Item 1. Financial Statements

GUARANTY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

	(Unaudited)			(Audited)
	March 31, 2020			December 31, 2019
ASSETS
Cash and due from banks	$	40,354		$	39,907
Federal funds sold		81,250			45,246
Interest-bearing deposits		25,324			5,561
Total cash and cash equivalents		146,928			90,714
Securities available for sale		377,062			212,716
Securities held to maturity		—			155,458
Loans held for sale		4,024			2,368
Loans, net of allowance for credit losses of $21,948 and $16,202, respectively		1,696,861			1,690,794
Accrued interest receivable		8,148			9,151
Premises and equipment, net		54,496			53,431
Other real estate owned		605			603
Cash surrender value of life insurance		34,713			34,495
Core deposit intangible, net		3,639			3,853
Goodwill		32,160			32,160
Other assets		32,348			32,701
Total assets	$	2,390,984		$	2,318,444
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing	$	528,817		$	525,865
Interest-bearing		1,471,609			1,430,939
Total deposits		2,000,426			1,956,804
Securities sold under agreements to repurchase		11,843			11,100
Accrued interest and other liabilities		23,645			23,061
Line of credit		20,000			—
Federal Home Loan Bank advances		70,614			55,118
Subordinated debentures		10,810			10,810
Total liabilities		2,137,338			2,056,893
Commitments and contingencies (see Note 11)
Shareholders' equity
Preferred stock, $5.00 par value, 15,000,000 shares authorized, 0 shares issued		—			—
Common stock, $1.00 par value, 50,000,000 shares authorized, 12,908,097 and 12,905,097 shares issued, and 11,128,556 and 11,547,443 shares outstanding, respectively		12,908			12,905
Additional paid-in capital		186,916			186,692
Retained earnings		98,805			98,239
Treasury stock, 1,779,541 and 1,357,654 shares at cost		(45,309	)		(34,492	)
Accumulated other comprehensive income (loss)		326			(1,793	)
Total shareholders' equity		253,646			261,551
Total liabilities and shareholders' equity	$	2,390,984		$	2,318,444

GUARANTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited) (Audited)
September 30,
2017 December 31,
2016
ASSETS
Cash and due from banks $ 33,736
$ 39,605
Federal funds sold 34,250
60,600
Interest-bearing deposits 27,075
27,338
Total cash and cash equivalents 95,061
127,543
Securities available for sale 238,133
156,925
Securities held to maturity 179,081
189,371
Loans held for sale 3,400
2,563
Loans, net 1,294,847
1,233,651
Accrued interest receivable 6,440
7,419
Premises and equipment, net 43,958
44,810
Other real estate owned 1,929
1,692
Cash surrender value of life insurance 18,376
17,804
Deferred tax asset 4,267
4,892
Core deposit intangible, net 2,870
3,308
Goodwill 18,742
18,742
Other assets 16,949
19,616
Total assets $ 1,924,053
$ 1,828,336
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
  Deposits
    Noninterest-bearing $ 405,678
$ 358,752
    Interest-bearing 1,211,624
1,218,039
          Total deposits 1,617,302
1,576,791
   Securities sold under agreements to repurchase 12,920
10,859
   Accrued interest and other liabilities 7,601
6,006
   Other debt —
18,286
   Federal Home Loan Bank advances 65,157
55,170
   Subordinated debentures 13,810
19,310
      Total liabilities 1,716,790
1,686,422

Commitments and contingent liabilities

KSOP-owned shares —
31,661

See accompanying notes to consolidated financial statements.

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

~~See accompanying notes to consolidated financial statements.~~

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	2020		2019
Interest income
Loans, including fees	$	22,517	$	22,244
Securities
Taxable		1,294		1,599
Nontaxable		975		959
Federal funds sold and interest-bearing deposits		466		505
Total interest income		25,252		25,307

Interest expense
Deposits		4,421		5,673
FHLB advances and federal funds purchased		82		447
Subordinated debentures		143		169
Other borrowed money		37		11
Total interest expense		4,683		6,300

Net interest income		20,569		19,007
Provision for credit losses		1,400		575
Net interest income after provision for credit losses		19,169		18,432

Noninterest income
Service charges		908		826
Net realized gain on sale of loans		1,189		477
Other income		2,864		2,259
Total noninterest income		4,961		3,562

Noninterest expense
Employee compensation and benefits		9,466		8,986
Occupancy expenses		2,477		2,451
Other expenses		4,464		4,033
Total noninterest expense		16,407		15,470

Income before income taxes		7,723		6,524
Income tax provision		1,445		1,187
Net earnings	$	6,278	$	5,337
Basic earnings per share	$	0.55	$	0.45
Diluted earnings per share	$	0.55	$	0.45

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

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2020			2019
Net earnings	$	6,278		$	5,337
Other comprehensive income:
Unrealized gains on securities
Unrealized holding gains arising during the period		1,104			5,159
Unrealized gains on held to maturity securities transferred to available for sale		2,265			—
Amortization of net unrealized gains on held to maturity securities		46			5
Tax effect		(710	)		(1,086	)
Unrealized gains on securities, net of tax		2,705			4,078
Unrealized holding losses arising during the period on interest rate swaps		(586	)		(83	)
Total other comprehensive income		2,119			3,995
Comprehensive income	$	8,397		$	9,332

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

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

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

(Dollars in thousands, except per share amounts)

	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity
For the Three Months Ended March 31, 2019
Balance at December 31, 2018	$	—	$	12,835	$	185,174		$	80,088		$	(24,352	)	$	(9,162	)	$	244,583
Net earnings		—		—		—			5,337			—			—			5,337
Other comprehensive loss		—		—		—			—			—			3,995			3,995
Exercise of stock options		—		19		462			—			—			—			481
Purchase of treasury stock		—		—		—			—			(2,215	)		—			(2,215	)
Restricted stock grants		—		31		(31	)		—			—			—			—
Stock based compensation		—		—		137			—			—			—			137
Dividends:
Common - $0.17 per share		—		—		—			(2,008	)		—			—			(2,008	)
Balance at March 31, 2019	$	—	$	12,885	$	185,742		$	83,417		$	(26,567	)	$	(5,167	)	$	250,310

For the Three Months Ended March 31, 2020
Balance at December 31, 2019	$	—	$	12,905	$	186,692	$	98,239		$	(34,492	)	$	(1,793	)	$	261,551
Impact of adoption of ASC 326, net of tax of $955		—		—		—		(3,593	)		—			—			(3,593	)
Net earnings		—		—		—		6,278			—			—			6,278
Other comprehensive income		—		—		—		—			—			2,119			2,119
Exercise of stock options		—		3		69		—			—			—			72
Purchase of treasury stock		—		—		—		—			(10,817	)		—			(10,817	)
Stock based compensation		—		—		155		—			—			—			155
Dividends:
Common - $0.19 per share		—		—		—		(2,119	)		—			—			(2,119	)
Balance at March 31, 2020	$	—	$	12,908	$	186,916	$	98,805		$	(45,309	)	$	326		$	253,646

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

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	For the Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net earnings	$	6,278		$	5,337
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation		989			1,003
Amortization		335			348
Deferred taxes		(613	)		(43	)
Premium amortization, net of discount accretion		912			943
Gain on sale of loans		(1,189	)		(477	)
Provision for credit losses		1,400			575
Origination of loans held for sale		(25,017	)		(13,560	)
Proceeds from loans held for sale		24,550			14,610
Write-down of other real estate and repossessed assets		102			10
Net gain on sale of premises, equipment, other real estate owned and other assets		(2	)		(34	)
Stock based compensation		155			137
Net change in accrued interest receivable and other assets		1,775			(9,826	)
Net change in accrued interest payable and other liabilities		(45	)		11,302
Net cash provided by operating activities		9,630			10,325

Cash flows from investing activities
Securities available for sale:
Purchases		(19,551	)		(5,120	)
Proceeds from maturities and principal repayments		10,142			5,855
Securities held to maturity:
Proceeds from maturities and principal repayments		3,024			1,666
Net originations of loans		(12,194	)		3,760
Net purchases of premises and equipment		(2,054	)		(1,154	)
Net proceeds from sale of premises, equipment, other real estate owned and other assets		177			296
Net cash (used in) provided by investing activities		(20,456	)		5,303

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 )

See accompanying notes to consolidated financial statements.

	For the Three Months Ended March 31,
	2020			2019
Cash flows from financing activities
Net change in deposits		43,622			90,821
Net change in securities sold under agreements to repurchase		743			(686	)
Proceeds from FHLB advances		60,000			56,000
Repayment of FHLB advances		(44,504	)		(121,005	)
Proceeds from line of credit		20,000			—
Repayments of debentures		—			(500	)
Purchase of treasury stock		(10,817	)		(1,932	)
Exercise of stock options		72			481
Cash dividends		(2,076	)		(2,013	)
Net cash provided by financing activities		67,040			21,166
Net change in cash and cash equivalents		56,214			36,794
Cash and cash equivalents at beginning of period		90,714			71,510
Cash and cash equivalents at end of period	$	146,928		$	108,304

Supplemental disclosures of cash flow information
Interest paid	$	4,915		$	6,174

Supplemental schedule of noncash investing and financing activities
Purchase of treasury stock accrued		—			283
Cash dividends accrued		2,119			2,008
Transfer loans to other real estate owned and repossessed assets		179			130

GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Nine Months Ended September 30,
2017 2016
Sale of treasury stock —
8,557
Exercise of stock options 84
—
Sale of common stock 55,755
—
Cash dividends (4,013 ) (2,329 )
Net cash provided by financing activities 80,599
92,724
Net change in cash and cash equivalents (32,482 ) 7,920
Cash and cash equivalents at beginning of period 127,543
111,379
Cash and cash equivalents at end of period $ 95,061
$ 119,299

Supplemental disclosures of cash flow information
Interest paid $ 8,958
$ 1,839
Income taxes paid 4,910
4,610

Supplemental schedule of noncash investing and financing activities
Transfer loans to other real estate owned and repossessed assets $ 992
$ 5,862
Terminated KSOP put option 34,300
—
Net change in fair value of KSOP shares 2,639
1,539

See accompanying notes to consolidated financial statements.

~~10.~~

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Presentation: The consolidated financial statements in this Quarterly Report on Form 10-Q (this “Report”) include the accounts of Guaranty, the Bank, and their respective other direct and indirect subsidiaries and any other entities in which Guaranty has a controlling interest. The Bank has ~~five~~6 wholly-owned non-bank subsidiaries, Guaranty Company, Inc., G B COM, INC., 2800 South Texas Avenue LLC, Pin Oak Realty Holdings, Inc. ~~and~~, Pin Oak Energy Holdings, LLC and White Oak Aviation, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the financial services industry.

The consolidated financial statements in this Report have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, ~~2016,~~2019, included in Guaranty’s Annual Report on Form 10-K for the ~~Guaranty’s Prospectus filed with the SEC under Rule 424(b) on May 9, 2017, relating to its initial public offering.~~year ended December 31, 2019. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

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

~~KSOP Repurchase Right~~

COVID-19: ~~In accordance~~On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread through the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and business activities must be, to varying degrees, curtailed with ~~applicable provisions~~the goal of decreasing the ~~Internal Revenue Code, the terms~~rate of ~~Guaranty’s employee stock ownership plan with 401(k) provisions (“KSOP”), provided that, for so long as Guaranty was~~new infections. The outbreak of COVID-19 could adversely impact a ~~privately-held company without a public market for its common stock, KSOP participants would have the right, for a specified period~~broad range of time, to require Guaranty to repurchase shares of its common stock that are distributed to them by the KSOP. This repurchase obligation terminated upon the consummation of Guaranty’s initial public offering and listing of its common stock on the NASDAQ Global Select Marketindustries in May 2017. However, because Guaranty was privately-held without a public market for its common stock as of and for the year ended December 31, 2016, the shares of common stock held by the KSOP are reflected inwhich the Company’s ~~consolidated balance sheet as~~customers operate and impair their ability to fulfill their financial obligations to the Company.

Government leaders and the Federal Reserve have taken several actions designed to mitigate the economic fallout resulting from the coronavirus. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law on March 27, 2020, authorized more than $2 trillion to battle COVID-19 and its economic effects, including immediate cash relief for individual citizens, loan programs for small businesses, support for hospitals and other medical providers, and various types of ~~December 31, 2016 as a line item called “KSOP-owned shares,” appearing between total liabilities~~economic relief for impacted businesses and ~~shareholders’ equity. As a result, the KSOP-owned shares are deducted from shareholders’ equity in the Company’s consolidated balance sheet~~

~~(Continued)~~

~~11.~~

~~Table~~industries. The goal of ~~Contents~~

CARES Act is to prevent severe economic downturn. The CARES Act also provided for temporary interest only or payment deferral modifications for loans

(Continued)

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

without classifying them as troubled debt restructurings under current accounting rules. Additional government backed hardship relief measures are currently being negotiated.

Due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%, and this rate was further reduced to a rate target range of ~~December 31, 2016. For all periods following Guaranty’s initial public offering~~0.00% to 0.25% on March 16, 2020. These reductions in interest rates and ~~continued listing~~other effects of the COVID-19 outbreak may adversely affect the Company’s ~~common stock on the NASDAQ Global Select Market, the KSOP-owned shares will be included in,~~financial condition and ~~not be deducted from, shareholders’ equity. The termination~~results of the repurchase obligation following the listing of Guaranty’s common stock on the NASDAQ Global Select Market is also reflected in the statement of changes in shareholders’ equity as “terminated KSOP put option.”

