet Amounts, Interest Earned and Yield Analysis

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

The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended September 30, ~~2017~~2021 and ~~2016,~~2020, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

~~50.~~

(Continued)

60.

For the Three Months Ended September 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⁾
$ 1,300,307
$ 15,486
4.72 % $ 1,223,611
$ 14,294
4.65 %
Securities available for sale 245,409
1,376
2.22 % 163,563
709
1.72 %
Securities held to maturity 180,737
1,088
2.39 % 196,003
1,252
2.54 %
Nonmarketable equity securities 6,541
59
3.58 % 8,816
61
2.75 %
Interest-bearing deposits in other banks 40,997
156
1.51 % 75,112
111
0.59 %
Total interest-earning assets 1,773,991
$ 18,165
4.06 % 1,667,105
$ 16,427
3.92 %
Allowance for loan losses (12,492 ) (11,843 )
Noninterest-earnings assets 145,958
140,087

Total assets $ 1,907,457
$ 1,795,349

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits $ 1,224,991
$ 2,730
0.88 % $ 1,162,060
$ 2,329
0.80 %
Advances from FHLB and fed funds purchased 50,420
157
1.24 % 93,001
97
0.41 %
Other debt —
—
— % 10,000
104
4.14 %
Subordinated debentures 13,821
164
4.71 % 20,310
217
4.25 %
Securities sold under agreements to repurchase 14,262
12
0.33 % 11,952
12
0.40 %
Total interest-bearing liabilities 1,303,494
$ 3,063
0.93 % 1,297,323
$ 2,759
0.85 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 390,043
344,721

Accrued interest and other liabilities 6,798
6,752

Total noninterest-bearing liabilities 396,841
351,473

Shareholders’ equity 207,122
146,553

Total liabilities and shareholders’ equity $ 1,907,457
$ 1,795,349

Net interest rate spread⁽²⁾
3.13 % 3.07 %
Net interest income $ 15,102
$ 13,668

Net interest margin⁽³⁾
3.38 % 3.26 %

~~(1) Includes average outstanding balances of~~


	For the Three Months Ended September 30,
	2021								2020
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
ASSETS
Interest-earning assets:
Total loans(1)	$	1,921,005		$	22,605		4.67	%	$	1,964,894		$	22,681		4.59	%
Securities available for sale		320,476			1,199		1.48			378,735			2,125		2.23
Securities held to maturity		116,527			1,054		3.59			—			—		—
Nonmarketable equity securities		10,040			268		10.59			12,332			111		3.58
Interest-bearing deposits in other banks		412,033			109		0.10			125,492			39		0.12
Total interest-earning assets		2,780,081			25,235		3.60			2,481,453			24,956		4.00
Allowance for credit losses		(31,133	)							(34,083	)
Noninterest-earning assets		204,233								191,965
Total assets	$	2,953,181							$	2,639,335
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,599,012		$	1,348		0.33	%	$	1,448,117		$	2,285		0.63	%
Advances from FHLB and fed funds purchased		48,609			107		0.87			79,580			141		0.70
Line of credit		2,641			25		3.76			4,989			44		3.51
Subordinated debentures		19,810			182		3.64			20,310			192		3.76
Securities sold under agreements to repurchase		12,171			3		0.10			20,568			15		0.29
Total interest-bearing liabilities		1,682,243			1,665		0.39			1,573,564			2,677		0.68
Noninterest-bearing liabilities:
Noninterest-bearing deposits		950,574								775,341
Accrued interest and other liabilities		25,288								25,403
Total noninterest-bearing liabilities		975,862								800,744
Shareholders’ equity		295,076								265,027
Total liabilities and shareholders’ equity	$	2,953,181							$	2,639,335
Net interest rate spread(2)							3.21	%							3.32	%
Net interest income				$	23,570							$	22,279
Net interest margin(3)							3.36	%							3.57	%
Net interest margin, fully taxable equivalent(4)							3.40	%							3.61	%

(1) Includes average outstanding balances of loans held for sale of $3.7 million and $9.3 million for the three months ended September 30, 2021 and 2020, respectively.
(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(4) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.

(Continued)

61.

To illustrate core net interest margin and remove the extraordinary impacts resulting from the PPP program, the table below excludes PPP loans ~~held for sale of $2.1 million~~ and ~~$1.7 million~~their associated fees and costs for the three months ended September 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.~~

2021:


	For the Three Months Ended September 30, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total interest-earning assets	$	2,780,081		$	25,235			3.60	%

Total loans		1,921,005			22,605			4.67
Adjustments:
PPP loans average balance and net fees(1)		(107,931	)		(1,005	)		3.69
Total loans, net of PPP effects	$	1,813,074		$	21,600			4.73	%

Total interest-earning assets, net of PPP effects†	$	2,672,150		$	24,230			3.60	%


Net interest income, fully taxable equivalent ("FTE")				$	23,848
Net interest margin, FTE								3.40	%
Net interest income, net of PPP effects†					22,843
Net interest margin, FTE, net of PPP effects†								3.39	%

† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in "—Non-GAAP Financial Measures"
(1) Interest earned consists of interest income of $270,000 and net origination fees recognized in earnings of $735,000 million for the three months ended September 30, 2021.

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

~~51.~~

For the Three Months Ended September 30, 2017 vs. 2016
Increase (Decrease)
Due to Change in Total Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest-earning assets:
Total loans $ 3,624
$ (2,432 ) $ 1,192
Securities available for sale 1,821
(1,154 ) 667
Securities held to maturity (365 ) 201
(164 )
Nonmarketable equity securities (81 ) 79
(2 )
Interest-earning deposits in other banks (515 ) 560
45
Total increase (decrease) in interest income $ 4,484
$ (2,746 ) $ 1,738

Interest-bearing liabilities:
Interest-bearing deposits $ 556
$ (155 ) $ 401
Advances from FHLB and fed funds purchased (526 ) 586
60
Other debt —
(104 ) (104 )
Subordinated debentures (305 ) 252
(53 )
Securities sold under agreements to repurchase 8
(8 ) —
Total increase (decrease) in interest expense (267 ) 571
304
Increase (decrease) in net interest income $ 4,751
$ (3,317 ) $ 1,434


	For the Three Months Ended September 30, 2021 vs. 2020
	Increase (Decrease)
	Due to Change in						Total Increase
(in thousands)	Volume			Rate			(Decrease)
Interest-earning assets:
Total loans	$	(504	)	$	428		$	(76	)
Securities available for sale		(325	)		(601	)		(926	)
Securities held to maturity		—			1,054			1,054
Nonmarketable equity securities		(21	)		178			157
Interest-earning deposits in other banks		86			(16	)		70
Total (decrease) increase in interest income	$	(764	)	$	1,043		$	279

Interest-bearing liabilities:
Interest-bearing deposits	$	238		$	(1,175	)	$	(937	)
Advances from FHLB and fed funds purchased		(54	)		20			(34	)
Line of credit		(21	)		2			(19	)
Subordinated debentures		(5	)		(5	)		(10	)
Securities sold under agreements to repurchase		(6	)		(6	)		(12	)
Total increase (decrease) in interest expense		152			(1,164	)		(1,012	)
(Decrease) increase in net interest income	$	(916	)	$	2,207		$	1,291

Provision for ~~Loan~~Credit Losses

~~The~~

There was a reverse provision for ~~loan~~credit losses of $700,000 for the three months ended September 30, ~~2017 was $800,000~~2021, compared to ~~$840,000~~a provision expense of $300,000 for the three months ended September 30, ~~2016. Net charge offs~~2020. During the second quarter of 2020, a COVID-specific qualitative factor was added to the CECL model, primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were ~~$1.0 million for~~impacted by the ~~three months ended September 30, 2017 compared to $1.3 million for the same period in 2016. Two relationships totaling approximately $700,000 were charged off~~effects of COVID-19. The COVID-19 qualitative factor was reduced during the ~~third~~current year quarter by 12.75 basis points to reflect the continued improvement of ~~2017 and one relationship totaling approximately $1.2 million was charged off~~those macroeconomic factors used to establish the initial COVID-specific qualitative factor at the onset of the pandemic. The reduction in the COVID-specific qualitative factor, along with risk grade improvements on specific loans, resulted in the reverse provision during the ~~third quarter of 2016.~~

current quarter.

(Continued)

62.

Noninterest Income

The following table presents components of noninterest income for the three months ended September 30, ~~2017~~2021 and ~~2016~~2020 and the period-over-period variations in the categories of noninterest income:

For the Three Months Ended
September 30, Increase (Decrease)
2017 2016 2017 v. 2016
(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts $ 986
$ 914
$ 72
Merchant and debit card fees 778
690
88
Fiduciary income 362
364
(2 )
Gain on sales of loans 589
486
103
Bank-owned life insurance income 116
112
4
Gain (loss) on sales of investment securities —
64
(64 )
Loan processing fee income 146
161
(15 )
Other noninterest income 725
611
114
Total noninterest income $ 3,702
$ 3,402
$ 300

~~52.~~


	For The Three Months Ended September 30,				Increase (Decrease)
(in thousands)	2021		2020		2021 vs. 2020
Noninterest income:
Service charges	$	1,003	$	717	$	286
Gain on sale of loans		1,759		2,114		(355	)
Fiduciary and custodial income		599		511		88
Bank-owned life insurance income		215		208		7
Merchant and debit card fees		1,620		1,654		(34	)
Loan processing fee income		164		181		(17	)
Warehouse lending fees		196		288		(92	)
Mortgage fee income		145		272		(127	)
Other noninterest income		748		718		30
Total noninterest income	$	6,449	$	6,663	$	(214	)

Total noninterest income ~~increased $300,000,~~decreased $214,000, or ~~8.8%~~3.2%, for the three months ended September 30, ~~2017~~2021 compared to the same period in ~~2016.~~2020. 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 $986,000 for the three months ended September 30, 2017, which increased over the same period in 2016 by $72,000, or 7.9%. 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 $778,000 for the three months ended September 30, 2017 compared to $690,000 for the same period in 2016, an increase of $88,000, or 12.8%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during 2017.

~~Gain on Sale of Loans.~~ ~~We originate long-term fixed-rate mortgage loans for resale into the secondary market. We sold 109 loans for $19.9~~$1.0 million for the three months ended September 30, ~~2017~~2021 compared to 92$717,000 for the same period in 2020, an increase of $286,000, or 39.9%. The increase was primarily due to the expiration of COVID-related fee waivers and increases in customer spending activity during the current year quarter.

Gain on Sale of Loans. We sold 123 mortgage loans for ~~$16.2~~$29.6 million for the three months ended September 30, ~~2016. Gain on sale of loans was $589,000 for the three months ended September 30, 2017, an increase of $103,000, or 21.2%,~~2021 compared to ~~$486,000~~227 mortgage loans 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 $114,000, or 18.7%, for the three months ended September 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 September 30, 2017, noninterest expense totaled $12.2 million, an increase of $686,000, or 6.0%, compared to $11.5~~$52.6 million for the three months ended September 30, ~~2016.~~2020. Gain on sale of loans was $1.8 million for the three months ended September 30, 2021, a decrease of $355,000, or 16.8%, compared to $2.1 million for the same period in 2020. The total gain on loans sold during the quarter ended September 30, 2021 consisted of $1.2 million in mortgage loans and $541,000 in SBA 7(a) loans sold during the quarter ended September 30, 2021 compared to $1.9 million and $210,000 for mortgage and SBA loans sold, respectively, during the quarter ended September 31, 2020.