~~Recent Accounting Pronouncements~~:

~~In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~. This ASU is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. In addition, the amendments in this ASU provide a detailed framework to assist entities in evaluating whether a set of assets and activities constitutes a business,operations, as well as ~~clarify the definition~~business and consumer confidence. As a result of the ~~term output so the term~~spread of COVID-19, economic uncertainties have arisen which are likely to negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impact is consistent with how outputs are described in Topic 606. ASU 2017-01 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expectunknown at this ~~pronouncement to have a significant impact on its consolidated financial statements.~~

time.

Recent Accounting Pronouncements:

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ~~Impairment~~.Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment changes to be based on the first step in today’s two-step impairment test, thus eliminating step two from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step two of the goodwill impairment test. For ~~pubic~~public companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ~~The Company is in the process of evaluating the impact of~~We adopted this pronouncement ~~which is~~on January 1, 2020 and it did not ~~expected to~~ have a significant impact on ~~its~~our consolidated financial statements.

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

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

In June 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit loss" ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss ~~model and~~methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to ~~the measurement~~financial assets measured at amortized cost, including loans receivable and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842: Leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale securities that management does not intend to sell or believes that it is more likely than not they will be required to sell.

The Company adopted the Current Expected Credit Losses (CECL) standard (Accounting Standards Update 2016-13 or ASC 326) on January 1, 2020. The day one impact of adopting CECL resulted in an allowance increase of $4,548, or 28.1%, from December 31, 2019. The day one increase was primarily due to recognizing expected lifetime losses in the portfolio and adding an economic forecast based upon our assumptions on January 1, 2020. Subsequent to the day one effect, there was a $1,400 provision for loan losses in the first quarter of 2020, compared to 0 provision recorded in the fourth quarter of 2019 and $575 in the first quarter of 2019. The $1,400 provision this quarter consists of approximately $900 that we recorded as a result of COVID-19 specifically and the remaining $500 was calculated using our standard CECL methodology.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and ~~applies to some off-balance sheet~~off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings of $4,548, net of tax effects of $955, as of January 1, 2020 for the cumulative effect of adopting ASC 326.

Allowance for Credit Losses:

Available for Sale Debt Securities

For ~~public companies,~~available-for-sale debt securities in an unrealized loss position, the ~~amendments in this update are effective for fiscal~~

~~(Continued)~~

~~12.~~

~~Table~~Company first assesses whether or not it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of ~~Contents~~

its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the securities amortized cost basis is written down to fair

(Continued)

10.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

~~years beginning after December 15, 2019, including interim periods within those fiscal years.~~

value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates 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 related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of the 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 are less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provisions for or reversal of credit loss expense. Losses are charged against the allowance when management believes an available-for-sale security is uncollectible or when either of the criteria regarding intent to sell or required to sell is met. Accrued interest receivable on available for sale debt securities is excluded from the estimate of credit losses.

Loans

The ~~Company has assembled~~allowance for credit losses is a ~~transition team~~valuation account that is deducted from the loans' amortized cost basis to ~~assess~~present the ~~adoption~~net amount expected to be collected over the lifetime of ~~this ASU,~~the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Recoveries do not exceed the aggregate of amounts previously charged-off and ~~has developed~~expected to be charged-off. Subsequent recoveries, if any, are credited to the allowance.

~~In February 2016,~~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 ~~FASB issued ASU 2016-02,~~ ~~Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on~~credit loss reserve for the remaining outstanding balances of loans in a segment at the balance sheet ~~by lessees~~date. The average annual charge-off rate is applied to the contractual term, further adjusted for ~~those leases classified~~estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as ~~operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments~~differences in ~~this ASU are effective~~underwriting standards, portfolio mix, delinquency level, or term as well as for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption of this ASU is permitted for all entities. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with~~ changes in ~~fair value recognized~~environmental conditions, such as changes in ~~net income; public business entities~~unemployment rates, property values, or other relevant factors. These qualitative factors serve to ~~use~~compensate for additional areas of uncertainty inherent in the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizationsportfolio that are not ~~public business entities; eliminating the requirement~~reflected in our historic loss factors.

The allowance for ~~public business entities to disclose the method(s)~~credit losses is measured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan portfolio segments include both regulatory call report codes and ~~significant assumptions used to estimate the fair value that~~by internally identified risk ratings for our commercial loan segments and by delinquency status for our consumer loan segments. We also have separate segments for our mortgage warehouse loans, for our internally originated SBA loans and for our SBA loans acquired from Westbound Bank in 2018. Accrued interest receivable on loans is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU permits early adoption of the instrument-specific credit risk provision. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on its consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606),~~ ~~followed by various amendments~~: ~~ASU 2015-14,~~ ~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,~~ ~~ASU 2016-08,~~ ~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),~~ ~~ASU 2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,~~ ~~ASU 2016-11,~~ Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ~~and ASU 2016-12,~~ ~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.~~ The amendments in these updates amend existing guidance related to revenue from contracts with customers. The amendments supersede and replace nearly all existing revenue recognition guidance, including industry-specific guidance, establish a new control-based revenue recognition model, change the basis for deciding when revenue is recognized over a time or point in time, provide new and more detailed guidance on specific topics and expand and improve disclosures about revenue. In addition, these amendments specify the accounting for some costs to obtain or fulfill a contract with a customer. The amendments are effective for annual and interim periods beginning after December 15, 2017, and must be retrospectively applied. The majority of the Company's income consists of net interest income on financial assets and financial liabilities, which is explicitly excluded from the ~~scope~~estimate of credit losses.

Below is a summary of the ~~amendments. The Company continues to evaluate the impact~~segments and certain of the ~~amendments on~~inherent risks in the components of noninterest income that have recurring revenue streams; however, the Company does not expect any recognition changes to have a significant impact to its consolidated financial statements.

Company’s loan portfolio:

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.

(Continued)

~~13.~~

11.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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.

(Continued)

12.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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.

~~NOTE 2 - ACQUISITIONS~~

~~On August 6, 2016,~~

In general, the ~~Company purchased certain assets~~loans in our portfolio have low historical credit losses. The credit quality of loans in our portfolio is impacted by delinquency status and ~~assumed certain liabilities associated with a former branch location of a non-related bank in Denton, Texas (Denton), which resulted in the addition of approximately $4,659 in assets~~debt service coverage generated by our borrowers’ businesses and the assumption of approximately $4,658 in liabilities. The Company acquired the bank premises at 4101 Wind River Lane in Denton and recorded it at fair market value of $2,075. Other assets acquired, at fair value, included cash of $2,399, core deposit intangible of $42, goodwill of $141 and loans of $2. Liabilities assumed included non-interest bearing deposits of $581, interest bearing deposits of $4,047 and other liabilities of $30. As a result of the transaction, the Company paid $66 to the seller, representing the differencefluctuations in the value of real estate collateral. Management considers delinquency status to be the ~~acquired assets less~~most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for credit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for credit losses, which would adversely affect our results of operations and financial condition. Delinquency statistics are updated at least monthly.

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

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the ~~liabilities assumed~~collateral at the reporting date, adjusted for selling costs as appropriate.

Credit Quality Indicators - The Company monitors the credit quality of the loans in the various segments by identifying and evaluating credit quality indicators specific to each segment class. This information is incorporated into management’s analysis of the adequacy of the allowance for credit losses. Information for the credit quality indicators is updated monthly or quarterly for classified assets and at least annually for the remainder of the portfolio.

The following is a discussion of the primary credit quality indicators most closely monitored for the loan portfolio, by class:

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 he is 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.

(Continued)

13.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


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

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

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

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

Reserve for Unfunded Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the ~~Company in the transaction.~~

~~Goodwill of $141 arising from the Denton acquisition consisted largely of synergies and the cost savings resulting from the combining~~Company. The allowance for credit losses on off balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the ~~operations~~likelihood that funding will occur and an estimate of ~~the companies and is~~expected credit losses on commitments expected to be ~~deductible for income taxes purposes.~~

funded over its estimated life.

(Continued)

14.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 32 - MARKETABLE SECURITIES

During the three months ended March 31, 2020, the Company transferred all of its investment securities classified as held to maturity to available for sale in order to provide maximum flexibility to address liquidity and capital needs that may result from COVID-19. The Company believes that these transfers are allowable under existing GAAP due to the isolated, non-recurring and unusual events resulting from the pandemic.

The following tables summarize the amortized cost and fair value of securities available for sale as of March 31, 2020, and the amortized cost and fair value of securities held to maturity and available for sale, respectively, as of ~~September 30, 2017 and~~ December 31, ~~2016~~2019 and the corresponding amounts of gross unrealized gains and losses:

March 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	19,648	$	144	$	103	$	19,689
Municipal securities		170,561		3,276		288		173,549
Mortgage-backed securities		93,979		2,508		67		96,420
Collateralized mortgage obligations		87,001		487		84		87,404
Total available for sale	$	371,189	$	6,415	$	542	$	377,062

December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	19,667	$	592	$	—	$	20,259
Municipal securities		16,780		576		8		17,348
Mortgage-backed securities		83,967		550		335		84,182
Collateralized mortgage obligations		89,798		1,146		17		90,927
Total available for sale	$	210,212	$	2,864	$	360	$	212,716

Held to maturity:
Municipal securities	$	138,416	$	4,710	$	3	$	143,123
Mortgage-backed securities		14,365		198		13		14,550
Collateralized mortgage obligations		2,677		110		—		2,787
Total held to maturity	$	155,458	$	5,018	$	16	$	160,460

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

~~(Continued)~~

~~14.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

December 31, 2016
Amortized
Cost

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

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

~~The Company’s held to maturity mortgage-backed securities portfolio includes non-agency collateralized mortgage obligations with a carrying value of $1,470, which had unrealized~~

There is 0 allowance for credit losses ~~of $503~~recorded for our available for sale debt securities as of ~~September 30, 2017. These non-agency mortgage-backed securities were rated AAA at purchase. The Company monitors these securities to ensure it has adequate credit support, and~~March 31, 2020.

For the Company records other than temporary impairment (OTTI) as appropriate. The Company does not have the intent to sell these securities and does not expect to sell the securities before their anticipated recovery.

~~Management evaluates~~year ended December 31, 2019, management evaluated securities for ~~OTTI~~other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns ~~warrant~~warranted such evaluation. Consideration iswas given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company did ~~not~~0t record any OTTI losses on any of its securities ~~during the nine months ended September 30, 2017 or~~ for the year ended December 31, ~~2016.~~

2019.

(Continued)

15.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Information pertaining to securities with gross unrealized losses as of ~~September 30, 2017~~March 31, 2020, for which no allowance for credit losses has been recorded, and December 31, ~~2016~~2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is detailed in the following tables:

	Less Than 12 Months					12 Months or Longer					Total
March 31, 2020	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(103	)	$	11,430	$	—		$	—	$	(103	)	$	11,430
Municipal securities		(288	)		28,772		—			—		(288	)		28,772
Mortgage-backed securities		(13	)		4,233		(54	)		5,840		(67	)		10,073
Collateralized mortgage obligations		(66	)		26,914		(18	)		2,261		(84	)		29,175
Total available for sale	$	(470	)	$	71,349	$	(72	)	$	8,101	$	(542	)	$	79,450

	Less Than 12 Months					12 Months or Longer					Total
December 31, 2019	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	—		$	—	$	—		$	—	$	—		$	—
Municipal securities		(8	)		1,138		—			—		(8	)		1,138
Mortgage-backed securities		(25	)		19,421		(310	)		42,116		(335	)		61,537
Collateralized mortgage obligations		—			—		(17	)		2,594		(17	)		2,594
Total available for sale	$	(33	)	$	20,559	$	(327	)	$	44,710	$	(360	)	$	65,269

Held to maturity:
Municipal securities	$	(1	)	$	1,313	$	(2	)	$	759	$	(3	)	$	2,072
Mortgage-backed securities		—			—		(13	)		7,032		(13	)		7,032
Collateralized mortgage obligations		—			—		—			—		—			—
Total held to maturity	$	(1	)	$	1,313	$	(15	)	$	7,791	$	(16	)	$	9,104

Less Than 12 Months 12 Months or Longer Total
September 30, 2017
Gross
Unrealized
Losses

Estimated
Fair
Value

Gross
Unrealized
Losses

Estimated
Fair
Value

Gross
Unrealized
Losses

Estimated
Fair
Value
Available for sale:
Corporate bonds $ —
$ —
$ —
$ —
$ —
$ —
Municipal securities —
—
(305 ) 7,464
(305 ) 7,464
Mortgage-backed securities (556 ) 72,802
(307 ) 13,913
(863 ) 86,715
Collateralized mortgage obligations (244 ) 42,825
(138 ) 7,522
(382 ) 50,347
Total available for sale $ (800 ) $ 115,627
$ (750 ) $ 28,899
$ (1,550 ) $ 144,526

Held to maturity:
Municipal securities $ (258 ) $ 39,090
$ (258 ) $ 13,085
$ (516 ) $ 52,175
Mortgage-backed securities (66 ) 10,562
—
—
(66 ) 10,562
Collateralized mortgage obligations —
—
(503 ) 2,272
(503 ) 2,272
Total held to maturity $ (324 ) $ 49,652
$ (761 ) $ 15,357
$ (1,085 ) $ 65,009

Less Than 12 Months 12 Months or Longer Total
December 31, 2016
Gross
Unrealized
Losses

Estimated
Fair
Value

Gross
Unrealized
Losses

Estimated
Fair
Value

Gross
Unrealized
Losses

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

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

The number of investment positions in an unrealized loss position with no recorded allowance for credit losses totaled ~~104 and 177~~66 at ~~September 30, 2017 and December~~March 31, ~~2016, respectively.~~2020. The securities in a loss position were composed of tax-exempt municipal bonds, corporate bonds, collateralized mortgage obligations and mortgage backed securities.Management evaluates available for sale debt securities in an unrealized loss position to determine whether the impairment is due to credit-related factors or noncredit-related factors. With respect to U.S. Government agency securities, the Company has determined that a decline in fair value is not due to credit-related factors. The Company monitors the credit quality of other debt securities through the use of credit ratings and other factors specific to an individual security in assessing whether or not the decline in fair value of municipal or corporate securities, relative to their amortized cost, is due to credit-related factors. Triggers to prompt further investigation of securities when the fair value is less than the amortized cost are when a security has been downgraded and falls below an A credit rating, and the security’s unrealized loss exceeds 20% of its book value. Consideration is given to (1) the extent to which fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. Based on evaluation of available evidence, management believes the unrealized loss on the ~~remaining~~ securities as of March 31, 2020 is ~~a function of the movement of interest rates since the time of purchase. Based on evaluation of available evidence, including recent changes in interest rates, credit rating information and~~

~~(Continued)~~

~~16.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment would be reduced and the resulting loss recognized in net income in the period the OTTI is identified. The Companynot credit-related. Management does not have the intent to sell any of these ~~mortgage-backed~~ securities and believes that it is more likely ~~that it~~than not the Company will not ~~be required~~have to sell any such securities before recovery of cost. The fair values are expected to recover as the securities ~~before~~approach their ~~anticipated recovery. The Company does not consider these securities to be OTTI at September 30, 2017.~~

maturity date or repricing date or if market yields for the investments decline.

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

(Continued)

16.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

As of ~~September 30, 2017,~~March 31, 2020, there were no0 holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with fair values of approximately ~~$221,777~~$300,214 and ~~$259,499~~$278,318 at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.

~~The proceeds from sales of~~

There were 0 securities ~~and~~sold during the ~~associated gains and losses are listed below for:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Proceeds $ 199,974
$ 31,969
$ 214,736
$ 109,056
Gross gains —
96
38
243
Gross losses —
(32 ) (13 ) (161 )

~~During the nine~~three months ended September 30, 2017 and 2016, the Company sold three held-to-maturity securities each year. The Company sold these municipal securities based upon internal credit analysis, under the belief that they had experienced significant deterioration in creditworthiness. The risk exposure presented by these municipalities had increased beyond acceptable levels, and the Company determined that it was reasonably possible that all amounts due would not be collected. The credit analysis determined that the municipalities had been significantly impacted because their tax bases are heavily reliant on the energy industry relative to other sectors of the economy. Specifically, the revenues of these municipalities have been adversely impacted by the significant decline in energy prices since 2014. The Company believes the sale of these securities were merited and permissible under the applicable accounting guidelines because of the significant deterioration in the creditworthiness of the issuers.

~~Sale of securities held to maturity were as follows for:~~

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

~~(Continued)~~

~~17.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

March 31, 2020 or 2019.

The contractual maturities at ~~September 30, 2017~~March 31, 2020 of available for sale ~~and held to maturity~~ securities at carrying value and estimated fair value are shown below. The Company invests in mortgage-backed securities and collateralized mortgage obligations that have expected maturities that differ from their contractual maturities. These differences arise because borrowers and/or issuers may have the right to call or prepay their obligation with or without call or prepayment penalties.

	Available for Sale
March 31, 2020	Amortized Cost		Estimated Fair Value
Due within one year	$	5,095	$	5,115
Due after one year through five years		51,142		51,724
Due after five years through ten years		51,401		52,805
Due after ten years		82,571		83,594
Mortgage-backed securities		93,979		96,420
Collateralized mortgage obligations		87,001		87,404
Total securities	$	371,189	$	377,062

Available for Sale Held to Maturity

Amortized
Cost

Estimated
Fair
Value

Amortized
Cost

Estimated
Fair
Value
Due within one year $ —
$ —
$ 2,683
$ 2,693
Due after one year through five years 1,086
1,096
5,126
5,292
Due after five years through ten years 17,756
17,924
43,228
44,785
Due after ten years 7,769
7,464
95,956
96,403
Mortgage-backed securities 91,801
90,958
23,337
23,549
Collateralized mortgage obligations 120,580
120,691
8,751
8,429
Total Securities $ 238,992
$ 238,133
$ 179,081
$ 181,151

NOTE 43 - LOANS AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

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

	March 31, 2020			December 31, 2019
Commercial and industrial	$	297,163		$	279,583
Real estate:
Construction and development		263,973			280,498
Commercial real estate		584,883			567,360
Farmland		78,635			57,476
1-4 family residential		400,605			412,166
Multi-family residential		20,430			37,379
Consumer		52,996			53,245
Agricultural		19,314			18,359
Overdrafts		354			329
Total loans⁽¹⁾		1,718,353			1,706,395	��
Net of:
Deferred loan costs, net		456			601
Allowance for credit losses		(21,948	)		(16,202	)
Total net loans⁽¹⁾	$	1,696,861		$	1,690,794

(1) Excludes accrued interest receivable on loans of $6.8 million as of March 31, 2020 and December 31, 2019, which is presented on the consolidated balance sheets.

September 30, 2017 December 31, 2016
Commercial and industrial $ 192,663
$ 223,997
Real estate:
Construction and development 201,067
129,366
Commercial real estate 393,314
367,656
Farmland 54,349
62,362
1-4 family residential 365,889
362,952
Multi-family residential 23,235
26,079
Consumer 51,711
53,505
Agricultural 24,449
18,901
Overdrafts 698
317
Total loans 1,307,375
1,245,135
Less:
Allowance for loan losses 12,528
11,484
Total net loans $ 1,294,847
$ 1,233,651

~~As of September 30, 2017 and December 31, 2016, included in total loans above were $1,089 and $1,210 in unamortized loan costs, net of loan fees, respectively.~~

(Continued)

~~18.~~

17.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The Company’s estimate of the allowance for credit losses (“ACL”) reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The following tables present the activity in the ACL by class of loans for the three months ended March 31, 2020, and the activity in the allowance for loan ~~losses and the recorded investment in loans~~loss by portfolio segment ~~and based on impairment method for the nine months ended September 30, 2017,~~ for the year ended December 31, ~~2016~~2019 and for the ~~nine~~three months ended ~~September 30, 2016:~~March 31, 2019:

For the Three Months Ended March 31, 2020	Commercial and industrial			Construction and development			Commercial real estate		Farmland		1-4 family residential			Multi-family residential			Consumer			Agricultural		Overdrafts			Unallocated COVID-19 reserve		Total
Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326	$	2,056		$	2,378		$	6,853	$	570	$	3,125		$	409		$	602		$	197	$	12		$	—	$	16,202
Impact of adopting ASC 326		546			323			2,228		26		1,339			(50	)		72			73		(9	)		—		4,548
Provision for credit losses		365			(229	)		447		193		(250	)		(170	)		85			11		35			—		487
Provision for credit losses - COVID-19		—			106			233		3		—			—			—			—		—			571		913
Loans charged-off		(43	)		—			—		—		(59	)		—			(73	)		—		(49	)		—		(224	)
Recoveries		—			—			—		—		1			—			7			—		14			—		22
Ending balance	$	2,924		$	2,578		$	9,761	$	792	$	4,156		$	189		$	693		$	281	$	3		$	571	$	21,948

For the Year Ended December 31, 2019	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	$	1,751		$	1,920	$	6,025	$	643		$	2,868		$	631		$	565		$	238		$	10		$	14,651
Provision for loan losses		(117	)		458		827		(73	)		268			(222	)		(2	)		(41	)		152			1,250
Loans charged-off		(86	)		—		—		—			(14	)		—			(72	)		(89	)		(192	)		(453	)
Recoveries		508			—		1		—			3			—			111			89			42			754
Ending balance	$	2,056		$	2,378	$	6,853	$	570		$	3,125		$	409		$	602		$	197		$	12		$	16,202

For the Three Months Ended March 31, 2019	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	$	1,751		$	1,920	$	6,025	$	643	$	2,868		$	631		$	565		$	238		$	10		$	14,651
Provision for loan losses		213			81		269		16		7			(56	)		46			(35	)		34			575
Loans charged-off		(6	)		—		—		—		(6	)		—			(17	)		—			(49	)		(78	)
Recoveries		5			—		—		—		1			—			23			—			13			42
Ending balance	$	1,963		$	2,001	$	6,294	$	659	$	2,870		$	575		$	617		$	203		$	8		$	15,190

For the nine months ended September 30, 2017 Commercial
and
industrial Construction
and
development Commercial
real
estate Farmland 1-4 family
residential Multi-family
residential Consumer Agricultural Overdrafts Total
Allowance for loan losses:
Beginning balance $ 1,592
$ 1,161
$ 3,264
$ 482
$ 3,960
$ 281
$ 585
$ 153
$ 6
$ 11,484
Provision for loan losses 602
762
1,019
(24 ) (585 ) (15 ) 149
258
84
2,250
Loans charged-off (737 ) —
(84 ) —
(307 ) —
(230 ) (4 ) (117 ) (1,479 )
Recoveries 116
—
—
—
21
—
95
—
41
273
Ending balance $ 1,573
$ 1,923
$ 4,199
$ 458
$ 3,089
$ 266
$ 599
$ 407
$ 14
$ 12,528
Allowance ending balance:
Individually evaluated for impairment $ 19
$ —
$ 31
$ 85
$ 145
$ —
$ —
$ 240
$ —
$ 520
Collectively evaluated for impairment 1,554
1,923
4,168
373
2,944
266
599
167
14
12,008
Ending balance $ 1,573
$ 1,923
$ 4,199
$ 458
$ 3,089
$ 266
$ 599
$ 407
$ 14
$ 12,528
Loans:
Individually evaluated for impairment $ 354
$ —
$ 4,029
$ 276
$ 1,097
$ 228
$ —
$ 696
$ —
$ 6,680
Collectively evaluated for impairment 192,309
201,067
389,285
54,073
364,792
23,007
51,711
23,753
698
1,300,695
Ending balance $ 192,663
$ 201,067
$ 393,314
$ 54,349
$ 365,889
$ 23,235
$ 51,711
$ 24,449
$ 698
$ 1,307,375

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

(Continued)

~~19.~~

18.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

For the nine months ended September 30, 2016 Commercial
and
industrial Construction
and
development Commercial
real
estate Farmland 1-4 family
residential Multi-family
residential Consumer Agricultural Overdrafts Total
Allowance for loan losses:
Beginning balance $ 1,878
$ 1,004
$ 2,106
$ 400
$ 2,839
$ 325
$ 562
$ 138
$ 11
$ 9,263
Provision for loan losses 949
134
993
74
916
46
74
(10 ) 64
3,240
Loans charged-off (1,196 ) (9 ) —
—
(25 ) —
(170 ) —
(119 ) (1,519 )
Recoveries 14
4
—
—
—
—
103
—
61
182
Ending balance $ 1,645
$ 1,133
$ 3,099
$ 474
$ 3,730
$ 371
$ 569
$ 128
$ 17
$ 11,166
Allowance ending balance:
Individually evaluated for impairment $ 139
$ —
$ —
$ 47
$ 82
$ —
$ 29
$ 1
$ —
$ 298
Collectively evaluated for impairment 1,506
1,133
3,099
427
3,648
371
540
127
17
10,868
Ending balance $ 1,645
$ 1,133
$ 3,099
$ 474
$ 3,730
$ 371
$ 569
$ 128
$ 17
$ 11,166
Loans:
Individually evaluated for impairment $ 236
$ —
$ 1,464
$ 259
$ 2,177
$ —
$ 208
$ 319
$ —
$ 4,663
Collectively evaluated for impairment 224,381
125,045
359,212
61,643
346,224
34,538
54,137
18,904
594
1,224,678
Ending balance $ 224,617
$ 125,045
$ 360,676
$ 61,902
$ 348,401
$ 34,538
$ 54,345
$ 19,223
$ 594
$ 1,229,341

~~Credit Quality~~

The ACL as of March 31, 2020 was estimated using the current expected credit loss model. The primary reasons for the increase in required ACL were to capture the expected lifetime losses of the portfolio, which were previously measured under an incurred loss model, expectations for an economic recession during 2020, including uncertainties due to COVID-19, forecasted increases in unemployment rates, and changes in other qualitative factors used in our CECL methodology.

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

The ACL is measured on a collective segment basis when similar risk characteristics exist. Our loan ~~performance trends to manage~~portfolio is segmented first by regulatory call report code, and ~~evaluate~~second, by internally identified risk grades for our commercial loan segments and by delinquency status for our consumer loan segments. We also have separate segments for our warehouse lines of credit, for our internally originated SBA loans and for our SBA loans acquired from Westbound Bank. Consistent forecasts of the ~~exposure to credit risk. Key factors tracked by~~loss drivers are used across the ~~Company and utilized in evaluating~~loan segments. For loans that do not share general risk characteristics with segments, we estimate a specific reserve on an individual basis. A reserve is recorded when the ~~credit quality~~carrying amount of the loan ~~portfolio include trends in delinquency ratios,~~exceeds the ~~level~~discounted estimated cash flows using the loan's initial effective interest rate or the fair value of ~~nonperforming assets, borrower’s repayment capacity, and~~ collateral ~~coverage.~~

for collateral-dependent loans.