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

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

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

Mortgage Fee Income. Mortgage fee income consists of lender processing fees such as underwriting fees,

administrative fees and funding fees that are collected from mortgage loans that the Bank intends to sell on the secondary

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

(Continued)

63.

Noninterest Expense

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

For the Three Months Ended
September 30, Increase (Decrease)
2017 2016 2017 v. 2016
(Dollars in thousands)
Employee compensation and benefits $ 6,729
$ 6,370
$ 359
Non-staff expenses:
Occupancy expenses 1,938
1,720
218
Amortization 258
240
18
Software and Technology 533
451
82
FDIC insurance assessment fees 162
300
(138 )
Legal and professional fees 692
481
211
Advertising and promotions 303
278
25
Telecommunication expense 128
130
(2 )
ATM and debit card expense 253
203
50
Director and committee fees 253
222
31
Other noninterest expense 917
1,085
(168 )
Total noninterest expense $ 12,166
$ 11,480
$ 686


	For The Three Months Ended September 30,				Increase (Decrease)
(in thousands)	2021		2020		2021 vs. 2020
Employee compensation and benefits	$	10,998	$	9,439	$	1,559
Non-staff expenses:
Occupancy expenses		2,738		2,597		141
Legal and professional fees		644		574		70
Software and technology		1,258		1,093		165
Amortization		253		338		(85	)
Director and committee fees		197		211		(14	)
Advertising and promotions		495		301		194
ATM and debit card expense		646		509		137
Telecommunication expense		197		231		(34	)
FDIC insurance assessment fees		214		252		(38	)
Other noninterest expense		1,647		1,213		434
Total noninterest expense	$	19,287	$	16,758	$	2,529

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

~~53.~~

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 ~~$6.7~~$11.0 million for the three months ended September 30, ~~2017,~~2021, an increase of ~~$359,000,~~$1.6 million, or ~~5.6%~~16.5%, compared to ~~$6.4~~$9.4 million for the same period in ~~2016.~~2020. The increase resulted from higher salary expense, higher insurance expense accruals due to increased claims experience, higher payroll tax expense due to larger bonuses paid in July and bonus accruals. The bonus accrual in the prior year was lower due ~~primarily~~ to an increase in per employee salaries, as well as increased health insurance expenses, benefit plan expenses and payroll taxes. As of September 30, 2017 and 2016, we had 397 and 395 full-time equivalent employees, respectively, an increase of two employees.

lower net income.

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

Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were ~~$1.9 million and $1.7 million~~$644,000 for the three months ended September 30, ~~2017 and 2016, respectively.~~2021, an increase of $70,000, or 12.2%, compared to $574,000 for the same period in 2020. The increase was primarily the result of ~~$218,000, or 12.7%, resulted primarily from additional lease expense of banking centers and an increase~~professional recruiting fees paid during the ~~quarter~~three months ended September 30, 2021, that were not paid during the same period of ~~machine and equipment servicing expenses related to automated teller machines and banking center alarm systems.~~

the prior year.

Software and Technology Fees. Software and technology fees consist of fees paid to third parties for support of software and technology products. Software support fee expense was ~~$533,000~~$1.3 million for the three months ended September 30, ~~2017, compared to $451,000 for the same period in 2016, an increase of $82,000, or 18.2%. The increase resulted primarily from general increases in support and technology contract costs.~~

~~FDIC Insurance Assessment Fees.~~ FDIC assessment fees were $162,000 and $300,000 for the three months ended September 30, 2017 and 2016, respectively. The decrease of $138,000, or 46.0%, 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.

~~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 decreased to $917,000 for the three months ended September 30, 2017,2021, compared to $1.1 million for the same period in ~~2016, a decrease~~2020, an increase of ~~$168,000,~~$165,000, or ~~15.48%~~15.1%. The ~~decrease~~increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities, upgrade cybersecurity monitoring and tools, and improve connectivity to support remote working and other technology capabilities.

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

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

(Continued)

64.

Other. Other noninterest expense increased $434,000, or 35.8%, from $1.2 million for the three months ended September 30, 2020 to $1.6 million for the three months ended September 30, 2021. The increase was primarily due to ~~reductions in office and computer supplies, account promotion~~a one-time expense ~~and loan and filing expenses, quarter-over-quarter, partially offset by an increase in liability insurance expense.~~

of $434,000 to terminate two swap agreements associated with our trust preferred securities.

Income Tax Expense

For the three months ended September 30, ~~2017 and 2016,~~2021, income tax expense totaled ~~$1.7~~$2.2 million, ~~and $1.4~~in contrast to a tax benefit of $2.4 million ~~respectively. Our~~received in the same period of 2020. The effective tax rates for the three months ended September 30, ~~2017~~2021 and ~~2016,~~2020 were ~~29.10%~~19.06% and ~~29.05%~~18.82%, respectively.

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

(Continued)

65.

Discussion and Analysis of Financial Condition as of September 30, ~~2017~~

2021

Assets

Our total assets increased ~~$95.7~~$227.4 million, or ~~5.2%~~8.3%, from ~~$1.8~~$2.74 billion as of December 31, ~~2016~~2020 to ~~$1.9~~$2.97 billion as of September 30, ~~2017.~~2021. Our asset growth was primarily due to increases in ~~our loan~~cash and cash equivalents of $57.1 million, total securities ~~portfolios,~~of $62.0 million and gross loans of $104.1 million. The increase in cash and cash equivalents is due to a $127.7 million increase in federal funds sold, partially offset by decreases in interest-bearing cash deposits and due from balances of $57.5 million and $13.1 million, respectively. The increase in loans resulted largely from our participation in the PPP2 loan program, as well as organic loan growth, and the increase in cash and ~~other assets.~~

cash equivalents resulted largely from increases in deposit balances that resulted from government stimulus payments, PPP2 loan proceeds and general changes in consumer spending and saving habits.

Loan Portfolio

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

Our loan portfolio is the largest category of our earning assets. As of September 30, ~~2017,~~2021, total loans held for investment were ~~$1.31~~$1.97 billion, an increase of ~~$62.2~~$104.1 million, or ~~5.0%~~5.6%, from the December 31, ~~2016~~2020 balance of ~~$1.25~~$1.87 billion. In addition to these amounts, ~~$3.4~~$1.9 million and ~~$2.6~~$5.5 million in loans were classified as held for sale as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.

~~54.~~

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

Total loans, excluding those held for sale, as a percentage of deposits, were ~~80.8%~~76.9% and ~~79.0%~~81.6% as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively. Total loans, excluding those held for sale, as a percentage of total assets, were ~~67.9%~~66.4% and 68.1% as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.

The following table summarizes our loan portfolio by type of loan and dollar change and percentage change from December 31, ~~2016~~2020 to September 30, ~~2017:~~

As of September 30, 2017 As of December 31, 2016 Dollar Change Percent Change
(Dollars in thousands)
Commercial and industrial $ 192,663
$ 223,997
$ (31,334 ) (13.99 )%
Real estate:
Construction and development 201,067
129,366
71,701
55.42 %
Commercial real estate 393,314
367,656
25,658
6.98 %
Farmland 54,349
62,362
(8,013 ) (12.85 )%
1-4 family residential 365,889
362,952
2,937
0.81 %
Multi-family residential 23,235
26,079
(2,844 ) (10.91 )%
Consumer and overdrafts 52,409
53,822
(1,413 ) (2.63 )%
Agricultural 24,449
18,901
5,548
29.35 %
Total loans held for investment $ 1,307,375
$ 1,245,135
$ 62,240
5.00 %

Total loans held for sale $ 3,400
$ 2,563
$ 837
32.66 %

2021:


(in thousands)	As of September 30, 2021		As of December 31, 2020		Increase (Decrease)			Percent Change
Commercial and industrial	$	380,470	$	445,771	$	(65,301	)		(14.65	%)
Real estate:
Construction and development		309,746		270,407		39,339			14.55	%
Commercial real estate		633,353		594,216		39,137			6.59	%
Farmland		135,413		78,508		56,905			72.48	%
1-4 family residential		403,403		389,096		14,307			3.68	%
Multi-family residential		40,810		21,701		19,109			88.06	%
Consumer and overdrafts		53,487		51,386		2,101			4.09	%
Agricultural		14,199		15,734		(1,535	)		(9.76	%)
Total loans held for investment	$	1,970,881	$	1,866,819	$	104,062			5.57	%

Total loans held for sale	$	1,903	$	5,542	$	(3,639	)		(65.66	%)

Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may

(Continued)

66.

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

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

~~We had $10.2 million in~~

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

assets included three SBA 7(a), partially guaranteed (75%) loans that were acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of September 30, ~~2017, compared~~2020. During the first quarter of 2021, one of these loans was resolved when the underlying collateral, a hotel, was sold to ~~$9.6 million as of December 31, 2016. We had $5.8 million~~a third party. The bank charged off $475,000 in nonperforming loans as of September 30, 2017, compared to $4.4 million as of December 31, 2016. The $1.3 million, or 30.5%, increase in our nonperforming (nonaccrual) loans from December 31, 2016 to September 30, 2017 primarily relates to an increase in nonaccrual loans in our 1-4 family residential portfolio of $1.0 million,connection with the sale, all of which ~~$612,000 is related~~had previously been specifically reserved within the allowance for credit losses, or ACL. The other two loans, both to one borrower and ~~several loans~~collateralized by the same hotel, were resolved through a bankruptcy judgment during the first quarter of 2021 that ~~are~~allows the borrower to adequately service their debt coverage. The bankruptcy order resulted in a charge-off of $270,000, which had previously been fully reserved in the ~~process of foreclosure. We also had an increase in our nonaccrual commercial real estate portfolio of $1.7 million, of which $1.5 million is related~~ACL. These loans were internally identified as problem assets prior to ~~two borrowers. The increase in nonaccrual loans was partially offset by a decrease in our construction~~COVID-19 and ~~development nonaccrual portfolio, all of which was attributable to one borrower that was returned to accrual status in accordance with our loan policy.~~

~~55.~~

were properly reserved.

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

September 30, 2017 December 31, 2016
(Dollars in thousands)
Nonaccrual loans $ 5,755
$ 4,409
Accruing loans 90 or more days past due —
—
Total nonperforming loans 5,755
4,409
Other real estate owned:
Commercial real estate, construction and development, and farmland 1,003
1,074
Residential real estate 926
618
Total other real estate owned 1,929
1,692
Repossessed assets owned 2,479
3,530
Total other assets owned 4,408
5,222
Total nonperforming assets $ 10,163
$ 9,631
Restructured loans-nonaccrual $ —
$ 43
Restructured loans-accruing 316
462
Ratio of nonperforming loans to total loans⁽¹⁾⁽²⁾
0.44 % 0.35 %
Ratio of nonperforming assets to total assets 0.53 % 0.53 %

~~(1) Excludes loans held for sale of $3.4 million and $2.6 million as of September 30, 2017and December 31, 2016, respectively.~~

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


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

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

The following table presents nonaccrual loans by category as of:

September 30, 2017 December 31, 2016
(Dollars in thousands)
Nonaccrual loans by category:
Real estate:
Construction and development $ —
$ 1,825
Commercial real estate 2,113
415
Farmland 162
176
1-4 family residential 2,716
1,699
Multi-family residential 228
5
Commercial and industrial 57
82
Consumer 164
192
Agricultural 315
15
Total $ 5,755
$ 4,409


(in thousands)	September 30, 2021		December 31, 2020
Commercial and industrial	$	39	$	27
Real estate:
Construction and development		230		—
Commercial real estate		387		10,604
Farmland		137		115
1-4 family residential		2,165		1,667
Consumer and overdrafts		145		212
Agricultural		32		80
Total	$	3,135	$	12,705

(Continued)

67.