Assets are graded “pass” when the relationship exhibits acceptable credit risk and indicates repayment ability, tolerable collateral coverage and reasonable performance history. Lending relationships exhibiting potentially significant credit risk and marginal repayment ability and/or asset protection are graded “special mention.” Assets classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. Substandard graded loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets graded “doubtful” are substandard graded loans that have added characteristics that make collection or liquidation in full improbable.

In general, the loans in our portfolio have low historical credit losses. The Company ~~typically measures impairment based on~~closely monitors economic conditions and loan performance trends to manage and evaluate the ~~present value of expected future cash flows, discounted at~~exposure to credit risk. Key factors tracked by the ~~loan's effective interest rate, or based on~~Company and utilized in evaluating the ~~loan's observable market price or the fair value~~credit quality of the loan portfolio include trends in delinquency ratios, the level of nonperforming assets, borrower’s repayment capacity, and collateral ifcoverage.

The projected economic impact of COVID-19 as of March 31, 2020 created the ~~loan is collateral-dependent.~~

~~The following tables summarize the credit exposure~~need for $913 of additional ACL, as shown in the ~~Company’s consumer~~preceding table and ~~commercial loan portfolios as of:~~

September 30, 2017
Commercial
and
industrial

Construction
and
development

Commercial
real
estate
Farmland
1-4 family
residential

Multi-family
residential
Consumer and Overdrafts Agricultural Total
Grade:
Pass $ 188,440
$ 181,879
$ 388,007
$ 53,649
$ 357,814
$ 21,659
$ 51,631
$ 22,525
$ 1,265,604
Special mention 3,705
19,188
1,030
413
3,059
1,348
362
1,147
30,252
Substandard 518
—
4,277
287
5,016
228
416
777
11,519
Total $ 192,663
$ 201,067
$ 393,314
$ 54,349
$ 365,889
$ 23,235
$ 52,409
$ 24,449
$ 1,307,375

labeled “Provision for credit losses – COVID-19.”

(Continued)

~~20.~~

19.

~~Table of Contents~~

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 March 31, 2020:

March 31, 2020	2020		2019		2018			2017		2016		Prior		Revolving Loans Amortized Cost		Total
Commercial and industrial:
Risk rating
Pass	$	89,353	$	44,914	$	22,360		$	9,359	$	9,586	$	19,274	$	101,608	$	296,454
Special mention		—		—		—			—		—		—		—		—
Substandard		—		—		218			21		58		—		—		297
Nonaccrual		—		—		28			—		43		191		150		412
Total commercial and industrial loans	$	89,353	$	44,914	$	22,606		$	9,380	$	9,687	$	19,465	$	101,758	$	297,163

Charge-offs	$	—	$	—	$	(43	)	$	—	$	—	$	—	$	—	$	(43	)
Recoveries		—		—		—			—		—		—		—		—
Current period net	$	—	$	—	$	(43	)	$	—	$	—	$	—	$	—	$	(43	)

Construction and development:
Risk rating
Pass	$	29,946	$	119,807	$	55,942		$	28,704	$	10,867	$	11,023	$	5,886	$	262,175
Special mention		—		—		—			—		—		—		—		—
Substandard		—		600		6			—		—		—		—		606
Nonaccrual		—		1,192		—			—		—		—		—		1,192
Total construction and development loans	$	29,946	$	121,599	$	55,948		$	28,704	$	10,867	$	11,023	$	5,886	$	263,973

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

Commercial real estate:
Risk rating
Pass	$	17,610	$	106,440	$	101,206		$	86,620	$	101,885	$	137,737	$	11,921	$	563,419
Special mention		—		—		—			—		—		70		—		70
Substandard		—		—		1,183			617		—		9,358		—		11,158
Nonaccrual		—		—		158			3,947		5,087		1,044		—		10,236
Total commercial real estate loans	$	17,610	$	106,440	$	102,547		$	91,184	$	106,972	$	148,209	$	11,921	$	584,883

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

Farmland:
Risk rating
Pass	$	5,423	$	14,614	$	14,202		$	8,507	$	11,353	$	18,649	$	5,573	$	78,321
Special mention		—		—		—			—		—		41		—		41
Substandard		—		—		—			—		—		97		—		97
Nonaccrual		—		—		—			—		—		176		—		176
Total farmland loans	$	5,423	$	14,614	$	14,202		$	8,507	$	11,353	$	18,963	$	5,573	$	78,635

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

(Continued)

20.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

March 31, 2020	2020			2019			2018			2017			2016		Prior			Revolving Loans Amortized Cost		Total
1-4 family residential:
Risk rating
Pass	$	12,890		$	81,727		$	65,493		$	46,797		$	53,530	$	125,807		$	10,237	$	396,481
Special mention		—			—			55			113			—		70			—		238
Substandard		—			—			—			—			—		—			—		—
Nonaccrual		—			—			383			446			1,031		2,026			—		3,886
Total 1-4 family residential loans	$	12,890		$	81,727		$	65,931		$	47,356		$	54,561	$	127,903		$	10,237	$	400,605

Charge-offs	$	—		$	—		$	—		$	—		$	—	$	(59	)	$	—	$	(59	)
Recoveries		—			—			—			—			—		1			—		1
Current period net	$	—		$	—		$	—		$	—		$	—	$	(58	)	$	—	$	(58	)

Multi-family residential:
Risk rating
Pass	$	1,304		$	4,837		$	3,746		$	1,515		$	1,801	$	6,665		$	562	$	20,430
Special mention		—			—			—			—			—		—			—		—
Substandard		—			—			—			—			—		—			—		—
Nonaccrual		—			—			—			—			—		—			—		—
Total multi-family residential loans	$	1,304		$	4,837		$	3,746		$	1,515		$	1,801	$	6,665		$	562	$	20,430

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

Consumer and overdrafts:
Risk rating
Pass	$	8,344		$	20,857		$	14,693		$	3,694		$	1,442	$	843		$	3,171	$	53,044
Special mention		—			39			35			3			—		—			—		77
Substandard		—			—			—			—			—		—			—		—
Nonaccrual		—			50			150			23			3		3			—		229
Total consumer loans and overdrafts	$	8,344		$	20,946		$	14,878		$	3,720		$	1,445	$	846		$	3,171	$	53,350

Charge-offs	$	(49	)	$	(17	)	$	(18	)	$	(38	)	$	—	$	—		$	—	$	(122	)
Recoveries		14			—			—			4			1		2			—		21
Current period net	$	(35	)	$	(17	)	$	(18	)	$	(34	)	$	1	$	2		$	—	$	(101	)

Agricultural:										��
Risk rating
Pass	$	1,532		$	2,919		$	3,357		$	1,146		$	432	$	391		$	9,276	$	19,053
Special mention		—			—			—			70			—		—			—		70
Substandard		—			—			—			—			85		5			—		90
Nonaccrual		—			—			69			—			32		—			—		101
Total agricultural loans	$	1,532		$	2,919		$	3,426		$	1,216		$	549	$	396		$	9,276	$	19,314

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

Total loans	$	166,402		$	397,996		$	283,284		$	191,582		$	197,235	$	333,470		$	148,384	$	1,718,353

Charge-offs	$	(49	)	$	(17	)	$	(61	)	$	(38	)	$	—	$	(59	)	$	—	$	(224	)
Recoveries		14			—			—			4			1		3			—		22
Total current period net charge-offs	$	(35	)	$	(17	)	$	(61	)	$	(34	)	$	1	$	(56	)	$	—	$	(202	)

(Continued)

21.

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 class as of December 31, 2019:

December 31, 2019	Commercial and industrial		Construction and development		Commercial real estate		Farmland		1-4 family residential		Multi-family residential		Consumer and Overdrafts		Agricultural		Total
Grade:
Pass	$	279,217	$	278,679	$	548,662	$	57,152	$	409,896	$	37,379	$	53,327	$	18,101	$	1,682,413
Special mention		153		600		1,071		91		1,425		—		192		126		3,658
Substandard		213		1,219		17,627		233		845		—		55		132		20,324
Total	$	279,583	$	280,498	$	567,360	$	57,476	$	412,166	$	37,379	$	53,574	$	18,359	$	1,706,395

There were 0 loans classified in the “doubtful” or “loss” risk rating categories as of the periods ended March 31, 2020 and December 31, 2019.

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

	Real Estate		Non-RE		Total		Allowance for Credit Losses Allocation
Commercial and industrial	$	134	$	—	$	134	$	16
Real estate:
Construction and development		600		—		600		69
Commercial real estate		9,692		—		9,692		1,415
Farmland		—		—		—		—
1-4 family residential		—		—		—		—
Multi-family residential		—		—		—		—
Consumer		—		174		174		—
Agricultural		—		191		191		—
Overdrafts		—		—		—		—
Total	$	10,426	$	365	$	10,791	$	1,500

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

(Continued)

22.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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:

March 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	$	73	$	49	$	356	$	478	$	296,685	$	297,163	$	—
Real estate:
Construction and development		1,369		—		—		1,369		262,604		263,973		—
Commercial real estate		8,285		340		9,139		17,764		567,119		584,883		150
Farmland		263		238		49		550		78,085		78,635		—
1-4 family residential		2,823		712		471		4,006		396,599		400,605		—
Multi-family residential		—		—		—		—		20,430		20,430		—
Consumer		566		103		72		741		52,255		52,996		—
Agricultural		10		7		29		46		19,268		19,314		—
Overdrafts		—		—		—		—		354		354		—
Total	$	13,389	$	1,449	$	10,116	$	24,954	$	1,693,399	$	1,718,353	$	150

December 31, 2019	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	$	321	$	53	$	15	$	389	$	279,194	$	279,583	$	—
Real estate:
Construction and development		161		—		—		161		280,337		280,498		—
Commercial real estate		1,181		49		882		2,112		565,248		567,360		—
Farmland		103		—		—		103		57,373		57,476		—
1-4 family residential		2,514		1,433		845		4,792		407,374		412,166		—
Multi-family residential		—		—		—		—		37,379		37,379		—
Consumer		373		152		96		621		52,624		53,245		—
Agricultural		51		67		—		118		18,241		18,359		—
Overdrafts		—		—		—		—		329		329		—
Total	$	4,704	$	1,754	$	1,838	$	8,296	$	1,698,099	$	1,706,395	$	—

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
$ —

~~(Continued)~~

~~21.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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.

The outstanding balances of TDRs are shown below:

	March 31, 2020		December 31, 2019
Nonaccrual TDRs	$	97	$	101
Performing TDRs		7,220		7,240
Total	$	7,317	$	7,341
Specific reserves on TDRs	$	—	$	164

(Continued)

23.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

There were 0 loans modified as TDRs that occurred during the three months ended March 31, 2020 and 2019.

The following table presents loans by class, modified as TDRs that occurred during the year ended December 31, 2019:

Year Ended December 31, 2019	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial real estate		4	$	1,680	$	1,515
Total		4	$	1,680	$	1,515

There were two TDRs that subsequently defaulted during 2019 and remained on nonaccrual status as of December 31, 2019. The TDRs described above did 0t increase the allowance for loan losses and resulted in 0 charge-offs during the year ended December 31, 2019.

The following table presents loans individually and collectively evaluated for impairment, and the respective allowance for loan losses as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASC 326. A loan iswas considered impaired when, based on current information and events, it iswas probable that the Company ~~will~~would 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~~were not considered to be impaired. Loans defined as individually impaired ~~based on applicable accounting guidance, include~~included larger balance ~~nonperforming~~non-performing loans and TDRs.

December 31, 2019	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	289	$	289	$	—	$	312
Real estate:
Construction and development		1,212		1,212		—		1,259
Commercial real estate		4,612		4,612		—		4,244
Farmland		—		—		—		—
1-4 family residential		2,498		2,498		—		1,798
Multi-family residential		—		—		—		—
Consumer		—		—		—		—
Agricultural		62		62		—		190
Subtotal		8,673		8,673		—		7,803
With allowance recorded:
Commercial and industrial		—		—		—		61
Real estate:
Construction and development		—		—		—		-
Commercial real estate		12,871		12,871		1,587		9,111
Farmland		133		133		62		135
1-4 family residential		—		—		—		78
Multi-family residential		—		—		—		—
Consumer		—		—		—		—
Agricultural		—		—		—		—
Subtotal		13,004		13,004		1,649		9,385
Total	$	21,677	$	21,677	$	1,649	$	17,188

~~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 modified as TDRs that occurred 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 TDRs that have subsequently defaulted through September 30, 2017. The TDRs described above increased the allowance for loan losses by $19 and resulted in no charge-offs during the nine months ended September 30, 2017.

(Continued)

~~22.~~

24.

~~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 TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the nine months ended September 30, 2016.

~~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~~March 31, 2020 and December 31, ~~2016,~~2019, securities sold under agreements to repurchase totaled ~~$12,920~~$11,843 and ~~$10,859,~~$11,100, respectively.

The Company has ~~a $25.0 million~~an unsecured $25,000 revolving line of credit, which had ana $20,000 outstanding balance ~~of $0~~ at ~~quarter end,~~March 31, 2020, bears interest at the prime rate ~~plus 0.50%~~of 3.25%, with interest payable quarterly, and matures in March ~~2018.~~2021.

Federal Home Loan Bank (FHLB) advances, as of March 31, 2020, were as follows:

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

Year	Current Weighted Average Rate			Principal Due
2020		0.62	%	$	61,500
2021		1.87	%		1,500
2022		1.99	%		1,500
2023		—			—
2024		1.76	%		6,000
					70,500

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

Year

Current

Weighted

Average Rate

Principal Due

2021

1.38

114

70,614

~~(Continued)~~

~~24.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

NOTE 65 - SUBORDINATED DEBENTURES

Subordinated debentures are made up of the following as of:

	March 31, 2020		December 31, 2019
Trust II Debentures	$	3,093	$	3,093
Trust III Debentures		2,062		2,062
DCB Trust I Debentures		5,155		5,155
Other debentures		500		500
	$	10,810	$	10,810

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)

25.

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~~March 31, 2020 and December 31, ~~2016.~~2019. 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%.

, thereafter.

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

Trust III 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’ 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’ notice, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.

Other ~~debentures~~

In July 2015, the Company issued $4,000 in debentures, of which $3,000 were issued to directors and other related parties. The $3,000 of debentures to related parties were repaid in May 2017 and a $500 par value debenture, which carried a rate of 2.5%, matured and was repaid in July 2017. The remaining $500 debenture has a rate of 4.00% and a maturity date of January 1, 2019. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the 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.

Debentures

In December 2015, the Company issued $5,000 in debentures, of which $2,500 were issued to directors and other related parties. In May 2017, $2,000 of the related party debentures were repaid with a portion of the proceeds of Guaranty’s initial public offering. ~~The remaining $3,000~~A further $1,000 of other debentures matured and were paid off in full in July of 2018 and another $1,000 and $500 of debentures matured and were paid off in full in July and December of 2019, respectively. The

(Continued)

26.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

remaining $500 debenture was issued at par value of $500 ~~each~~ with ~~rates ranging from 3.00% to~~a rate of 5.00% and maturity ~~dates from July 1, 2018 to~~date of 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.

~~(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 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~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 follows:

Three Months Ended March 31, 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		23,000			29.00		9.84		11
Exercised		(3,000	)		24.00		2.54		—
Forfeited		(24,400	)		31.72		8.46		—
Balance, March 31, 2020		503,600		$	26.55		6.07	$	21

Exercisable at end of period		260,880		$	25.26		5.01	$	7

Three Months Ended March 31, 2019	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		537,872		$	26.49		6.96	$	2,088
Granted		19,000			29.80		9.90		—
Exercised		(19,172	)		25.08		6.14		79
Forfeited		(16,400	)		28.90		8.49		27
Balance, March 31, 2019		521,300		$	26.59		6.79	$	1,745

Exercisable at end of period		194,140		$	24.52		5.41	$	938

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

(Continued)

27.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

A summary of nonvested stock option activity in the Plan during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 follows:

Three Months Ended March 31, 2020	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		251,120		$	28.18		7.31	$	1,188
Granted		23,000			29.00		9.84		11
Vested		(8,200	)		27.45		7.19		—
Forfeited		(23,200	)		33.36		8.90		—
Balance, March 31, 2020		242,720		$	27.94		7.19	$	13

Three Months Ended March 31, 2019	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		331,560		$	27.74		7.77	$	975
Granted		19,000			29.80		9.90		—
Vested		(7,000	)		27.13		7.81		22
Forfeited		(16,400	)		28.90		8.49		27
Balance, March 31, 2019		327,160		$	27.81		7.61	$	807

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~~three months ended:

	March 31, 2020		March 31, 2019
Intrinsic value of options exercised	$	—	$	79
Cash received from options exercised		72		481
Weighted average fair value of options granted		5.62		5.21

Restricted Stock Awards and Units

A summary of restricted stock activity in the Plan during the three months ended March 31, 2020 and 2019 follows:

Three Months Ended March 31, 2020	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		31,459		$	30.29
Granted		—			—
Vested		(6,100	)		30.25
Forfeited		—			—
Balance, March 31, 2020		25,359		$	30.29

(Continued)

28.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

Three Months Ended March 31, 2019	Number of Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		1,439	$	31.57
Granted		30,500		30.25
Vested		—		—
Forfeited		—		—
Balance, March 31, 2019		31,939	$	30.31

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,~~March 31, 2020, there was ~~$1,963~~$1,897 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~~3.32 years.

The Company granted options under the Plan during the first ~~nine~~three months of ~~2016~~2020 and ~~2017.~~2019. Expense of ~~$247~~$155 and ~~$162~~$137 was recorded during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively.~~

2019, respectively,which represents the fair value of shares vested during those years.

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~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 totaled ~~$739~~$383 and ~~$727,~~$343, 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)~~

cash.

As of ~~December~~March 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.

~~As of September 30, 2017~~2020 and December 31, ~~2016,~~2019, the number of shares held by the KSOP were ~~1,314,277~~1,227,096 and ~~1,319,225,~~1,224,697, respectively. There were no0 unallocated shares to plan participants as of ~~September 30, 2017 and there were 50,000 shares unallocated to plan participants~~March 31, 2020 or 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.2019. All shares held by the KSOP were treated as outstanding at each of the respective period ends.

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~~$34,713 and ~~$17,804~~$34,495 as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

Expense related to these plans totaled ~~$381~~$296 and ~~$329~~$285 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively, and $602 for the year ended December 31, 2019. This expense is included in employee compensation and benefits on the Company’s consolidated statements of earnings. The recorded liability totaled approximately ~~$2,361~~$4,337 and ~~$2,002~~$4,081 as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, 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

(Continued)

29.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 totaled ~~$1,718~~$478 and ~~$1,451,~~$715, respectively, and $3,265 for the year ended December 31, 2019. 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 15 years. Some of the Company’s operating leases include options to extend the leases for up to 7 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 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 March 31, 2020, operating lease right-of-use assets were $11,230 and liabilities were $11,385 and were included within the accompanying consolidated balance sheets as components of other assets and other liabilities, respectively.

Operating lease expense for operating leases accounted for under ASC 842 for the three months ended March 31, 2020 and 2019 was approximately $477 and $418, respectively, and is included as a component of occupancy expenses within the accompanying consolidated statements of earnings.

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

	March 31, 2020			December 31, 2019
Operating leases
Operating lease right-of-use assets	$	11,230		$	11,554
Operating lease liabilities		11,385			11,675

Weighted average remaining lease term
Operating leases	10 years			10 years
Weighted average discount rate
Operating leases		2.68	%		2.69	%

The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2024 and thereafter. Minimum future lease payments under these non-cancelable operating leases in excess of one year as of March 31, 2020, are as follows:

Year Ended December 31,	Amount
2020	$	1,379
2021		1,430
2022		1,323
2023		1,314
2024		1,312
Thereafter		6,312
Total lease payments		13,070
Less: interest		(1,685	)
Present value of lease liabilities	$	11,385

(Continued)

30.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 9 - INCOME TAXES

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

	Three Months Ended March 31,
	2020			2019
Income tax expense for the period	$	1,445		$	1,187
Effective tax rate		18.71	%		18.19	%

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 months ended March 31, 2020 and 2019, 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.

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 that entering into the interest rate swaps exposed the Company to variability in their fair value due to changes in the level of interest rates. It is the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this liability to other liabilities of the Company. ~~To meet this objective, the~~

The Company ~~utilizes~~also entered into interest rate swaps ~~as an asset/liability management strategy~~ to ~~hedge~~receive payments at a floating rate in exchange for paying a fixed rate, the ~~change in value~~objective of which is to reduce the ~~cash flows due to changes in expected~~overall cost of short-term 3-month FHLB advances that will be renewed consistent with the reset terms on the interest rate ~~assumptions.~~

swap and that are included in the amounts in Note 4.

Interest rate swaps with notional amounts totaling $5,000 as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, were designated as cash flow hedges of the debentures and $40,000 as of March 31, 2020 were designated as cash flow hedges of the FHLB advances. The cash flow hedges were determined to be fully effective during all periods presented. As such, no0 amount of ineffectiveness has been included in net income.

Therefore, the aggregate fair value of the swaps is recorded in accrued interest and other liabilities within the 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.

(Continued)

31.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

March 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		6.00	$	457
$	3,000		7.505	%	3 month LIBOR plus 3.35%	10/30/2012		2.58	$	287
$	15,000		0.668	%	3 month LIBOR	3/18/2020		2.97	$	113
$	15,000		0.790	%	3 month LIBOR	3/18/2020		4.97	$	224
$	10,000		0.530	%	3 month LIBOR	3/23/2020		2.98	$	31

December 31, 2019
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		6.25	$	314
$	3,000		7.505	%	3 month LIBOR plus 3.35%	10/30/2012		2.83	$	212

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~~$137 and ~~$656~~$169 during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively, and $648 for the year ended December 31, 2019. This expense is reported as a component of interest expense on the debentures. At ~~September 30, 2017,~~March 31, 2020, the Company expected ~~none~~NaN of the unrealized loss to be reclassified as a reduction of interest expense during the remainder of ~~2017.~~

~~(Continued)~~

~~30.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

2020.

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 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.~~

March 31, 2020 and December 31, 2019.

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

(Continued)

32.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

customer. As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016, no~~2019, 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
	March 31, 2020		December 31, 2019
Commitments to extend credit	$	411,087	$	440,685
Letters of credit		8,463		9,054

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,~~March 31, 2020, the Company had letters of credit of ~~$52,000~~$6,800 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 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 March 31, 2020 and December 31, 2019, 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”I” (“CETI”), ~~(2) specify~~(ii) specified that Tier 1I capital consist of ~~Common Equity Tier 1~~CETI and “Additional Tier 1I Capital” instruments meeting specified requirements, ~~(3) define Common Equity Tier 1~~(iii) defined CETI narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to ~~Common Equity Tier 1~~CETI 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 on January 1, 2015, with certain transition provisions to be fully phased in by January 1, 2019.~~

Starting in January 2016, the implementation of the capital conservation buffer ~~became~~was effective for the Company starting at the 0.625% level and ~~increases~~increasing 0.625% each year thereafter, until it ~~reaches~~reached 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 share data)~~

the minimum required risk-weighted capital ratios. ~~Failure to meet the full amount~~

As 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, 2017March 31, 2020 and December 31, ~~2016 that~~2019, the ~~Company met all capital adequacy requirements to which it was subject.~~

~~As of September 30, 2017 and December 31, 2016, 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, Tier 1 risk-based and Tier 1I leverage ratios as set forth in the ~~table above.~~table. There are no conditions or events since ~~September 30, 2017~~March 31, 2020 that management believes have changed the ~~Bank’s capital category under the regulatory framework for prompt corrective action.~~

Company’s category.

(Continued)

33.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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 1I capital, net of goodwill, the rules permit the inclusion of $10,310 of trust preferred securities in Tier 1I capital ~~at September 30, 2017~~as of March 31, 2020 and December 31, ~~2016.~~2019, Additionally, the rules provide that trust preferred securities would no longer qualify for Tier 1I 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.

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 Fully Phased-In			To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
March 31, 2020
Total capital to risk-weighted assets:
Consolidated	$	249,729	12.65%	$	157,988	8.00%	$	207,359	10.50%			n/a
Bank		268,880	13.62%		157,988	8.00%		207,359	10.50%	$	197,485	10.00%
Tier 1 capital to risk-weighted assets:
Consolidated		227,781	11.53%		118,491	6.00%		167,862	8.50%			n/a
Bank		246,932	12.50%		118,491	6.00%		167,862	8.50%		157,988	8.00%
Tier 1 capital to average assets:⁽¹⁾
Consolidated		227,781	9.97%		91,421	4.00%		91,421	4.00%			n/a
Bank		246,932	10.80%		91,424	4.00%		91,424	4.00%		114,280	5.00%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		217,471	11.01%		88,868	4.50%		138,239	7.00%			n/a
Bank		246,932	12.50%		88,868	4.50%		138,239	7.00%		128,365	6.50%
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve Board 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 Fully Phased-In			To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
December 31, 2019
Total capital to risk-weighted assets:
Consolidated	$	253,793	13.29%	$	152,770	8.00%	$	200,510	10.50%			n/a
Bank		249,643	13.07%		152,774	8.00%		200,516	10.50%	$	190,968	10.00%
Tier 1 capital to risk-weighted assets:
Consolidated		237,591	12.44%		114,577	6.00%		162,318	8.50%			n/a
Bank		233,441	12.22%		114,581	6.00%		162,322	8.50%		152,774	8.00%
Tier 1 capital to average assets:
Consolidated		237,591	10.29%		92,318	4.00%		92,318	4.00%			n/a
Bank		233,441	10.11%		92,321	4.00%		92,321	4.00%		115,401	5.00%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		227,281	11.90%		85,933	4.50%		133,674	7.00%			n/a
Bank		233,441	12.22%		85,935	4.50%		133,677	7.00%		124,129	6.50%

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.~~

34.

~~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 Loans: ~~The~~For the year ended December 31, 2019, the fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on the present value of estimated future cash flows using the ~~loan's~~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.~~

35.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

As of March 31, 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	$	96,420		$	—	$	96,420		$	—
Collateralized mortgage obligations		87,404			—		87,404			—
Municipal securities		173,549			—		173,549			—
Corporate bonds		19,689			—		19,689			—
Loans held for sale		4,024			—		—			4,024
Cash surrender value of life insurance		34,713			—		34,713			—
SBA servicing assets		713			—		—			713
Derivative instrument assets		1,112			—		1,112			—
Derivative instrument liabilities		(1,112	)		—		(1,112	)		—

As of December 31, 2019	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	$	84,182		$	—	$	84,182		$	—
Collateralized mortgage obligations		90,927			—		90,927			—
Municipal securities		17,348			—		17,348			—
Corporate bonds		20,259			—		20,259			—
Loans held for sale		2,368			—		—			2,368
Cash surrender value of life insurance		34,495			—		34,495			—
SBA servicing assets		672			—		—			672
Derivative instrument assets		526			—		526			—
Derivative instrument liabilities		(526	)		—		(526	)		—

Assets at fair value on a nonrecurring basis:
Impaired loans		20,028			—		—			20,028

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~~three months ended ~~September 30, 2017~~March 31, 2020 or for the year ended December 31, ~~2016.~~

2019.