Potential Problem Loans

From a credit risk standpoint, we classify loans in one of five ~~categories:~~risk ratings: pass, special mention, substandard, doubtful or loss. Within the pass ~~category,~~rating, we classify loans into one of the following ~~four~~five subcategories based on perceived credit risk, including repayment capacity and collateral security: superior, excellent, good, acceptable and ~~acceptable.~~acceptable/watch. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific ~~reserve~~ACL allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the ~~short-~~

~~56.~~

~~term.~~short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating. The increase in special mention loans from December 31, 2016 to September 30, 2017 is attributable to one borrower, with an outstanding balance of $19.0 million, whose cash flow was adversely impacted by hurricane Harvey, thus was added to our special mention/watch list until the cash flow returns to normal levels. The physical collateral was not impacted and we do not expect any long term impairment or losses as a result of the hurricane for this loan.

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.

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

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

September 30, 2017
Pass Special Mention Substandard Doubtful Loss Total
(Dollars in thousands)
Real estate:
Construction and development $ 181,879
$ 19,188
$ —
$ —
$ —
$ 201,067
Commercial real estate 388,007
1,030
4,277
—
—
393,314
Farmland 53,649
413
287
—
—
54,349
1-4 family residential 357,814
3,059
5,016
—
—
365,889
Multi-family residential 21,659
1,348
228
—
—
23,235
Commercial and industrial 188,440
3,705
518
—
—
192,663
Consumer and overdrafts 51,631
362
416
—
—
52,409
Agricultural 22,525
1,147
777
—
—
24,449
Total $ 1,265,604
$ 30,252
$ 11,519
$ —
$ —
$ 1,307,375

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

~~57.~~


	September 30, 2021
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total
Commercial and industrial	$	379,732	$	117	$	582	$	—	$	—	$	39	$	380,470
Real estate:
Construction and development		307,239		1,665		612		—		—		230		309,746
Commercial real estate		579,903		9,057		44,006		—		—		387		633,353
Farmland		135,130		28		118		—		—		137		135,413
1-4 family residential		401,181		57		—		—		—		2,165		403,403
Multi-family residential		40,135		—		675		—		—		—		40,810
Consumer and overdrafts		53,332		10		—		—		—		145		53,487
Agricultural		14,059		20		88		—		—		32		14,199
Total	$	1,910,711	$	10,954	$	46,081	$	—	$	—	$	3,135	$	1,970,881

(Continued)

68.


	December 31, 2020
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total
Commercial and industrial	$	438,975	$	5,829	$	940	$	—	$	—	$	27	$	445,771
Real estate:
Construction and development		267,767		1,346		1,294		—		—		—		270,407
Commercial real estate		550,724		13,280		19,608		—		—		10,604		594,216
Farmland		78,229		35		129		—		—		115		78,508
1-4 family residential		387,261		168		—		—		—		1,667		389,096
Multi-family residential		21,701		—		—		—		—		—		21,701
Consumer and overdrafts		51,059		115		—		—		—		212		51,386
Agricultural		15,577		36		41		—		—		80		15,734
Total	$	1,811,293	$	20,809	$	22,012	$	—	$	—	$	12,705	$	1,866,819

Allowance for ~~Loan~~Credit Losses

We maintain an allowance for ~~loan~~credit losses (“ACL”) that represents management’s best estimate of the ~~loan~~appropriate level of losses and risks inherent in our ~~loan portfolio.~~applicable financial assets under the current expected credit loss model. The amount of the allowance for ~~loan~~credit losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. The determination of the amount of allowance involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to the financial statements for discussion regarding our ACL methodologies for loans held for investment and available for sale securities.

For available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings through provision for credit loss expense. As of September 30, 2021, the Company determined that all available for sale securities that experienced a decline in fair value below the amortized costs basis were due to noncredit-related factors, therefore no related ACL was recorded and there was no related provision expense recognized during the nine months ended September 30, 2021.

For held to maturity debt securities, the Company evaluates expected credit losses on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage backed securities issued by the U.S. governments, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to municipal securities, management considers 1) issuer bond ratings, 2) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, 3) internal forecasts and 4) whether or not such securities are guaranteed by the Texas Permanent School Fund or pre-refunded by the issuers. As of September 30, 2021, the Company determined there were no credit related concerns that warrant an ACL for the held to maturity portfolio.

In determining the ~~allowance~~ACL for ~~loan losses,~~loans held for investment, we primarily estimate losses on ~~specific loans, or groups~~segments of loans with similar risk characteristics and where the ~~probable~~potential loss can be identified and reasonably determined. For loans that do not share similar risk characteristics with our existing segments, they are evaluated individually for an ACL. Our portfolio is segmented by regulatory call report codes, with additional segments for warehouse mortgage loans, SBA loans acquired from Westbound Bank, SBA loans originated by us and SBA PPP loans. The segments are further disaggregated by internally assigned risk rating classifications. The balance of the ~~allowance for loan losses~~ACL is ~~based on internally assigned risk classifications of loans,~~determined using the current expected credit loss model, which considers historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and reasonable and supportable forecasts of the ~~estimated~~ impact of ~~current~~future economic conditions on ~~certain historical~~ loan loss rates. Please see ~~“-Critical~~“Critical Accounting ~~Policies-Allowance~~Policies - Allowance for ~~Loan Losses.~~Credit Losses.”

In connection with the review of our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:



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

(Continued)

69.

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



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



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



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

As of September 30, ~~2017,~~2021, the allowance for ~~loan~~credit losses totaled ~~$12.5~~$30.6 million, or ~~0.96%~~1.55%, of total loans, excluding those held for sale, and totaled 1.62%, excluding PPP loans and loans held for sale. As of December 31, ~~2016,~~2020, the allowance for loan losses totaled ~~$11.5~~$33.6 million, or ~~0.92%~~1.80%, of total loans, excluding those held for sale, and totaled 1.95%, excluding PPP loans and loans held for sale. The ~~increase~~decrease in ~~allowance~~the ACL of $3.0 million, or 8.9%, is due to ~~general reserves for organic loan growth, specific allocations on impaired assets and slightly higher~~COVID-specific qualitative factors established during 2020 that were reduced during the first three quarters of 2021 from 55 basis points across the loan portfolio to 14.75 basis points in ~~general allocation~~order to conservatively capture some of the improvements that have occurred to macroeconomic factors evaluated at the onset of the pandemic as part of the aforementioned COVID-specific qualitative factors, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model, offset by growth in ~~recognition~~our overall loan portfolio. Although management is cautiously optimistic about improving vaccination and hospitalization rates and economic trends, it is very likely that the economic effects of ~~certain macroeconomic trends in consumer and commercial real estate lending.~~

~~58.~~

the pandemic will continue into 2022.

(Continued)

70.

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

For the Nine Months Ended September 30, For the Year Ended December 31,
2017 2016 2016
(Dollars in thousands)
Average loans outstanding⁽¹⁾
$ 1,269,387
$ 1,158,807
$ 1,179,938
Gross loans outstanding at end of period⁽²⁾
$ 1,307,375
$ 1,229,341
$ 1,245,135
Allowance for loan losses at beginning of the period 11,484
9,263
9,263
Provision for loan losses 2,250
3,240
3,640
Charge-offs:
Real Estate:
Construction and development —
9
9
Commercial real estate 84
—
—
Farmland —
—
—
1-4 family residential 307
25
71
Multi-family residential —
—
—
Commercial and industrial 737
1,196
1,213
Consumer 230
170
269
Agriculture 4
—
—
Overdrafts 117
119
200
Total charge-offs 1,479
1,519
1,762
Recoveries:
Real Estate:
Construction and development —
4
4
Commercial real estate —
—
—
Farmland —
—
—
1-4 family residential 21
—
75
Multi-family residential —
—
—
Commercial and industrial 116
14
17
Consumer 95
103
121
Agriculture —
—
—
Overdrafts 41
61
126
Total recoveries 273
182
343
Net charge-offs 1,206
1,337
1,419
Allowance for loan losses at end of period $ 12,528
$ 11,166
$ 11,484
Ratio of allowance to end of period loans⁽²⁾
0.96 % 0.91 % 0.92 %
Ratio of net charge-offs to average loans⁽¹⁾
0.13 % 0.15 % 0.12 %

~~(1) Includes average outstanding balances~~


	As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
(dollars in thousands)	2021			2020			2020
Average loans outstanding(1)	$	1,906,989		$	1,851,209		$	1,872,914
Gross loans outstanding at end of period(2)		1,970,881			1,958,634			1,866,819
Allowance for credit losses at beginning of the period		33,619			16,202			16,202
Impact of adopting ASC 326		—			4,548			4,548
Provision for credit losses		(1,700	)		13,200			13,200
Charge offs:
Commercial and industrial		300			43			68
Real estate:
Commercial real estate		816			—			—
1-4 family residential		—			59			68
Consumer		113			136			155
Agriculture		—			18			18
Overdrafts		173			128			234
Total charge-offs		1,402			384			543
Recoveries:
Commercial and industrial		15			93			101
Real estate:
Construction and development		1			—			—
Commercial real estate		11			1			1
1-4 family residential		—			2			2
Consumer		32			30			37
Agriculture		—			20			20
Overdrafts		45			45			51
Total recoveries		104			191			212
Net charge-offs (recoveries)		1,298			193			331
Allowance for credit losses at end of period	$	30,621		$	33,757		$	33,619
Ratio of allowance to end of period loans(2)		1.55	%		1.72	%		1.80	%
Ratio of net charge-offs (recoveries) to average loans(1)		0.07	%		0.01	%		0.02	%

(1) Includes average outstanding balances of loans held for sale of $3.7 million, $6.1 million and $6.0 million for the nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
(2) Excludes loans held for sale of $1.9 million, $9.1 million and $5.5 million for the nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.

The ratio of ~~loans held for sale of $2.8 million, $3.0 million and $3.0 million for the nine months ended September 30, 2017 and 2016 and for the year ended December 31, 2016, respectively.~~

~~(2) Excludes loans held for sale of $3.4 million, $3.1 million and $2.6 million for the nine months ended September 30, 2017 and 2016 and for the year ended December 31, 2016, respectively.~~

~~The~~ allowance for ~~loan~~credit losses to non-performing loans ~~has decreased~~increased from ~~260.5%~~264.6% at December 31, ~~2016~~2020 to ~~217.7%~~976.7% at September 30, ~~2017.~~2021. Non-performing loans ~~increased~~decreased to ~~$5.8~~$3.1 million at September 30, ~~2017~~2021, compared to ~~$4.4~~$12.7 million at December 31, ~~2016, which is attributable primarily~~2020 due to ~~an increases~~the resolution of three Small Business Administration ("SBA") 7(a) partially guaranteed (75%) problem loans that were acquired in ~~nonaccrual loans in our 1-4 family residential and commercial real estate portfolios, and partially offset by a decrease in nonaccrual loans in our construction and development portfolio.~~

~~59.~~

the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of December 31, 2020.

Although we believe that we have established our allowance for ~~loan~~credit losses in accordance with GAAP and that the allowance for ~~loan~~credit losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for ~~loan~~credit 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~~credit losses could be required.

(Continued)

71.

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

As of September 30, 2017 As of December 31, 2016
Amount Percent to Total Loans Amount Percent to Total Loans
(Dollars in thousands)
Real estate:
Construction and development $ 1,923
0.15 % $ 1,161
0.09 %
Commercial real estate 4,199
0.32 % 3,264
0.26 %
Farmland 458
0.04 % 482
0.04 %
1-4 family residential 3,089
0.24 % 3,960
0.32 %
Multi-family residential 266
0.02 % 281
0.02 %
Total real estate 9,935
0.77 % 9,148
0.73 %
Commercial and industrial 1,573
0.12 % 1,592
0.13 %
Consumer 613
0.05 % 591
0.05 %
Agricultural 407
0.03 % 153
0.01 %
Total allowance for loan losses $ 12,528
0.97 % $ 11,484
0.92 %


	As of September 30, 2021					As of December 31, 2020
(in thousands)	Amount		Percent to Total Loans			Amount		Percent to Total Loans
Commercial and industrial	$	3,480		11.36	%	$	4,033		12.00	%
Real estate:
Construction and development		3,962		12.94	%		4,735		14.08	%
Commercial real estate		14,305		46.72	%		15,780		46.94	%
Farmland		1,585		5.18	%		1,220		3.63	%
1-4 family residential		5,754		18.79	%		6,313		18.78	%
Multi-family residential		576		1.88	%		363		1.08	%
Total real estate		26,182		85.51	%		28,411		84.51	%
Consumer and overdrafts		793		2.59	%		936		2.78	%
Agricultural		166		0.54	%		239		0.71	%
Total allowance for credit losses	$	30,621		100.00	%	$	33,619		100.00	%

Securities

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of September 30, ~~2017,~~2021, the carrying amount of our investment securities totaled ~~$417.2~~$442.7 million, an increase of ~~$70.9~~$62.0 million, or ~~20.5%~~16.3%, compared to ~~$346.3~~$380.8 million as of December 31, ~~2016.~~2020. Investment securities represented ~~21.7%~~14.9% and ~~18.9%~~13.9% of total assets as of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.

Our investment portfolio consists of securities classified as available for sale and held to maturity. As of September 30, 2017, securities available for sale and securities held to maturity totaled $238.1 million and $179.1 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 42.9% of our investment portfolio as of September 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.

~~60.~~

As of September 30, 2021, the Company determined that all available for sale securities that experienced a decline in fair value below their amortized cost basis were impacted by noncredit-related factors and that securities held to maturity have not experienced credit deterioration; therefore the Company carried no ACL with respect to our securities portfolio at September 30, 2021.

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

As of September 30, 2017
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(Dollars in thousands)
Corporate bonds $ 18,842
$ 178
$ —
$ 19,020
Municipal securities 154,762
2,696
821
156,637
Mortgage-backed securities 115,138
298
929
114,507
Collateralized mortgage obligations 129,331
674
885
129,120
Total $ 418,073
$ 3,846
$ 2,635
$ 419,284

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


	As of September 30, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies	$	10,013	$	46	$	—	$	10,059
Corporate bonds		34,105		1,233		92		35,246
Municipal securities		170,634		9,139		147		179,626
Mortgage-backed securities		160,888		2,143		884		162,147
Collateralized mortgage obligations		63,272		1,405		54		64,623
Total	$	438,912	$	13,966	$	1,177	$	451,701

(Continued)

72.


	As of December 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate bonds	$	29,608	$	1,382	$	8	$	30,982
Municipal securities		164,668		11,036		—		175,704
Mortgage-backed securities		104,210		3,041		87		107,164
Collateralized mortgage obligations		64,611		2,335		1		66,945
Total	$	363,097	$	17,794	$	96	$	380,795

We do not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, structured investment vehicles or second lien elements in our investment portfolio. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A ~~mortgages. The Bank owns no~~mortgages, non-U.S. agency mortgage-backed securities ~~and only one non-U.S. agency~~or corporate collateralized mortgage ~~obligation, which is categorized as held to maturity and had a $1.5 million carrying value as of September 30, 2017.~~

Our management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In 2013, we recognized OTTI with respect to the non-U.S. agency corporate collateralized mortgage obligation that we hold. As of September 30, 2017, $461,307 of OTTI was recorded.

obligations.

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

As of September 30, 2017
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
(Dollars in thousands)
Corporate bonds $ —
— % $ 1,096
2.59 % $ 17,924
2.93 % $ —
— % $ 19,020
2.91 %
Municipal securities 2,683
2.27 % 5,126
3.56 % 43,228
3.63 % 103,420
3.63 % $ 154,457
3.60 %
Mortgage-backed securities —
— % 58,496
2.25 % 55,799
2.54 % —
— % $ 114,295
2.39 %
Collateralized mortgage obligations 381
— % 84,374
2.55 % 44,687
2.67 % —
2.69 % $ 129,442
2.61 %
Total $ 3,064
2.27 % $ 149,092
2.46 % $ 161,638
2.89 % $ 103,420
3.48 % $ 417,214
2.92 %

~~61.~~

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


	As of September 30, 2021
	Within One Year			After One Year but Within Five Years			After Five Years but Within Ten Years			After Ten Years			Total
(dollars in thousands)	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total		Yield
U.S. government agencies	$	—	—	$	—	—	$	10,059	1.35%	$	—	—	$	10,059	1.35%
Corporate bonds		—	—		15,430	3.21%		19,816	4.04%		—	—		35,246	3.68%
Municipal securities		4,802	3.86%		48,612	3.23%		50,369	3.35%		66,851	3.23%		170,634	3.28%
Mortgage-backed securities		98	3.39%		92,073	1.56%		53,818	1.71%		16,195	1.93%		162,184	1.65%
Collateralized mortgage obligations		2,310	3.09%		55,350	2.26%		—	—		6,963	1.02%		64,623	2.15%
Total	$	7,210	3.61%	$	211,465	2.24%	$	134,062	2.62%	$	90,009	2.80%	$	442,746	2.49%


	As of December 31, 2020
	Within One Year			After One Year but Within Five Years			After Five Years but Within Ten Years			After Ten Years			Total
(dollars in thousands)	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total		Yield
Corporate bonds	$	—	—	$	18,839	2.96%	$	12,143	4.31%	$	—	—	$	30,982	3.49%
Municipal securities		4,154	2.84%		35,849	3.13%		51,823	3.39%		83,878	3.23%		175,704	3.25%
Mortgage-backed securities		170	3.37%		74,450	2.04%		22,104	2.05%		10,440	1.81%		107,164	2.02%
Collateralized mortgage obligations		9,641	1.49%		57,304	2.74%		—	—		—	—		66,945	2.56%
Total	$	13,965	1.91%	$	186,442	2.56%	$	86,070	3.17%	$	94,318	3.07%	$	380,795	2.80%

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities typically cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and, consequently, the average life of this security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was ~~7.42~~6.45 years with an estimated effective duration of ~~4.63~~3.71 years as of September 30, ~~2017.~~

2021.

As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively, we did not own securities of any one issuer, other than the U.S. government and its agencies, for which aggregate adjusted cost exceeded 10.0% of the consolidated shareholders’ equity.

(Continued)

73.

The average yield of our securities portfolio was ~~2.92%~~2.49% as of September 30, ~~2017 compared to 2.97%~~2021, down from 2.80% as of December 31, ~~2016.~~2020. The ~~decrease~~decline in average yield ~~as of September 30, 2017, compared to December 31, 2016, was~~resulted primarily ~~due to purchases of new mortgage-backed~~from decreases in yields on mortgage backed securities and collateralized mortgage obligations ~~which typically have a lower yield than do the~~of 2.02% and 2.56% at December 31, 2020, respectively, to 1.65% and 2.15% at September 30, 2021, respectively. As of September 30, 2021, municipal securities ~~in our portfolio. Municipal~~and mortgage-backed securities ~~decreased slightly from $156.6 million at a yield~~comprised 39.8% and 35.9% of ~~3.58%, as~~the portfolio, respectively. As of December 31, ~~2016, to $154.5 million at a yield of 3.60% as of September 30, 2017, however,~~2020, municipal securities ~~represent only 37.0%~~and mortgage-backed securities comprised 46.1% and 28.1% of the ~~total investment~~ portfolio, ~~as September 30, 2017, compared to 45.2% of the total investment portfolio as of 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 September 30, ~~2017~~2021 were ~~$1.62~~$2.56 billion, an increase of ~~$40.5~~$276.7 million, or ~~2.6%~~12.1%, compared to ~~$1.58~~$2.29 billion as of December 31, ~~2016.~~

~~62.~~

2020. The majority of the deposit balance increase was due to the deposit of government stimulus payments and PPP funds into demand and money market accounts at the Bank, as well as apparent changes in depositor spending habits resulting from economic and other uncertainties due to COVID-19.

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

For the Nine Months Ended September 30, 2017 For the Year Ended December 31, 2016 Dollar Change Percent Change
(Dollars in thousands)
Now and interest-bearing demand accounts $ 264,502
$ 278,521
$ (14,019 ) (5.03 )%
Savings accounts 64,705
59,961
4,744
7.91 %
Money market accounts 589,763
482,089
107,674
22.33 %
Certificates and other time deposits 324,566
354,949
(30,383 ) (8.56 )%
Total interest-bearing deposits 1,243,536
1,175,520
68,016
5.79 %
Noninterest-bearing demand accounts 375,655
340,240
35,415
10.41 %
Total deposits $ 1,619,191
$ 1,515,760
$ 103,431
6.82 %


(dollars in thousands)	For the Nine Months Ended September 30, 2021		For the Year Ended December 31, 2020		Increase (Decrease) ($)			Increase (Decrease) (%)
NOW and interest-bearing demand accounts	$	361,445	$	293,111	$	68,334			23.31	%
Savings accounts		116,604		87,092		29,512			33.89	%
Money market accounts		757,472		642,239		115,233			17.94	%
Certificates and other time deposits		358,698		445,911		(87,213	)		(19.56	%)
Total interest-bearing deposits		1,594,219		1,468,353		125,866			8.57	%
Noninterest-bearing demand accounts		892,260		696,454		195,806			28.11	%
Total deposits	$	2,486,479	$	2,164,807	$	321,672			14.86	%

The aggregate amount of certificates and other time deposits in denominations of $100,000 or more as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020 was ~~$190.4~~$236.4 million and ~~$218.6~~$266.3 million, respectively.

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

As of September 30, 2017
Amount Weighted Average Interest Rate
(Dollars in thousands)
Under 3 months $ 41,718
0.95 %
3 to 6 months 42,231
1.02 %
6 to 12 months 61,233
1.04 %
12 to 24 months 24,091
1.24 %
24 to 36 months 4,574
1.49 %
36 to 48 months 11,936
1.56 %
Over 48 months 4,638
1.63 %
Total $ 190,421
1.10 %


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

Borrowings

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

(Continued)

74.

Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, total borrowing capacity of ~~$471.4~~$570.4 million and ~~$400.4~~$476.5 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within 5three years. As of September 30, ~~2017,~~2021, approximately ~~$1.0~~$1.40 billion in real estate loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to ~~fund certain fixed~~hedge interest rate ~~loans in our portfolio.~~ risk.

The following table presents our FHLB borrowings by maturity and weighted average rate as of September 30, ~~2017:~~

Balance Weighted Average Rate
(Dollars in thousands)
Less than 90 days $ 20,000
1.17 %
90 days to less than one year 25,000
1.12 %
Three to five years 20,157
1.11 %
Total $ 65,157
1.13 %

~~63.~~

2021:


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

Federal Reserve Bank of Dallas. The Federal Reserve Bank of Dallas has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain commercial and industrial and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As of September 30, ~~2017~~2021 and December 31, ~~2016, $142.0~~2020, $184.8 million and ~~$168.3~~$158.8 million, respectively, were available under this arrangement. As of September 30, ~~2017,~~2021 and December 31, 2020, approximately ~~$184.4~~$240.4 million and $214.5 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, no borrowings were outstanding under this arrangement.