Nonfinancial Assets and Nonfinancial Liabilities

Nonfinancial assets measured at fair value on a nonrecurring basis during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 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, 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.~~

36.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

	March 31, 2020			December 31, 2019			March 31, 2019
Other real estate owned remeasured at initial recognition:
Carrying value of other real estate owned prior to remeasurement	$	176		$	147		$	130
Charge-offs recognized in the allowance for credit losses		(66	)		(11	)		(6	)
Fair value of other real estate owned remeasured at initial recognition	$	110		$	136		$	124

Other real estate owned remeasured subsequent to initial recognition:
Carrying value of other real estate owned prior to remeasurement	$	6		$	35		$	—
Write-downs included in collection and other real estate owned expense		(2	)		(10	)		—
Fair value of other real estate owned remeasured subsequent to initial recognition	$	4		$	25		$	—

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:

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range

(Weighted

Average)

March 31, 2020

Other real estate owned

605

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, 2019
Impaired loans	$	20,028	Fair value of collateral - sales comparison approach	Selling costs or other normal adjustments: Real estate Equipment	10%-20% (16%) 10%-20% (19%)
Other real estate owned	$	603	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.~~

37.

~~Table of Contents~~

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents information on individually evaluated collateral dependent loans as of March 31, 2020:

	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total Fair Value
Commercial and industrial	$	—	$	—	$	118	$	118
Real estate:
Construction and development		—		—		531		531
Commercial real estate		—		—		8,277		8,277
Farmland		—		—		—		—
1-4 family residential		—		—		—		—
Multi-family residential		—		—		—		—
Consumer		—		—		—		—
Agricultural		—		—		—		—
Overdrafts
Total	$	—	$	—	$	8,926	$	8,926

The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, are as follows:

	Fair value measurements as of March 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	$	146,928	$	146,928	$	—	$	—	$	146,928
Loans, net		1,696,861		—		—		1,715,503		1,715,503
Accrued interest receivable		8,148		—		8,148		—		8,148
Nonmarketable equity securities		12,323		—		12,323		—		12,323
Financial liabilities:
Deposits	$	2,000,426	$	1,497,464	$	507,364	$	—	$	2,004,828
Securities sold under repurchase agreements		11,843		—		11,843		—		11,843
Accrued interest payable		1,410		—		1,410		—		1,410
Federal Home Loan Bank advances		70,614		—		70,874		—		70,874
Subordinated debentures		10,810		—		8,360		—		8,360

(Continued)

38.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

	Fair value measurements as of December 31, 2019 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	$	90,714	$	90,714	$	—	$	—	$	90,714
Marketable securities held to maturity		155,458		—		160,460		—		160,460
Loans, net		1,690,794		—		—		1,705,155		1,705,155
Accrued interest receivable		9,151		—		9,151		—		9,151
Nonmarketable equity securities		12,301		—		12,301		—		12,301
Financial liabilities:
Deposits	$	1,956,804	$	1,438,509	$	520,469	$	—	$	1,958,978
Securities sold under repurchase agreements		11,100		—		11,100		—		11,100
Accrued interest payable		1,642		—		1,642		—		1,642
Federal Home Loan Bank advances		55,118		—		55,125		—		55,125
Subordinated debentures		10,810		—		8,677		—		8,677

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.

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.

(Continued)

39.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 14 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the maximum potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and would then share in the net earnings of the Company. Dilutive share equivalents include stock-based awards issued to employees.

Stock options granted by the Company are treated as potential shares in computing earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money awards which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

~~(Continued)~~

~~38.~~

~~Table of Contents~~

~~GUARANTY BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

	Three Months Ended March 31,
	2020		2019
Numerator:
Net earnings (basic)	$	6,278	$	5,337
Net earnings (diluted)	$	6,278	$	5,337

Denominator:
Weighted-average shares outstanding (basic)		11,432,391		11,815,966
Effect of dilutive securities:
Common stock equivalent shares from stock options		—		43,492
Weighted-average shares outstanding (diluted)⁽¹⁾		11,432,391		11,859,458

Net earnings per share
Basic	$	0.55	$	0.45
Diluted	$	0.55	$	0.45

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

(1) Outstanding options and the closing price of the Company's stock as of March 31, 2020 had an anti-dilutive effect on the weighted-average common shares outstanding for the quarter ended March 31, 2020; therefore, the effect of their conversion has been excluded from the calculation of the diluted weighted-average common shares outstanding for the period. The diluted EPS has been calculated using the basic weighted-average shares outstanding in order to comply with GAAP.

(Continued)

~~39.~~

40.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Report”) ~~as well as with our consolidated financial statements~~ and ~~notes thereto appearing~~any subsequent Quarterly Reports on Form 10-Q, 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, 2019. 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. 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 Recent Developments

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 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. Governmental responses to the pandemic have 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, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and 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.

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

(Continued)

41.

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 have and are likely to continue to 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 contains 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 nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law providing an additional $320 billion in funding for the PPP program. PPP loans are intended to provide eligible businesses with funding for approximately eight weeks of 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.

Significant uncertainties as to future economic conditions exist, and we have taken measured actions 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. Additionally, the economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by the current expected credit loss (“CECL”) methodology, have contributed to an increased provision for credit losses for the first quarter of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.

In response to the COVID-19 pandemic, the Company is:

•

Participating in the PPP, administered by the Small Business Administration (the “SBA”), to provide potentially forgivable loans to small businesses to be used for payroll, utilities, rent and interest. In total, as of May 4, 2020, the Company obtained approvals for approximately 1,728 customers totaling approximately $209.6 million in approved loans, of which approximately $12.0 million had not been funded as of May 4, 2020 but is expected to be funded during May 2020. The PPP approvals will impact approximately 25,000 jobs.

•

To provide additional liquidity for funding PPP loans, we obtained a six-month advance of $100.0 million from the Federal Home Loan Bank (“FHLB”) at a fixed interest rate of 0.25%, maturing October 13, 2020 and with no prepayment penalty.

•

Working with borrowers to provide hardship relief either through a 3-month payment deferral or up to 6-months of interest only payments. As of May 4, 2020, we have 495 borrowers with outstanding loan balances of $160.1 million who have requested this relief under the 3-month deferral program, and 296 borrowers with outstanding loans balances of $114.0 million who have requested relief under the up to 6-month interest only program. Borrowers who were provided relief under these programs represent 14.2% of the total outstanding loan balance as of May 4, 2020.

~~40.~~

•

Suspending foreclosures and repossessions, and waiving overdraft fees, late payment fees and CD early withdrawal penalties through at least June 30, 2020.

•

Practicing social distancing with both employees and customers. Our lobbies are temporarily closed and by appointment only, but drive-thrus remain open and employees are contacting customers to assist them with online and mobile banking when desired. We have also implemented bank-wide work-from-home rotation programs, where possible.

•

Contributing to charities in all communities we serve to assist with COVID-19 crisis relief efforts.

•

Subsequent to the quarter-end blackout period, halting or significantly reducing our stock repurchase program for the foreseeable future. The Company repurchased 421,887 shares of common stock during the first quarter ending March 31, 2020 at an average repurchase price of $25.64.

•

Conducted a private placement of unregistered debt securities totaling $10.0 million from related parties of the Company and Bank, which closed on May 1, 2020. The debentures have terms that are less than 4.5 years in maturity and the average rate is 3.0%. The proceeds of these debentures were used to replenish cash that was used to repurchase shares of capital stock in the first quarter of 2020.

•

Continuing to be conservative in our assumptions for the allowance for credit losses (“ACL”) for our loan portfolio due to the significant unknowns surrounding the impact of COVID-19. The ending balance of our ACL at March 31, 2020 was $21.95 million, or 1.28% of outstanding loans as of that date. In April 2020, we added an additional provision for credit losses of $4.0 million, increasing our ACL to $26.03 million, or 1.54% of outstanding loans, excluding PPP loans, as of April 30, 2020. We believe it is possible, as a result of our allowance modeling,

(Continued)

42.

macroeconomic factors and ongoing uncertainties surrounding COVID-19, that our ACL as a percentage of total loans could reach 1.75% to 2.00% by December 31, 2020.

•

Closely monitoring loans and concentrations in affected industries. Social distancing, stay-at-home orders and other measures as a result of COVID-19 have particularly affected restaurant, hospitality, retail commercial real estate (“CRE”) and energy sectors. Excluding SBA guaranteed loans, the Bank has direct exposure, through total loan commitments as of April 30, 2020, of $37.2 million to restaurant-related borrowers, $80.4 million to hospitality-related borrowers and $61.7 million to retail CRE borrowers. We have no direct energy exposure and minimal indirect energy exposure.

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 the general reserve, the loan portfolio, less cash secured loans, government guaranteed loans and impaired loans, is multiplied by our adjusted historical loss rate. The second component of the allowance for loan losses, the specific reserve, is determined in accordance with current authoritative accounting guidance based on probable and incurred losses on specific classified loans.

The allowance for ~~loan~~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 commercial loan segments and delinquency status for our consumer loan segments. We also have

(Continued)

43.

separate segments for our warehouse lines of ~~recoveries).~~

credit, for our internally originated SBA loans and for our SBA loans acquired from Westbound Bank.

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 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 not also included in 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 of the COVID modifications are not TDRs pursuant to the CARES Act and the April 7, 2020 Interagency guidance.

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 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.

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44.

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

~~42.~~

collateral, if secured, which must be perfected. The relatively small individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes risk.

Marketable Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase. Interest income includes amortization and accretion of purchase premiums and discounts. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for ~~other-than-temporary impairment (“OTTI”)~~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. Is 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 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.

Discussion and Analysis of Results of Operations for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~

2019

Results of Operations

The following discussion and analysis ~~of our results of operations~~ compares our results of operations for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 with the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2019. The results of operations for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2017.~~

2020.

(Continued)

45.

Net earnings were ~~$11.6~~$6.3 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, as compared to ~~$8.5~~$5.3 million for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2019. The following table presents key earnings data for the periods indicated:

	For the Three Months Ended March 31,
	2020			2019
	(Dollars in thousands, except per share data)
Net earnings	$	6,278		$	5,337
Net earnings per common share
-basic		0.55			0.45
-diluted		0.55			0.45
Net interest margin⁽¹⁾		3.85	%		3.64	%
Net interest rate spread⁽²⁾		3.49	%		3.21	%
Return on average assets		1.09	%		0.94	%
Return on average equity		9.94	%		9.11	%
Average equity to average total assets		10.92	%		10.37	%
Dividend payout ratio		34.55	%		37.78	%

(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.

~~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 net interest income divided by average interest-earning assets.~~

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

Net Interest Income

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

Net interest income, before the provision for ~~the nine months ended September 30, 2017~~loan losses, was ~~$44.1~~$20.6 million compared to ~~$39.8~~$19.0 million for the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2020 and 2019, respectively, an increase of ~~$4.3~~$1.6 million, or ~~10.9%~~8.2%. The increase in net interest income ~~was comprised of~~resulted from a ~~$5.1~~$1.6 million, or ~~10.6%~~25.7%, ~~increase~~decrease in interest ~~income~~expense offset by a ~~$775,000,~~$55,000, or ~~9.5%~~0.2%, ~~increase~~decrease in interest ~~expense. The growth in interest income~~income. Although there was ~~primarily attributable to~~ a ~~$110.6~~$49.9 million, or ~~9.5%~~3.0%, increase in average loans outstanding for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, compared to the ~~nine~~three months ended ~~September 30, 2016, further improved~~March 31, 2019, that increase was offset by a ~~0.04% increase~~14 basis point decrease in the average yield on total loans. The increase in average loans outstanding was primarily due to organic ~~growth in all of our markets and continuing maturity of~~ ~~de novo~~ ~~and acquired locations in the Dallas/Fort Worth metroplex and Bryan/College Station markets.~~growth. The ~~$775,000 increase~~$1.6 million decrease in interest expense for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 was primarily related to an average deposit rate decrease of 37 basis points, despite a ~~$74.1~~$17.2 million, or ~~6.33%~~1.2%, increase in average interest-bearing deposits over the same period in ~~2016.~~2019. The majority of ~~this~~the average deposit balance increase was due to organic growth, and was primarily in public funds accounts, savings accounts and ~~money market accounts, driven~~DDAs, offset by declines in ~~part by favorable rates that were offered in our Bryan/College Station~~certificates of deposit and ~~Dallas/Fort Worth metroplex markets.~~NOW accounts. For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, net interest margin and net interest spread were ~~3.37%~~3.85% and ~~3.15%~~3.49%, respectively, compared to ~~3.25%~~3.64% and ~~3.06%~~3.21% for the same period in ~~2016,~~2019, which reflects the ~~increases~~decreases in interest ~~income~~expense discussed above relative to the ~~increases~~decreases in interest ~~expense.~~

income.

Average Balance Sheet Amounts, Interest Earned and Yield Analysis

The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

(Continued)

46.