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

With certain exceptions, the amount of the principal and any accrued and unpaid interest on the debentures are subordinated in right of payment to the prior payment in full of all of our senior indebtedness. The terms of the debentures are such that they qualify as Tier 1 capital under the Federal Reserve’s regulatory capital guidelines applicable to bank holding companies. Interest 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 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 Trust I Debentures is payable at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.80%. The interest is deferrable on a cumulative basis for up to five consecutive years following a suspension of dividend payments on all other capital stock. No principal payments are due until maturity for each of the debentures.

On any interest payment date on or after (1) June 15, 2012 for the DCB Trust I Debentures, (2) October 30, 2012 for the Trust II Debentures and (3) October 1, 2016 for the Trust III Debentures, and before their respective maturity dates, the debentures are redeemable, in whole or in part, for cash at our option on at least 30, but not more than 60, days’ notice at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.

~~Beginning in July 2015, we have from time to time~~

On May 1, 2020, the Company issued subordinated debentures. All of the debentures pay interest semi-annually and are redeemable before their maturity date at our option, with 30 days’ notice to the holder, for a cash amount equal to the principal amount and all accrued interest. In July 2015, we issued $4.0$10.0 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 were repaid~~have stated maturity dates between November 1, 2020 and November 1, 2024, and bear interest at fixed annual

(Continued)

75.

rates between 1.00% and 4.00%. The Company pays interest semi-annually on May 1st and November 1st in ~~May 2017 with a portion~~arrears during the term of the ~~proceeds~~debentures. $500,000 matured in November of ~~our initial public offering~~2020 and ~~a $500,000 par value debenture, which carried a rate~~$9.5 million remains as of ~~2.5%, matured and was repaid~~September 30, 2021. The debentures are redeemable by the Company at its option, in ~~July 2017.~~whole in or part, at any time on or before the due date of any debenture. The ~~remaining $500,000 debenture has a rate of 4.0% and matures in January 2019. In December 2015, we issued $5.0 million in debentures, of which $2.5 million were issued~~redemption price is equal to ~~directors and other related parties. In May 2017, $2.0 million~~100% of the ~~$2.5 million of debentures issued to related parties were repaid with a portion~~face amount of the proceeds of our initial public offering. The remaining $3.0 million in debentures were issued in the principal amount of $500,000 each with rates ranging from 3.00% to 5.00% depending on maturity dates, which range from July 1, 2018 to July 1, 2020.

debenture redeemed, plus all accrued but unpaid interest.

Other Borrowings. We have historically used a line of credit with a correspondent bank as a source of funding for working capital needs, the payment of dividends when there is a temporary timing difference in cash flows, and repurchases of equity securities. ~~As of December 31, 2016,~~In March 2017, we ~~had a $15.0 million~~entered into an unsecured revolving line of credit for $25.0 million, and ~~$10.0 million amortizing note with our correspondent bank. In March 2017,~~ we ~~renegotiated the loan agreement such~~renewed that ~~the outstanding balance of our revolving~~ line of credit ~~and amortizing note was converted to a $25.0 million unsecured~~

~~64.~~

~~revolving line of credit.~~in March 2021. The line of credit bears interest at the prime rate ~~plus 0.50%~~(3.25% as of September 30, 2021) subject to a floor of 3.50%, 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 public offering to repay the outstanding balance of the revolving line of credit. Therefore, as~~2022. As of September 30, ~~2017,~~2021, 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.~~events, such as COVID-19. For the nine months ended September 30, ~~2017~~2021 and the year ended December 31, ~~2016,~~2020, liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Although access to purchased funds from correspondent banks and overnight or longer term advances from the FHLB and the Federal Reserve Bank of Dallas are available, and have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, we maintained ~~three~~two federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate ~~$70~~$60.0 million in federal funds. There were no funds under these lines of credit outstanding as of September 30, ~~2017~~2021 and December 31, ~~2016.~~2020. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above in “Other Borrowings”provides an additional source of liquidity.

(Continued)

76.

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~~$2.89 billion for the nine months ended September 30, ~~2017~~2021 and ~~$1.8~~$2.57 billion for the year ended December 31, ~~2016.~~

~~65.~~

For the Nine Months Ended For the Year Ended
September 30, 2017 December 31, 2016
Sources of Funds:
Deposits:
Noninterest-bearing 19.95 % 19.15 %
Interest-bearing 66.03 % 66.16 %
Federal funds purchased — % 0.01 %
Advances from FHLB 2.21 % 3.53 %
Other debt 0.48 % 0.74 %
Subordinated denentures 0.88 % 1.14 %
Securities sold under agreements to repurchase 0.69 % 0.73 %
Accrued interest and other liabilities 0.34 % 0.36 %
Shareholders’ equity 9.42 % 8.18 %
Total 100.00 % 100.00 %

Uses of Funds:
Loans 66.76 % 65.80 %
Securities available for sale 11.52 % 11.17 %
Securities held to maturity 9.78 % 10.29 %
Nonmarketable equity securities 0.37 % 0.48 %
Federal funds sold 2.61 % 2.96 %
Interest-bearing deposits in other banks 1.26 % 1.44 %
Other noninterest-earning assets 7.70 % 7.86 %
Total 100.00 % 100.00 %

Average noninterest-bearing deposits to average deposits 23.20 % 22.45 %
Average loans to average deposits 78.40 % 77.84 %

2020.


	For the Nine Months Ended September 30, 2021			For the Year Ended December 31, 2020
Sources of Funds:
Deposits:
Noninterest-bearing		30.88	%		27.09	%
Interest-bearing		55.17	%		57.11	%
Advances from FHLB		1.72	%		2.95	%
Line of credit		0.23	%		0.26	%
Subordinated debentures		0.69	%		0.67	%
Securities sold under agreements to repurchase		0.56	%		0.70	%
Accrued interest and other liabilities		0.85	%		0.96	%
Shareholders’ equity		9.90	%		10.26	%
Total		100.00	%		100.00	%

Uses of Funds:
Loans		64.87	%		71.72	%
Securities available for sale		12.90	%		13.17	%
Securities held to maturity		1.36	%		1.40	%
Nonmarketable equity securities		0.35	%		0.42	%
Federal funds sold		12.62	%		4.82	%
Interest-bearing deposits in other banks		0.92	%		5.70	%
Other noninterest-earning assets		6.98	%		2.77	%
Total		100.00	%		100.00	%

Average noninterest-bearing deposits to average deposits		35.88	%		32.17	%
Average loans to average deposits		76.69	%		86.52	%

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 ~~$110.6~~$55.8 million, or ~~9.5%~~3.0%, for the nine months ended September 30, ~~2017~~2021 compared to the same period in ~~2016.~~2020, while our average deposits increased $347.7 million, or 16.3%, for the same time periods. We predominantly invest excess deposits in overnight deposits with our correspondent banks, federal funds sold, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth.

As of September 30, ~~2017,~~2021, we had ~~$339.9~~$392.3 million in outstanding commitments to extend credit and ~~$9.3~~$9.9 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, ~~2016,~~2020, we had ~~$297.6~~$324.3 million in outstanding commitments to extend credit and ~~$8.9~~$8.5 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, 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.nature. As of September 30, ~~2017,~~2021, we had cash and cash equivalents of ~~$95.1~~$408.9 million, compared to ~~$127.5~~$351.8 million as of December 31, ~~2016.~~2020. The ~~decrease~~increase was primarily due to ~~a decrease~~an increase in federal funds sold of ~~$26.4~~$127.7 million, offset by a decrease in interest-bearing deposits held at other banks of $57.5 million.

~~66.~~

Capital Resources

Total shareholders’ equity increased to ~~$207.3~~$297.4 million as of September 30, ~~2017,~~2021, compared to ~~$141.9~~$272.6 million as of December 31, ~~2016 (including KSOP-owned shares),~~2020, an increase of ~~$65.3~~$24.8 million, or ~~46.0%~~9.1%. The increase from December 31, ~~2016~~2020 was primarily the result of net earnings, partially offset by a decrease in other comprehensive income and payment of dividends. The Company also issued a 10.0% stock dividend in the ~~issuance~~first quarter of ~~new~~2021 that resulted in an additional 1,093,932 shares of common stock in connection with our initial public offering in May 2017, as well as $11.6 million in net earnings for the nine months ended September 30, 2017 and the decrease in accumulated other comprehensive loss of $1.6 million, related primarily to increased value in the unrealized gains on securities held for sale and partially offset by the payment of dividends of $4.0 million.

issued.

(Continued)

77.

Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to certain regulatory capital requirements at the bank holding company and bank levels. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, 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,~~learn about the economic impacts of COVID-19, our regulatory capital levels may decrease depending on our level of ~~earnings.~~earnings and provisions for credit losses. However, we expect to closely monitor our loan portfolio, operating expenses and ~~control our growth~~overall capital levels 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:

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

  Total capital (to risk weighted assets) $ 213,905
14.62 % $ 149,468
10.86 %
  Tier 1 capital (to risk weighted assets) 201,377
13.76 % 137,984
10.03 %
  Tier 1 capital (to average assets) 201,377
10.68 % 137,984
7.71 %
  Common equity tier 1 risk-based capital 191,067
13.06 % 127,674
9.28 %

Guaranty Bank & Trust

  Total capital (to risk weighted assets) $ 202,722
13.85 % $ 173,528
12.63 %
  Tier 1 capital (to risk weighted assets) 190,194
13.00 % 162,044
11.79 %
  Tier 1 capital (to average assets) 190,194
10.08 % 162,044
9.06 %
  Common equity tier 1 risk-based capital 190,195
13.00 % 162,044
11.79 %


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

Total capital (to risk weighted assets)	$	289,390		14.13	%	$	263,144		13.20	%
Tier 1 capital (to risk weighted assets)		263,721		12.87	%		238,115		11.94	%
Tier 1 capital (to average assets)		263,721		9.06	%		238,115		9.13	%
Common equity tier 1 risk-based capital		253,411		12.37	%		227,805		11.43	%

Guaranty Bank & Trust, N.A.

Total capital (to risk weighted assets)	$	301,528		14.71	%	$	285,490		14.32	%
Tier 1 capital (to risk weighted assets)		275,839		13.45	%		260,459		13.06	%
Tier 1 capital (to average assets)		275,839		9.48	%		260,459		9.99	%
Common equity tier 1 risk-based capital		275,839		13.45	%		260,459		13.06	%

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments as of September 30, ~~2017~~2021 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.

As of September 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
(Dollars in thousands)
Time deposits $ 232,964
$ 46,392
$ 23,726
$ —
$ 303,082
Advances from FHLB 45,000
—
20,157
—
65,157
Subordinated debentures 1,000
2,500
—
10,310
13,810
Total $ 278,964
$ 48,892
$ 43,883
$ 10,310
$ 382,049


	As of September 30, 2021
(in thousands)	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total
Time deposits	$	288,124		44,214	$	7,705	$	—	$	340,043
Advances from FHLB		41,500		6,000		—		—		47,500
Subordinated debentures		—		7,500		2,000		10,310		19,810
Operating leases		423		3,622		3,636		7,562		15,243
Total	$	330,047	$	61,336	$	13,341	$	17,872	$	422,596

Off-Balance Sheet Items

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

(Continued)

78.

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of ~~the date indicated~~September 30, 2021 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 September 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
(Dollars in thousands)
Standby and commercial letters of credit $ 7,465
$ 212
$ 91
$ 1,566
$ 9,334
Commitments to extend credit 154,305
45,252
74,833
65,482
339,872
Total $ 161,770
$ 45,464
$ 74,924
$ 67,048
$ 349,206


	As of September 30, 2021
(in thousands)	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total
Standby and commercial letters of credit	$	6,962	$	54	$	381	$	2,525	$	9,922
Commitments to extend credit		205,931		85,924		10,574		89,903		392,332
Total	$	212,893	$	85,978	$	10,955	$	92,428	$	402,254

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers.

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

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

Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management believes the credit risk of these off balance sheet items is minimal and we recorded no ACL with respect to these loan agreements as of September 30, 2021.

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.

(Continued)

79.

Our exposure to interest rate risk is managed by the asset-liability committee of the Bank, in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on

~~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 shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 15.0% for a 100 basis point shift, 20.0% for a 200 basis point shift and 30.0% for a 300 basis point shift.

The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of:

September 30, 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
+300 1.83 % (15.87%)
1.44 % (18.99%)
+200 1.92 % (7.71%)
1.42 % (9.58%)
+100 1.71 % (2.41%)
1.19 % (3.45%)
Base — % — % — % — %
-100 (0.54%)
(4.72%)
(0.29%)
(1.80%)


	September 30, 2021						December 31, 2020
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
+300		6.69	%		4.75	%		4.40	%		5.04	%
+200		4.02	%		5.14	%		2.62	%		4.45	%
+100		1.53	%		2.50	%		1.42	%		3.35	%
Base		—			—			—			—
-100		(2.32	)%		6.20	%		(1.92	)%		3.96	%

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.~~

deflation.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

(Continued)

80.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements

~~70.~~

of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Report may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Report when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share. Tangible book value per common share is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as total shareholders’ equity, 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 September 30, As of December 31,
2017 2016 2016
(Dollars in thousands, except per share data)
Tangible Common Equity
Total shareholders’ equity, including KSOP-owned shares $ 207,263
$ 148,005
$ 141,914
Adjustments:
Goodwill (18,742 ) (18,742 ) (18,742 )
Core deposit and other intangibles (2,870 ) (3,453 ) (3,308 )
Total tangible common equity $ 185,651
$ 125,810
$ 119,864
Common shares outstanding⁽¹⁾
11,058,956
8,955,476
8,751,923
Book value per common share $ 18.74
$ 16.53
$ 16.22
Tangible book value per common share $ 16.79
$ 14.05
$ 13.70

(1) Excludes the dilutive effect, if any, of 75,505, 9,581 and 8,066 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2017, September 30, 2016 and December 31, 2016, respectively.


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

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

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.

~~71.~~

(Continued)

81.

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 September 30, 2017 As of December 31, 2016
(Dollars in thousands)
Tangible Common Equity
Total shareholders’ equity, including KSOP-owned shares $ 207,263
$ 141,914
Adjustments:
Goodwill (18,742 ) (18,742 )
Core deposit and other intangibles (2,870 ) (3,308 )
Total tangible common equity $ 185,651
$ 119,864
Tangible Assets
Total assets $ 1,924,053
$ 1,828,336
Adjustments:
Goodwill (18,742 ) (18,742 )
Core deposit and other intangibles $ (2,870 ) $ (3,308 )
Total tangible assets $ 1,902,441
$ 1,806,286


(dollars in thousands)	As of September 30, 2021			As of December 31, 2020
Total tangible common equity	$	262,822		$	237,484
Tangible Assets
Total assets		2,968,268			2,740,832
Adjustments:
Goodwill		(32,160	)		(32,160	)
Core deposit intangible, net		(2,426	)		(2,999	)
Total tangible assets	$	2,933,682		$	2,705,673

Total Shareholders' Equity to Total Assets		10.02	%		9.95	%
Tangible Common Equity to Tangible Assets		8.96	%		8.78	%

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

Net Core Earnings and Net Core Earnings per Common Share


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

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

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

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


	Nine Months Ended September 30,						Three Months Ended September 30,						Three Months Ended June 30,
(dollars in thousands)	2021			2020			2021			2020			2021
Net core earnings	$	28,910		$	30,710		$	9,727		$	11,111		$	9,790
Total average assets		2,889,882			2,541,214			2,953,181			2,639,335			2,938,944
Adjustments:
PPP loans average balance		(133,309	)		(124,541	)		(107,931	)		(209,506	)		(155,417	)
Excess fed funds sold due to PPP-related borrowings		—			(30,657	)		—			(8,152	)		—
Total average assets, adjusted	$	2,756,573		$	2,386,016		$	2,845,250		$	2,421,677		$	2,783,527
Net core earnings to average assets, as adjusted		1.40			1.72			1.36			1.83			1.41
Total average equity	$	286,228		$	261,205		$	295,076		$	265,027		$	285,803
Net core earnings to average equity		13.50			15.70			13.08			16.68			13.74

(Continued)

82.

Total Interest-Earning Assets, net of PPP Effects


	For the Three Months Ended September 30, 2021									For the Nine Months Ended September 30, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total interest-earning assets	$	2,780,081		$	25,235			3.60	%	$	2,720,103		$	77,032			3.79	%

Total loans		1,921,005			22,605			4.67			1,906,989			69,664			4.88
Adjustments:
PPP loan average balance and net fees(1)		(107,931	)		(1,005	)		3.69			(133,309	)		(6,265	)		6.28
Total loans, net of PPP effects		1,813,074			21,600			4.73			1,773,680			63,399			4.78

Total interest-earning assets, net of PPP effects	$	2,672,150		$	24,230			3.60	%	$	2,586,794		$	70,767			3.66	%

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

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


(dollars in thousands)	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021			Three Months Ended June 30, 2021			Three Months Ended September 30, 2020
Net interest income	$	23,570		$	71,538		$	23,477		$	22,279
Adjustments:
PPP-related interest income		(270	)		(990	)		(385	)		(527	)
PPP-related net origination fees		(735	)		(5,275	)		(1,362	)		(549	)
PPP-related borrowings		—			—			—			3
Net interest income, net of PPP effects	$	22,565		$	65,273		$	21,730		$	21,206

Total average interest-earning assets	$	2,780,081		$	2,720,103		$	2,769,054		$	2,481,453
Total average interest-earning assets, net of PPP effects		2,672,150			2,586,794			2,613,637			2,263,795

Net interest margin(1)		3.36	%		3.52	%		3.40	%		3.57	%
Net interest margin, net of PPP effects(2)		3.35			3.37			3.33			3.73

Net interest income	$	23,570		$	71,538		$	23,477		$	22,279
Interest income tax adjustments		278			798			269			233
Net interest income, fully taxable equivalent ("FTE")	$	23,848		$	72,336		$	23,746		$	22,512
Net interest income, FTE, net of PPP effects		22,843			66,071			21,999			21,439

Net interest margin, FTE(3)		3.40			3.56			3.44			3.61
Net interest margin, FTE, net of PPP effects(4)		3.39			3.41			3.38			3.77

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

(Continued)

83.

Efficiency Ratio, Net of PPP Effects


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

Net interest income		23,570			71,538			23,477			22,279
Net interest income, net of PPP effects		22,565			65,273			21,730			21,206

Total noninterest income	$	6,449		$	18,538		$	5,970		$	6,663

Efficiency ratio(1)		64.25	%		60.28	%		60.12	%		57.90	%
Efficiency ratio, net of PPP effects(2)		66.47			65.51			64.66			60.22

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

ACL to Total Loans, Excluding PPP


(dollars in thousands)	As of September 30, 2021			As of June 30, 2021			As of September 30, 2020
Total loans	$	1,970,881		$	1,890,164		$	1,958,634
Adjustments:
PPP loans		(75,304	)		(127,390	)		(209,609	)
Total loans, excluding PPP	$	1,895,577		$	1,762,774		$	1,749,025

Allowance for credit losses	$	30,621		$	31,548		$	33,757

Allowance for credit losses / period-end loans		1.55	%		1.67	%		1.72	%
Allowance for credit losses / period-end loans. excluding PPP		1.62			1.79			1.93

Loan Yield, Net of PPP Effects


	Three Months Ended September 30, 2021									Three Months Ended June 30, 2021
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid			Average Yield/ Rate
Total loans	$	1,921,005		$	22,605			4.67	%	$	1,912,722		$	22,864			4.79	%
Adjustments:
PPP loans average balance and net fees		(107,931	)		(1,005	)		3.69			(155,417	)		(1,747	)		4.51
Total loans, net of PPP effects	$	1,813,074		$	21,600			4.73	%	$	1,757,305		$	21,117			4.82	%
Effect of removing PPP loans on loan yield								0.06	%								0.03	%


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

(Continued)

84.

Cautionary Notice Regarding Forward-Looking Statements

This Report, our other filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of section 27A of the Securities Act and section 21E of the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for ~~loan~~credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or ~~proposes~~proposed acquisitions, the future or expected effect of acquisitions on our operations, results of the operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:



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



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



risks associated with our acquisition and de novo branching strategy;



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



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



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



changes in the value of collateral securing our loans;



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



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)~~cyberattacks), an outbreak of hostilities or public health outbreaks (such as COVID-19), or other international or domestic calamities, ~~catastrophic events including storms, droughts, tornados and flooding,~~ and other matters beyond our control;

(Continued)

85.



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



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



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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

~~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 September 30, ~~2017~~2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~74.~~

(Continued)

86.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. The Company intends to defend itself vigorously against any pending or future claims and litigation.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the ~~Company~~Company’s combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect the Company’s reputation, even if resolved in ~~our~~the Company’s favor.

Item 1A.Risk Factors

In evaluating an investment in the Company’s common stock, investors should consider carefully, among other things, the risk factors previously disclosed in under the caption “Risk Factors” in the Company’s ~~IPO Prospectus filed~~Annual Report on Form 10-K for the year ended December 31, 2020, and other risks included in the Company’s filings 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 the Company’s common stock.~~SEC. The Company’s business could be harmed by any of these risks. The trading price of the Company’s common stock could decline due to any of these risks, and you may lose all or part of your investment.

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

(Continued)

87.

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

On March 13, 2020, the Company announced the adoption of a new stock repurchase program that authorized the repurchase of up to 1,000,000 shares of the Company common stock. The stock repurchase program will be effective until the earlier of March 13, 2022, or the date all shares authorized for repurchase under the program have been repurchased, unless shortened or extended by the board of directors. There were no ~~sales~~repurchases made through the third quarter 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, during the period covered by this Report, the 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 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. 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.

2021.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

~~75.~~

(Continued)

88.

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)).

~~31.1~~4.1*		Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on April 6, 2017, file number 333-217176).

		The other instruments defining the rights of the long-term debt securities of Guaranty Bancshares, Inc. and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Guaranty Bancshares, Inc. hereby agrees to furnish copies of these instruments to the SEC upon request.

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* 101.INS		~~The following materials from Guaranty Bancshares’ Quarterly Report on Form 10-Q for~~ XBRL Instance Document – the ~~quarter ended September 30, 2017, formatted~~instance document does not appear in the Interactive Data File because its 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 Changestags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in ~~Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.~~Exhibit 101)*

______________________________

* Filed with this Quarterly Report on Form 10-Q

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

~~76.~~

(Continued)

89.