	For the Three Months Ended March 31,
	2020								2019
	Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
ASSETS
Interest-earnings assets:
Total loans⁽¹⁾	$	1,701,525		$	22,517		5.32	%	$	1,651,608		$	22,244		5.46	%
Securities available for sale		220,303			1,313		2.40			233,625			1,530		2.66
Securities held to maturity		144,531			956		2.66			162,121			1,028		2.57
Nonmarketable equity securities		9,221			114		4.97			12,128			170		5.68
Interest-bearing deposits in other banks		75,677			352		1.87			57,240			335		2.37
Total interest-earning assets		2,151,257			25,252		4.72			2,116,722			25,307		4.85
Allowance for credit losses		(20,781	)							(14,906	)
Noninterest-earning assets		195,142								188,917
Total assets	$	2,325,618							$	2,290,733
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,475,507		$	4,421		1.21	%	$	1,458,261		$	5,673		1.58	%
Advances from FHLB and fed funds purchased		23,236			82		1.42			74,700			447		2.43
Line of credit		3,407			—		—			—			—		—
Subordinated debentures		10,810			171		6.36			10,310			169		6.65
Securities sold under agreements to repurchase		12,827			9		0.28			11,065			11		0.40
Total interest-bearing liabilities		1,525,787			4,683		1.23			1,554,336			6,300		1.64
Noninterest-bearing liabilities:
Noninterest-bearing deposits		524,263								475,890
Accrued interest and other liabilities		21,649								22,893
Total noninterest-bearing liabilities		545,912								498,783
Shareholders’ equity		253,919								237,614
Total liabilities and shareholders’ equity	$	2,325,618							$	2,290,733
Net interest rate spread⁽²⁾							3.49	%							3.21	%
Net interest income				$	20,569							$	19,007
Net interest margin⁽³⁾							3.85	%							3.64	%

(1) Includes average outstanding balances of loans held for sale of $2.4 million and $1.3 million for the three months ended March 31, 2020 and 2019, 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. Net interest margin on a taxable equivalent basis was 3.87% and 3.64% for the three months ended March 31, 2020 and 2019, respectively, using a marginal tax rate of 21%.

~~44.~~

(Continued)

47.

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 loans held for sale of $3.5 million and $3.2 million 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.~~

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

	For the Three Months Ended March 31, 2020 vs. 2019
	Increase (Decrease)
	Due to Change in						Total Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	681		$	(408	)	$	273
Securities available for sale		(89	)		(128	)		(217	)
Securities held to maturity		(113	)		41			(72	)
Nonmarketable equity securities		(41	)		(15	)		(56	)
Interest-earning deposits in other banks		109			(92	)		17
Total increase (decrease) in interest income	$	547		$	(602	)	$	(55	)

Interest-bearing liabilities:
Interest-bearing deposits	$	68		$	(1,320	)	$	(1,252	)
Advances from FHLB and fed funds purchased		(313	)		(52	)		(365	)
Line of credit		—			—			—
Subordinated debentures		8			(6	)		2
Securities sold under agreements to repurchase		2			(4	)		(2	)
Total decrease in interest expense		(235	)		(1,382	)		(1,617	)
Increase in net interest income	$	782		$	780		$	1,562

~~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

Provision for Loan Losses

The provision for loan 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 provision for loan losses for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 was ~~$2.3~~$1.4 million compared to ~~$3.2 million~~$575,000 for the ~~nine~~three months ended ~~September~~March 31, 2019. The projected economic impact of COVID-19 as of March 31, 2020 created the need for $913,000 of the $1.4 million of additional ACL. Subsequent to March 31, as more information about the potential economic impacts of COVID-19 and related government relief programs became available, management closely reviewed the loan portfolio and met with borrowers to better understand their potential financial hardships, if any. As a result, additional loans in industries affected by this crisis were downgraded to appropriate risk ratings given the expected impacts of COVID-19 on those industries. These downgrades and other portfolio analysis resulted in additional provision for credit losses due to COVID-19 of approximately $4.0 million in April 2020, for a total of $4.9 million in provision due to COVID-19 through April 30, ~~2016.~~2020. The ~~decrease~~complete economic impacts of COVID-19 are still very much unknown. Therefore, the additional reserves added, and any future reserves that may be added until the effects of COVID-19 are more clear, are primarily qualitative in nature and portions of the ~~provision expense was related to one large loan relationship whose repayment ability deteriorated in the prior year, thus increasing a specific~~ reserve may not be 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~~any one loan or group of net charge offs during the nine months ended September 30, 2017 resulted primarily from two relationships totaling approximately $700,000, as well as smaller charge off amounts in our single family and consumer loan portfolios. The amount of net charge offs during the nine months ended September 30, 2016 resulted primarily from one relationship, totaling approximately $1.2 million, that was charged off during the third quarter of 2016.

loans.

Noninterest Income

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

(Continued)

48.

The following table presents components of noninterest income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 and the period-over-period variations in the categories of noninterest income:

	For The Three Months Ended March 31,				Increase
	2020		2019		2020 vs. 2019
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	908	$	826	$	82
Merchant and debit card fees		1,131		959		172
Fiduciary and custodial income		514		425		89
Gain on sale of loans		1,189		477		712
Bank-owned life insurance income		218		158		60
Loan processing fee income		150		128		22
Other noninterest income		851		589		262
Total noninterest income	$	4,961	$	3,562	$	1,399

~~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

Total noninterest income increased ~~$898,000,~~$1.4 million, or ~~9.35%~~39.3%, for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 compared to the same period in ~~2016.~~2019. 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. As noted above under “Impact of COVID-19 and Recent Developments”, we are waiving certain service charges in sensitivity to our customers through at least June 30, 2020. Service ~~charges on deposit accounts were $2.8 million~~fee income was $908,000 for the ~~nine~~three months ended ~~September 30, 2017, which increased over~~March 31, 2020 compared to $826,000 for the same period in ~~2016 by $176,000,~~2019, an increase of $82,000, or ~~6.7%~~9.9%. ~~This~~The increase was primarily due to an increase in ~~service charges was due in part to our deposit growth during~~insufficient fund income of approximately $72,000 from the same ~~period and a new deposit service charge and fee schedule implemented during February 2017.~~

quarter in 2019. The total number of DDAs as of March 31, 2020 was 46,653, an increase of 1,732 accounts from 44,921 as of March 31, 2019.

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~~$1.1 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020 compared to ~~$2.0 million~~$959,000 for the same period in ~~2016,~~2019, an increase of ~~$275,000,~~$172,000, or ~~13.6%~~17.9%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during ~~2017.~~

the first quarter of 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 $514,000 for the three months ended March 31, 2020, an increase of $89,000, or 20.9%, compared to $425,000 for the same period in 2019. The revenue increase resulted primarily from 11 new accounts that opened during the three months ended March 31, 2020, which have generated additional income. Furthermore, revenue for our services fluctuates by month with the market value for all publicly-traded assets, which are primarily held in irrevocable trusts and investment management accounts that carry higher fees. Additionally, our custody-only assets are carried in a tiered percentage rate fee schedule charged against market value.

Gain on ~~Sales~~Sale of Loans.We originate long-term fixed-rate and adjustable-rate mortgage loans for resale into the secondary market. We also began selling the guaranteed portion of SBA 7(a) loans on the secondary market during the second half of 2019. We sold ~~270~~106 mortgage loans for ~~$49.4~~$24.6 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 compared to ~~224~~75 mortgage loans for ~~$43.2~~$14.6 million for the ~~nine~~three months ended ~~September 30, 2016. Gain~~March 31, 2019. Total gain on sale of loans was ~~$1,490,000~~$1.2 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, an increase of ~~$259,000,~~$712,000, or ~~21.0%~~149.3%, compared to ~~$1,231,000~~$477,000 for the same period in ~~2016, which reflects~~2019. The gain consisted of $818,000 in mortgage loans and $371,000 in SBA 7(a) loans sold during the quarter.

Bank-owned Life Insurance Income. We invest in bank-owned life insurance due to its attractive nontaxable return and protection against the loss of our key employees. We record income based on the growth of the cash surrender value of these policies as well as the annual yield net of fees and charges, including mortality charges. Income from bank-owned life insurance increased by $60,000, or 38.0%, for the three months ended March 31, 2020 compared to the same period in 2019, primarily due to $7.0 million of additional policies purchased in June of 2019 on the lives of existing officers of the Company.

Loan Processing Fee Income. Revenue earned from collection of loan processing fees was $150,000 for the three months ended March 31, 2020 compared to $128,000 for the same period in 2019, an increase of $22,000, or 17.2%. The increase in loan processing fee income is primarily attributable to an increase in ~~mortgage~~ volume ~~and~~of newly originated, renewed or extended loans during the ~~number of loans sold.~~

~~Other.~~ period.

(Continued)

49.

Other Noninterest Income. 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,~~$262,000, or ~~14.5%~~44.5%, for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020 compared to the same period in ~~2016~~2019 due primarily to a large SBA fair value adjustment in the ~~growth~~first quarter of 2019 that reduced other noninterest income by $263,000, which was not present 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.~~

the first quarter of 2020.

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~~three months ended ~~September 30, 2017,~~March 31, 2020, noninterest expense totaled ~~$36.1~~$16.4 million, an increase of ~~$1.8 million,~~$937,000, or ~~5.17%~~6.1%, compared to ~~$34.3~~$15.5 million for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2019. The following table presents, for the periods indicated, the major categories of noninterest expense:

	For The Three Months Ended March 31,				Increase (Decrease)
	2020		2019		2020 vs. 2019
	(Dollars in thousands)
Employee compensation and benefits	$	9,466	$	8,986	$	480
Non-staff expenses:
Occupancy expenses		2,477		2,451		26
Amortization		333		349		(16	)
Software and technology		939		782		157
FDIC insurance assessment fees		195		33		162
Legal and professional fees		519		626		(107	)
Advertising and promotions		433		385		48
Telecommunication expense		180		174		6
ATM and debit card expense		418		278		140
Director and committee fees		219		239		(20	)
Other noninterest expense		1,228		1,167		61
Total noninterest expense	$	16,407	$	15,470	$	937

~~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

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~~$9.5 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, an increase of ~~$1,099,000,~~$480,000, or ~~5.8%~~5.3%, compared to ~~$19.1~~$9.0 million for the same period in ~~2016.~~2019. The increase ~~was due primarily to an increase in per employee salaries, as well as increased health insurance expenses, bonus expense, benefit plan expenses~~resulted from annual salary increases and ~~payroll taxes. As~~from the addition of ~~September 30, 2017 and 2016, we had 397 and 395 full-time~~six full time equivalent employees, ~~respectively,~~from 463 as of March 31, 2019 to 469 as of March 31, 2020, which were added to support operational growth.

Software and Technology Fees. Software and technology fees consist of fees paid to third parties for support of software and technology products. Software support expense was $939,000 for the three months ended March 31, 2020, compared to $782,000 for the same period in 2019, an increase of ~~two employees.~~

~~Occupancy Expenses.~~ ~~Occupancy expenses were $5.6 million and $5.2 million for the nine months ended September 30, 2017 and 2016, respectively. The increase of $356,000,~~$157,000, or ~~6.9%, resulted primarily from additional lease expense of banking centers totaling $181,000 and an increase in ad valorem taxes of $90,000, primarily associated with repossessed assets.~~

~~Software and Technology.~~ ~~Software and technology expenses increased~~ ~~$165,000, or~~ ~~12.06%, from~~ ~~$1.37 million~~ ~~for the~~ ~~nine months ended September 30, 2016~~ to ~~$1.53 million~~ ~~for the nine months ended September 30, 2017.~~20.1%. The increase is attributable primarily to ~~incremental processing fees resulting from growth in volume of our loan~~new software investments to improve online deposit account opening, further enhance treasury management capabilities and ~~deposit accounts.~~

improve connectivity to support remote working and other technology capabilities.

FDIC Insurance Assessment ~~Fees.~~ Fees. FDIC insurance assessment fees were ~~$527,000 and $900,000~~$195,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020, an increase of $162,000, or 490.9%, from the three months ended March 31, 2019. The increase resulted from an FDIC assessment credit of $534,000 that was received in January 2019, which was fully realized during the prior year.

Legal and ~~2016, respectively. The~~Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were $519,000 for the three months ended March 31, 2020, a decrease of ~~$373,000,~~$107,000, or ~~41.4%~~17.1%, ~~resulted from the effect of an update in our accounting methodology during 2016 related~~ compared

(Continued)

50.

to ~~accrual of the assessment fees and an increased one time expense in the prior period.~~

~~Advertising and Promotions.~~ Advertising and promotion related expenses were $879,000 and $752,000 for the nine months ended September 30, 2017 and 2016, respectively. The increase of $127,000, or 16.9%, was primarily due to increases in advertising expense in our growth markets, especially Dallas/Fort Worth and Bryan/College Station.

~~Other~~. This category includes operating and administrative expenses, such as stock option expense, expenses and losses related to repossession of assets, small hardware and software purchases, expense of the value of stock appreciation rights, losses incurred on problem assets, OREO related expenses, gains or losses on the sale of OREO, business development expenses (i.e., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense increased to $3.3 million for the nine months ended September 30, 2017, compared to $3.2 million$626,000 for the same period in ~~2016,~~2019. The decrease was primarily the result of professional recruiting fees paid during the quarter ended March 31, 2019 that were not paid during the first quarter of 2020.

ATM and Debit Card Expense. We pay processing fees related to the activity of our customers’ ATM and debit card usage. ATM and debit card expenses were $418,000 for the three months ended March 31, 2020, an increase of ~~$112,000,~~$140,000, or ~~3.5%. The increase was primarily due~~50.4%, compared to ~~additional stock appreciation rights~~$278,000 for the same period in 2019 as a result of increased ATM and ~~stock option expenses of $306,000 during the~~

~~48.~~

~~comparable periods, partially offset~~debit card usage 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.

our customers.

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 and 2016, income tax expense totaled $4.6 million and $3.3 million, respectively. Our effective tax rates for the nine months ended September 30, 2017 and 2016 were 28.54% and 27.79%, respectively.