SIGNATURES

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



		GUARANTY BANCSHARES, INC.
		(Registrant)


Date: November ~~13, 2017~~5, 2021		/s/ Tyson T. Abston
		Tyson T. Abston
		Chairman of the Board & Chief Executive Officer





Date: November ~~13, 2017~~5, 2021		/s/ Clifton A. Payne
		Clifton A. Payne
		Chief Financial Officer & Director

~~77.~~

90.



Texas	~~FORM 10-Q~~ 001-38087	75-1656431
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)
16475 Dallas Parkway, Suite 600 Addison, Texas		75001
(Address of Principal Executive Offices)		(Zip Code)



Title of each class	~~GUARANTY BANCSHARES, INC.~~ ~~(Exact name~~	Trading symbol	Name of ~~registrant as specified in its charter)~~

each exchange on which registered
Common Stock, par value $1.00 per share
~~Texas~~ GNTY		~~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)~~ NASDAQ Global Select Market



	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. ☒



GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)
	(Unaudited)			(Audited)
	September 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, 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	155,493			101,736
Retained earnings	64,778			57,160
Treasury stock, 862,342 and 864,352 shares at cost	(20,087		)	(20,111		)
Accumulated other comprehensive loss	(4,842		)	(6,487		)
	207,263			141,914
Less KSOP-owned shares	—			31,661

Total shareholders' equity	207,263			110,253
Total liabilities and shareholders' equity	$	1,924,053		$	1,828,336


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


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



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




		~~Page~~
PART I — FINANCIAL INFORMATION				Page

Item 1.		Financial Statements – (Unaudited)	4	3
		Consolidated Balance Sheets as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020	4	3
		Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	6	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	7	5
		Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	8	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	9	8
		Notes to Consolidated Financial Statements	11	10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	40	45
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	74	86
Item 4.		Controls and Procedures	74	86

		PART II — OTHER INFORMATION
~~Item 1.~~	~~Legal Proceedings~~	75
Item ~~1A.~~ 1.	~~Risk Factors~~	75 Legal Proceedings		87
Item 1A.		Risk Factors		87
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	75	88
Item 3.		Defaults Upon Senior Securities	75	88
Item 4.		Mine Safety Disclosures	75	88
Item 5.		Other Information	75	88
Item 6.	~~Exhibits~~	76 Exhibits		89
~~SIGNATURES~~	77
SIGNATURES				90



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Interest income
Loans, including fees	$	15,486	$	14,294	$	45,115	$	40,857
Securities
Taxable	1,545		1,038		4,257		4,298
Nontaxable	919		923		2,761		2,308
Federal funds sold and interest-bearing deposits	215		172		960		528
Total interest income	18,165		16,427		53,093		47,991

Interest expense
Deposits	2,730		2,329		7,761		6,791
FHLB advances and federal funds purchased	157		109		294		277
Subordinated debentures	164		217		559		656
Other borrowed money	12		104		337		452
Total interest expense	3,063		2,759		8,951		8,176

Net interest income	15,102		13,668		44,142		39,815
Provision for loan losses	800		840		2,250		3,240
Net interest income after provision for loan losses	14,302		12,828		41,892		36,575

Noninterest income
Service charges	986		914		2,801		2,625
Net realized gain on securities transactions	—		64		25		82
Net realized gain on sale of loans	589		486		1,490		1,231
Other income	2,127		1,938		6,184		5,664
Total noninterest income	3,702		3,402		10,500		9,602

Noninterest expense
Employee compensation and benefits	6,729		6,370		20,156		19,057
Occupancy expenses	1,938		1,720		5,552		5,196
Other expenses	3,499		3,390		10,409		10,087
Total noninterest expense	12,166		11,480		36,117		34,340

Income before income taxes	5,838		4,750		16,275		11,837
Income tax provision	1,699		1,380		4,644		3,290
Net earnings	$	4,139	$	3,370	$	11,631	$	8,547
Basic earnings per share	$	0.37	$	0.38	$	1.17	$	0.95
Diluted earnings per share	$	0.37	$	0.38	$	1.16	$	0.95



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net earnings	$	4,139		$	3,370		$	11,631		$	8,547
Other comprehensive income:
Unrealized (losses) gains on securities
Unrealized holding (losses) gains arising during the period	(264		)	(115		)	2,422			3,990
Amortization of net unrealized gains on held to maturity securities	23			48			58			98
Reclassification adjustment for net gains included in net earnings	—			(105		)	(25		)	(123		)
Tax effect	92			—			(839		)	(1,083		)
Unrealized (losses) gains on securities, net of tax	(149		)	(172		)	1,616			2,882
Unrealized holding gains (losses) arising during the period on interest rate swaps	35			34			29			(289		)
Total other comprehensive (loss) income	(114		)	(138		)	1,645			2,593
Comprehensive income	$	4,025		$	3,232		$	13,276		$	11,140



	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 Nine Months Ended September 30, 2016
Balance at December 31, 2015	$	—	$	9,616		$	101,525		$	49,654			$	(16,486	)		$	(6,573	)	$	(35,384	)	$	102,352
Net earnings	—		—			—			8,547				—				—			—			8,547
Other comprehensive income	—		—			—			—				—				2,593			—			2,593
Purchase of treasury stock	—		—			—			—				(7,261		)		—			(3,000		)	(10,261		)
Sale of treasury stock	—		—			—			—				8,557				—			—			8,557
Stock based compensation	—		—			162			—				—				—			—			162
Net change in fair value of KSOP shares	—		—			—			—				—				—			(1,539		)	(1,539		)
Dividends:
Common - $0.26 per share	—		—			—			(2,328		)		—				—			—			(2,328		)
Balance at September 30, 2016	$	—	$	9,616		$	101,687		$	55,873			$	(15,190	)		$	(3,980	)	$	(39,923	)	$	108,083

For the Nine Months Ended September 30, 2017
Balance at December 31, 2016	$	—	$	9,616		$	101,736		$	57,160			$	(20,111	)		$	(6,487	)	$	(31,661	)	$	110,253
Net earnings	—		—			—			11,631				—				—			—			11,631
Other comprehensive income	—		—			—			—				—				1,645			—			1,645
Terminated KSOP put option	—		—			—			—				—				—			34,300			34,300
Exercise of stock options	—		5			55			—				24				—			—			84
Sale of common stock	—		2,300			53,455			—				—				—			—			55,755
Stock based compensation	—		—			247			—				—				—			—			247
Net change in fair value of KSOP shares	—		—			—			—				—				—			(2,639		)	(2,639		)
Dividends:
Common - $0.39 per share	—		—			—			(4,013		)		—				—			—			(4,013		)
Balance at September 30, 2017	$	—	$	11,921	—	$	155,493	—	$	64,778		—	$	(20,087	)	—	$	(4,842	)	$	—		$	207,263


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
For the Nine Months Ended September 30, 2021
Balance at December 31, 2020	$	—	$	12,952	$	188,032		$	113,449		$	(51,419	)	$	9,629		$	272,643
Net earnings		—		—		—			30,647			—			—			30,647
Other comprehensive loss		—		—		—			—			—			(268	)		(268	)
10% stock dividend		—		1,094		34,853			(35,947	)		—			—			—
Exercise of stock options		—		48		1,065			—			—			—			1,113
Restricted stock grants		—		4		(4	)		—			—			—			—
Stock based compensation		—		—		512			—			—			—			512
Cash dividends:
Common - $0.60 per share		—		—		—			(7,239	)		—			—			(7,239	)
Balance at September 30, 2021	$	—	$	14,098	$	224,458		$	100,910		$	(51,419	)	$	9,361		$	297,408

For the Three Months Ended September 30, 2021
Balance at June 30, 2021	$	—	$	14,074	$	223,822		$	94,073		$	(51,419	)	$	7,179		$	287,729
Net earnings		—		—		—			9,253			—			—			9,253
Other comprehensive income		—		—		—			—			—			2,182			2,182
Exercise of stock options		—		20		457			—			—			—			477
Restricted stock grants		—		4		(4	)		—			—			—			0
Stock based compensation		—		—		183			—			—			—			183
Cash dividends:
Common - $0.20 per share		—		—		—			(2,416	)		—			—			(2,416	)
Balance at September 30, 2021	$	—	$	14,098	$	224,458		$	100,910		$	(51,419	)	$	9,361		$	297,408



GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities
Net earnings	$	11,631		$	8,547
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation	2,385			2,262
Amortization	782			779
Deferred taxes	(214		)	(1,228		)
Premium amortization, net of discount accretion	3,581			3,528
Net realized gain on securities transactions	(25		)	(82		)
Gain on sale of loans	(1,490		)	(1,231		)
Provision for loan losses	2,250			3,240
Origination of loans held for sale	(50,230		)	(43,146		)
Proceeds from loans held for sale	50,883			45,158
Write-down of other real estate and repossessed assets	9			107
Net loss (gain) on sale of premises, equipment, other real estate owned and other assets	111			(1,214		)
Stock based compensation	247			162
Net change in accrued interest receivable and other assets	1,680			(1,633		)
Net change in accrued interest payable and other liabilities	1,624			1,342
Net cash provided by operating activities	23,224			16,591

Cash flows from investing activities
Securities available for sale:
Purchases	(313,177		)	(26,140		)
Proceeds from sales	213,813			103,942
Proceeds from maturities and principal repayments	18,925			54,021
Securities held to maturity:
Purchases	—			(86,642		)
Proceeds from sales	923			1,866
Proceeds from maturities and principal repayments	7,497			15,121
Acquisition of Denton branch, net of cash paid	—			2,399
Net purchases of premises and equipment	(1,678		)	(634		)
Net proceeds from sale of premises, equipment, other real estate owned and other assets	1,830			2,826
Net increase in loans	(64,438		)	(168,154		)
Net cash used in investing activities	(136,305		)	(101,395		)

Cash flows from financing activities
Net change in deposits	40,511			64,536
Net change in securities sold under agreements to repurchase	2,061			(254		)
Proceeds from FHLB advances	60,000			120,178
Repayment of FHLB advances	(50,013		)	(81,346		)
Proceeds from other debt	2,000			10,000
Repayment of other debt	(20,286		)	(18,357		)
Repayments of debentures	(5,500		)	(1,000		)
Purchase of treasury stock	—			(7,261		)



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

Construction and development:		This portfolio segment includes all loans for the purpose of construction, including both business and residential structures; and real estate development loans, including non-agricultural vacant land. Credit risk inherent in this portfolio include fluctuations in property values, unemployment, and changes in the local and national economy.

Commercial real estate:		The commercial real estate portfolio segment includes all commercial loans that are secured by real estate, other than those included in the construction and development, farmland, multi-family, and 1-4 family residential segments. Risks inherent in this portfolio segment include fluctuations in property values and changes in the local and national economy impacting the sale of the finished structures.

Farmland:		The farmland portfolio includes loans that are secured by real estate that is used or usable for agricultural purposes, including land used for crops, livestock production, grazing & pastureland and timberland. This segment includes land with a 1-4 family residential structure if the value of the land exceeds the value of the residence. Risks inherent in this portfolio segment include adverse changes in climate, fluctuations in feed and cattle prices and changes in property values.

Consumer:		This portfolio segment consists of non-real estate loans to consumers. This includes secured and unsecured loans such as auto and personal loans. The risks inherent in this portfolio segment include those factors that would impact the consumer’s ability to meet their obligations under the loan. These include increases in the local unemployment rate and fluctuations in consumer and business sales.

1-4 family residential:		This portfolio segment includes loans to both commercial and consumer borrowers secured by real estate for housing units of up to 4 families. Risks inherent in this portfolio segment include increases in the local unemployment rate, changes in the local economy and factors that would impact the value of the underlying collateral, such as changes in property values.

Multi-family residential:		This portfolio segment includes loans secured by structures containing 5 or more residential housing units. Risks inherent in this portfolio segment include increases to the local unemployment rate, changes in the local economy, and factors that would impact property values.

Agricultural:		The agricultural portfolio segment includes loans to individuals and companies in the dairy and cattle industries and farmers. Loans in the segment are secured by collateral including cattle, crops and equipment. Risks inherent in this portfolio segment include adverse changes in climate and fluctuations in feed and cattle prices.


Mortgage Warehouse:		The mortgage warehouse portfolio includes loans in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30-days, typically 5-10 days before they are sold to an approved investor. These loans are consistently underwritten based on standards established by the approved investor. Risks inherent in this portfolio include borrower or mortgage originator fraud.

SBA – Acquired Loans		The SBA – acquired loans segment consists of partially SBA guaranteed loans that were acquired from Westbound Bank in June 2018. These loans are commercial real estate and commercial and industrial in nature and were underwritten with guidelines that are less conservative than our Company. Risks inherent in this portfolio include increases in interest rates, as most are variable rate loans, generally lower levels of borrower equity, less conservative underwriting guidelines, fluctuations in real estate values and changes in the local and national economy.

SBA – Originated Loans		The SBA – originated loans segment consists of loans that are partially guaranteed by the SBA and were originated and underwritten by Guaranty Bank & Trust loan officers. Risks inherent in this portfolio include increases in interest rates due to variable rate structures, generally lower levels of borrower equity or net worth, fluctuations in real estate values and changes in the local and national economy.

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


Commercial and industrial:		In assessing risk associated with commercial loans, management considers the business’s cash flow and the value of the underlying collateral to be the primary credit quality indicators.

Construction and development:		In assessing the credit quality of construction loans, management considers the ability of the borrower to make principal and interest payments in the event that they are unable to sell the completed structure to be a primary credit quality indicator. For real estate development loans, management also considers the likelihood of the successful sale of the constructed properties in the development.

Commercial real estate:		Management considers the strength of the borrower’s cash flows, changes in property values and occupancy status to be key credit quality indicators of commercial real estate loans.

Farmland:		In assessing risk associated with farmland loans, management considers the borrower’s cash flows and underlying property values to be key credit quality indicators.

Consumer:		Management considers delinquency status to be the primary credit quality indicator of consumer loans. Others include the debt to income ratio of the borrower, the borrower’s credit history, the availability of other credit to the borrower, the borrower’s past-due history, and, if applicable, the value of the underlying collateral to be primary credit quality indicators.

1-4 family residential:		Management considers delinquency status to be the primary credit quality indicator of 1-4 family residential loans. Others include changes in the local economy, changes in property values, and changes in local unemployment rates to be key credit quality indicators of the loans in the 1-4 family residential loan segment.

Multi-family residential:		Management considers changes in the local economy, changes in property values, vacancy rates and changes in local unemployment rates to be key credit quality indicators of the loans in the multifamily loan segment.

Agricultural:		In assessing risk associated with agricultural loans, management considers the borrower’s cash flows, the value of the underlying collateral and sources of secondary repayment to be primary credit quality indicators.



September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	18,842	$	178	$	—	$	19,020
Municipal securities	7,769		—		305		7,464
Mortgage-backed securities	91,801		20		863		90,958
Collateralized mortgage obligations	120,580		493		382		120,691
Total available for sale	$	238,992	$	691	$	1,550	$	238,133

Held to maturity:
Municipal securities	$	146,993	$	2,696	$	516	$	149,173
Mortgage-backed securities	23,337		278		66		23,549
Collateralized mortgage obligations	8,751		181		503		8,429
Total held to maturity	$	179,081	$	3,155	$	1,085	$	181,151



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


	Less Than 12 Months					12 Months or Longer					Total
September 30, 2021	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(92	)	$	7,678	$	0		$	0	$	(92	)	$	7,678
Mortgage-backed securities		(803	)		68,150		(44	)		3,276		(847	)		71,426
Collateralized mortgage obligations		(54	)		18,203		0			0		(54	)		18,203
Total available for sale	$	(949	)	$	94,031	$	(44	)	$	3,276	$	(993	)	$	97,307

Held to maturity:
Municipal securities	$	(147	)	$	4,381	$	0		$	0	$	(147	)	$	4,381
Mortgage-backed securities		(37	)		3,006		0			0		(37	)		3,006
Total held to maturity	$	(184	)	$	7,387	$	0		$	0	$	(184	)	$	7,387


	Available for Sale				Held to Maturity
September 30, 2021	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	0	$	0	$	4,802	$	4,868
Due after one year through five years		14,645		15,430		48,612		50,466
Due after five years through ten years		29,473		29,875		50,369		53,350
Due after ten years		0		0		66,851		70,942
Mortgage-backed securities		157,846		159,142		3,042		3,005
Collateralized mortgage obligations		63,272		64,623		0		0
Total securities	$	265,236	$	269,070	$	173,676	$	182,631


For the Nine Months Ended September 30, 2021	Commercial and industrial			Construction and development			Commercial real estate			Farmland		1-4 family residential			Multi-family residential		Consumer			Agricultural			Overdrafts			Total
Allowance for credit losses:
Beginning balance	$	4,033		$	4,735		$	15,780		$	1,220	$	6,313		$	363	$	929		$	239		$	7		$	33,619
Provision for credit losses		(268	)		(774	)		(670	)		365		(559	)		213		(61	)		(73	)		127			(1,700	)
Loans charged-off		(300	)		—			(816	)		—		—			—		(113	)		—			(173	)		(1,402	)
Recoveries		15			1			11			—		—			—		32			—			45			104
Ending balance	$	3,480		$	3,962		$	14,305		$	1,585	$	5,754		$	576	$	787		$	166		$	6		$	30,621



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
Ending balance	$	1,592		$	1,161		$	3,264	$	482	$	3,960		$	281		$	585		$	153	$	6		$	11,484
Loans:
Individually evaluated for impairment	$	231		$	1,825		$	1,196	$	258	$	2,588		$	5		$	200		$	15	$	—		$	6,318
Collectively evaluated for impairment	223,766			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



September 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	$	246	$	60	$	30	$	336	$	192,327	$	192,663	$	—
Real estate:
Construction and development	77		—		—		77		200,990		201,067		—
Commercial real estate	—		38		1,521		1,559		391,755		393,314		—
Farmland	2		—		6		8		54,341		54,349		—
1-4 family residential	2,701		838		1,894		5,433		360,456		365,889		—
Multi-family residential	—		—		228		228		23,007		23,235		—
Consumer	617		201		94		912		50,799		51,711		—
Agricultural	66		—		4		70		24,379		24,449		—
Overdrafts	—		—		—		—		698		698		—
Total	$	3,709	$	1,137	$	3,777	$	8,623	$	1,298,752	$	1,307,375	$	—



Nine Months Ended September 30, 2017	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial	1	$	34	$	15
1-4 family residential	1	11		11
Total	2	$	45	$	26



Nine Months Ended September 30, 2016	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial	1	$	90	$	90
Commercial real estate	1	796		796
1-4 family residential	2	189		189
Total	4	$	1,075	$	1,075



September 30, 2017	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	325	$	325	$	—	$	381
Real estate:
Construction and development	—		—		—		415
Commercial real estate	3,746		3,746		—		4,363
Farmland	120		120		—		106
1-4 family residential	231		231		—		1,288
Multi-family residential	228		228		—		166
Consumer	—		—		—		81
Agricultural	397		397		—		380
Subtotal	5,047		5,047		—		7,180
With allowance recorded:
Commercial and industrial	29		29		19		411
Real estate:
Construction and development	—		—		—		10
Commercial real estate	283		283		31		580
Farmland	156		156		85		122
1-4 family residential	866		866		145		867
Multi-family residential	—		—		—		26
Consumer	—		—		—		56
Agricultural	299		299		240		176
Subtotal	1,633		1,633		520		2,248
Total	$	6,680	$	6,680	$	520	$	9,428



Nine Months Ended September 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
Granted	150,598		27.64		9.62	657
Exercised	(7,033	)	11.94		4.48	141
Forfeited	(6,000	)	23.17		7.13	53
Balance, September 30, 2017	477,942		$	24.93	7.57	$	3,376

Exercisable at end of period	98,044		$	23.45	6.17	$	838



September 30, 2017:
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	8.51	$	340
$	3,000	7.505	%	3 month LIBOR plus 3.35%	October 30, 2012	5.08	$	326



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



	Actual				Minimum Required For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2017
Total capital to risk-weighted assets:
Consolidated	$	213,905	14.62	%	$	117,065	8.00	%			n/a
Bank	202,722		13.85	%	117,078		8.00	%	$	146,348	10.00	%
Tier 1 capital to risk-weighted assets:
Consolidated	201,377		13.76	%	87,799		6.00	%			n/a
Bank	190,194		13.00	%	87,809		6.00	%	117,078		8.00	%
Tier 1 capital to average assets:
Consolidated	201,377		10.68	%	75,457		4.00	%			n/a
Bank	190,194		10.08	%	75,465		4.00	%	94,331		5.00	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated	191,067		13.06	%	65,849		4.50	%			n/a
Bank	190,195		13.11	%	65,307		4.50	%	94,333		6.50	%



As of September 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	$	90,958		$	—	$	90,958		$	—
Collateralized mortgage obligations	120,691			—		120,691			—
Municipal securities	7,464			—		7,464			—
Corporate bonds	19,020			—		19,020			—
Derivative instruments	(666		)	—		(666		)	—

Assets at fair value on a nonrecurring basis:
Impaired loans	6,160			—		—			6,160
Other real estate owned	1,929			—		—			1,929



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)
Assets (liabilities) at fair value on a recurring basis:
Available for sale securities
Mortgage-backed securities	$	59,690		$	—	$	59,690		$	—
Collateralized mortgage obligations	65,133			—		65,133			—
Municipal securities	7,219			—		7,219			—
Corporate bonds	24,883			—		24,883			—
U.S. treasury securities	—			—		—			—
Derivative instruments	(695		)	—		(695		)	—

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



	September 30, 2017			December 31, 2016			September 30, 2016
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	544		$	78		$	67
Charge-offs recognized in the allowance for loan losses	(175		)	(11		)	(11		)
Fair value of foreclosed assets remeasured at initial recognition	$	369		$	67		$	56

Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	—		$	170		$	180
Write-downs included in collection and other real estate owned expense	—			(69		)	(79		)
Fair value of foreclosed assets remeasured subsequent to initial recognition	$	—		$	101		$	101



	Fair value measurements as of September 30, 2017 using:
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Financial assets:
Cash, due from banks, federal funds sold and interest-bearing deposits	$	95,061	$	67,986	$	27,075	$	—	$	95,061
Marketable securities held to maturity	179,081		—		181,151		—		181,151
Loans, net	1,294,847		—		—		1,293,992		1,293,992
Accrued interest receivable	6,440		—		6,440		—		6,440
Nonmarketable equity securities	9,379		—		9,379		—		9,379
Cash surrender value of life insurance	18,376		—		18,376		—		18,376
Financial liabilities:
Deposits	$	1,617,302	$	1,305,206	$	305,084	$	—	$	1,610,290
Securities sold under repurchase agreements	12,920		—		12,920		—		12,920
Accrued interest payable	883		—		883		—		883
Federal Home Loan Bank advances	65,157		—		64,856		—		64,856
Subordinated debentures	13,810		—		11,445		—		11,445