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

~~Results of Operations~~

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

Net earnings were $4.1 million for the three months ended September 30, 2017, as compared to $3.4 million for the three months ended September 30, 2016. 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 net interest income divided by average interest-earning assets.~~

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

~~Net Interest Income~~

Net interest income for the three months ended September 30, 2017 was $15.1 million compared to $13.7 million for the three months ended September 30, 2016, an increase of $1.4 million, or 10.5%. 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 average yield on total loans. The increase in average loans outstanding was primarily due to organic growth in all of our markets and continuing maturity of ~~de novo~~ ~~and acquired locations in the Dallas/Fort Worth metroplex and Bryan/College Station markets. The $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.

For the three months ended ~~September 30, 2017, net interest margin~~March 31, 2020 and ~~net interest spread were 3.38%~~2019, income tax expense totaled $1.4 million and ~~3.13%, respectively, compared to 3.26% and 3.07% for the same period in 2016, which reflects the increases in interest income discussed above relative to the increases in interest expense.~~

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

The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities,$1.2 million, 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 and 2016, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

~~50.~~

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 loans held for sale of $2.1 million and $1.7 million 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.~~

~~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

~~Provision for Loan Losses~~

The provision for loan losses for the three months ended September 30, 2017 was $800,000 compared to $840,000 for the three months ended September 30, 2016. Net charge offs were $1.0 million for 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 during the third quarter of 2017 and one relationship totaling approximately $1.2 million was charged off during the third quarter of 2016.

~~Noninterest Income~~

~~The following table presents components of noninterest income for the three months ended September 30, 2017 and 2016 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.~~

Total noninterest income increased $300,000, or 8.8%, for the three months ended September 30, 2017 compared to the same period in 2016. Material changes in the components of noninterest income are discussed below.

~~Service Charges on Deposit Accounts.~~ We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $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 increasetax expense 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 million for the three months ended September 30, 2017 compared to 92 loans for $16.2 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%, compared to $486,000 for the same period in 2016, which reflects~~ an increase in ~~mortgage volume and the number~~net earnings before taxes 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 million for the three months ended September 30, 2016. 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

~~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 million for the three months ended September 30, 2017, an increase of $359,000, or 5.6%, compared to $6.4 million for the same period in 2016. The increase was due primarily to an increase in per employee salaries, as well as increased health insurance expenses, benefit plan expenses and payroll taxes. As of September 30, 2017 and 2016, we had 397 and 395 full-time equivalent employees, respectively, an increase of two employees.

~~Occupancy Expenses.~~ Occupancy expenses were $1.9 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively. The increase of $218,000, or 12.7%, resulted primarily from additional lease expense of banking centers and an increase during the quarter of machine and equipment servicing expenses related to automated teller machines and banking center alarm systems.

~~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 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, compared to $1.1 million for the same period in 2016, a decrease of $168,000, or 15.48%. The decrease was primarily due to reductions in office and computer supplies, account promotion expense and loan and filing expenses, quarter-over-quarter, partially offset by an increase in liability insurance expense.

~~Income Tax Expense~~

~~For the three months ended September 30, 2017 and 2016, income tax expense totaled $1.7 million and $1.4 million, respectively.~~$1.2 million. Our effective tax rates for the three months ended ~~September 30, 2017~~2020 and ~~2016,~~2019 were ~~29.10%~~18.71% and ~~29.05%~~18.19%, respectively.

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

March 31, 2020

Assets

Our total assets increased ~~$95.7~~$72.5 million, or ~~5.2%~~3.13%, from ~~$1.8~~$2.32 billion as of December 31, ~~2016~~2019 to ~~$1.9~~$2.39 billion as of ~~September 30, 2017.~~March 31, 2020. Our asset growth was primarily due to increases in ~~our loan~~total loans of $12.0 million, cash and cash equivalents of $56.2 million and investment securities ~~portfolios,~~of $8.8 million. These increases were partially offset by ~~decreases~~a reduction in ~~cash and~~ other ~~assets.~~

assets of $0.4 million.

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,~~March 31, 2020, total loans were ~~$1.31~~$1.72 billion, an increase of ~~$62.2~~$12.0 million, or ~~5.0%~~0.7%, from the December 31, ~~2016~~2019 balance of ~~$1.25~~$1.71 billion. In addition to these amounts, ~~$3.4~~$4.0 million and ~~$2.6~~$2.4 million in loans were classified as held for sale as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

~~54.~~

(Continued)

51.

Total loans, excluding those held for sale, as a percentage of deposits, were ~~80.8%~~85.9% and ~~79.0%~~87.2% as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively. Total loans, excluding those held for sale, as a percentage of total assets, were ~~67.9%~~71.9% and ~~68.1%~~73.6% as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

The following table summarizes our loan portfolio by type of loan and dollar change and percentage change from December 31, ~~2016~~2019 to ~~September 30, 2017:~~March 31, 2020:

	As of March 31, 2020		As of December 31, 2019		Dollar Change			Percent Change
	(Dollars in thousands)
Commercial and industrial	$	297,163	$	279,583	$	17,580			6.29	%
Real estate:
Construction and development		263,973		280,498		(16,525	)		(5.89	)%
Commercial real estate		584,883		567,360		17,523			3.09	%
Farmland		78,635		57,476		21,159			36.81	%
1-4 family residential		400,605		412,166		(11,561	)		(2.80	)%
Multi-family residential		20,430		37,379		(16,949	)		(45.34	)%
Consumer and overdrafts		53,350		53,574		(224	)		(0.42	)%
Agricultural		19,314		18,359		955			5.20	%
Total loans held for investment	$	1,718,353	$	1,706,395	$	11,958			0.70	%

Total loans held for sale	$	4,024	$	2,368	$	1,656			69.93	%

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 %

Nonperforming Assets

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

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

We had ~~$10.2~~$17.3 million in nonperforming assets as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$9.6~~$12.3 million as of December 31, ~~2016.~~2019. We had ~~$5.8~~$16.4 million in nonperforming loans as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$4.4~~$11.3 million as of December 31, ~~2016.~~2019. The ~~$1.3 million, or 30.5%,~~ increase in nonperforming loans and assets resulted primarily from one SBA 7(a), partially guaranteed (75%) loan and one commercial loan, both of which were acquired in our ~~nonperforming (nonaccrual) loans~~June 2018 acquisition of Westbound Bank. To facilitate the workout of the SBA loan, we repurchased the guaranteed portion of the loan from a third party, resulting in an increased book balance of $3.1 million and a total book balance, which remains 75% SBA guaranteed, of $3.9 million. The increased book balance from the SBA loan of $3.1 million, combined with the commercial loan book balance of $1.2 million, comprises $4.3 million of the increase from December 31, ~~2016~~2019. Three SBA partially guaranteed loans relating to ~~September 30, 2017 primarily relates to an increase~~loans acquired from Westbound Bank, including the $3.1 million repurchased portion, are included in nonaccrual loans ~~in our 1-4 family residential portfolio~~at March 31, 2020 and had combined book balances of ~~$1.0 million,~~$8.7 million. Management continues efforts with these borrowers to achieve a return to full performing status; however, all three loans are collateralized by hospitality-focused properties and have been heavily impacted by the COVID-19 crisis, thus limiting available workout options at this time. Excluding these partially guaranteed SBA loans, non-performing assets as a percentage of ~~which $612,000 is related to one borrower and several~~total loans that are 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 to two borrowers. The increase in nonaccrual loans was partially offset by a decrease in our construction 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.~~

at March 31, 2020 would be 0.49%.

(Continued)

52.

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

	March 31, 2020			December 31, 2019
	(Dollars in thousands)
Nonaccrual loans	$	16,232		$	11,262
Accruing loans 90 or more days past due		150			—
Total nonperforming loans		16,382			11,262
Other real estate owned:
Commercial real estate, construction and development, and farmland		105			105
Residential real estate		500			498
Total other real estate owned		605			603
Repossessed assets owned		292			392
Total other assets owned		897			995
Total nonperforming assets	$	17,279		$	12,257
TDR loans - nonaccrual	$	97		$	101
TDR loans - accruing	$	7,220		$	7,240
Ratio of nonperforming loans to total loans⁽¹⁾⁽²⁾		0.95	%		0.66	%
Ratio of nonperforming assets to total assets		0.72	%		0.53	%

(1) Excludes loans held for sale of $4.0 million and $2.4 million as of March 31, 2020 and December 31, 2019, respectively.
(2) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.

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.~~

The following table presents nonaccrual loans by category as of:

	March 31, 2020		December 31, 2019
Commercial and industrial	$	412	$	46
Real estate:
Construction and development		1,192		—
Commercial real estate		10,236		6,860
Farmland		176		182
1-4 family residential		3,886		3,853
Multi-family residential		—		—
Consumer		229		279
Agricultural		101		42
Total	$	16,232	$	11,262

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

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.

(Continued)

53.

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.

Modified loans that avoided TDR status are not currently required to pay, or are paying with interest only, but they are nevertheless considered performing so long as they are compliant with the terms of their modifications. They will be evaluated for classification, but the existence of a loan modification in accordance with CARES Act does not necessarily results in a classification.

The following tables summarize the internal ratings of our loans as of:

	March 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Loss		Nonaccrual		Total
	(Dollars in thousands)
Commercial and industrial	$	296,454	$	—	$	297	$	—	$	—	$	412	$	297,163
Real estate:
Construction and development		262,175		—		606		—		—		1,192		263,973
Commercial real estate		563,419		70		11,158		—		—		10,236		584,883
Farmland		78,321		41		97		—		—		176		78,635
1-4 family residential		396,481		238		—		—		—		3,886		400,605
Multi-family residential		20,430		—		—		—		—		—		20,430
Consumer		53,044		77		—		—		—		229		53,350
Agricultural		19,053		70		90		—		—		101		19,314
Total	$	1,689,377	$	496	$	12,248	$	—	$	—	$	16,232	$	1,718,353

	December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	279,217	$	153	$	213	$	—	$	—	$	279,583
Real estate:
Construction and development		278,679		600		1,219		—		—		280,498
Commercial real estate		548,662		1,071		17,627		—		—		567,360
Farmland		57,152		91		233		—		—		57,476
1-4 family residential		409,896		1,425		845		—		—		412,166
Multi-family residential		37,379		—		—		—		—		37,379
Consumer		53,327		192		55		—		—		53,574
Agricultural		18,101		126		132		—		—		18,359
Total	$	1,682,413	$	3,658	$	20,324	$	—	$	—	$	1,706,395

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.~~

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 judgement 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,

(Continued)

54.

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. Upon adoption of ASC 326 on January 1, 2020, and as of March 31, 2020, the Company determined that all impaired available for sale securities that experienced a decline in fair value below the amortized costs basis were due to non-credit related factors, therefore no ACL was recorded and there was no provision expense recognized during the three months ended March 31, 2020.

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, and SBA loans originated by us. 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 for ~~Loan~~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 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,~~March 31, 2020, the allowance for ~~loan~~credit losses totaled ~~$12.5~~$21.9 million, or ~~0.96%~~1.28%, of total loans, excluding those held for sale. As of December 31, ~~2016,~~2019, the allowance for loan losses totaled ~~$11.5~~$16.2 million, or ~~0.92%~~0.95%, of total loans, excluding those held for sale. The increase in ~~allowance~~the ACL of $5.7 million, or 35.5%, is due to ~~general reserves~~the impact of adopting ASC 326 on January 1, 2020 of $4.5 million and provision for ~~organic~~credit losses in the first quarter of 2020 of $1.4 million. The provision for credit losses was impacted partially by our loan growth ~~specific allocations on impaired assets and slightly higher qualitative factors in general allocation in recognition~~ of ~~certain macroeconomic trends in consumer and commercial real estate lending.~~

~~58.~~

$12.0 million, as well as provision that is specifically the result of COVID-19 developments through March 31, 2020.

(Continued)

55.

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

	As of and for the Three Months Ended March 31,						As of and for the Year Ended December 31,
	2020			2019			2019
	(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	1,701,525		$	1,651,608		$	1,689,108
Gross loans outstanding at end of period⁽²⁾		1,718,353			1,655,703			1,706,395
Allowance for credit losses at beginning of the period		16,202			14,651			14,651
Impact of adopting ASC 326		4,548			—			—
Provision for credit losses		487			575			1,250
Provision for credit losses - COVID-19		913			—			—
Charge offs:
Commercial and industrial		43			6			86
Real estate:
Commercial real estate		—			—			—
1-4 family residential		59			6			14
Consumer		73			17			72
Agriculture		—			—			89
Overdrafts		49			49			192
Total charge-offs		224			78			453
Recoveries:
Commercial and industrial		—			5			508
Real estate:
Commercial real estate		—			—			1
1-4 family residential		1			1			3
Consumer		7			23			111
Agriculture		—			—			89
Overdrafts		14			13			42
Total recoveries		22			42			754
Net charge-offs (recoveries)		202			36			(301	)
Allowance for credit losses at end of period	$	21,948		$	15,190		$	16,202
Ratio of allowance to end of period loans⁽²⁾		1.28	%		0.92	%		0.95	%
Ratio of net (recoveries) charge-offs to average loans⁽¹⁾		0.01	%		0.00	%		(0.02	%)

(1) Includes average outstanding balances of loans held for sale of $2.4 million, $1.3 million and $2.7 million for the three months ended March 31, 2020 and 2019, and for the year ended December 31, 2019, respectively.
(2) Excludes loans held for sale of $4.0 million, $1.2 million and $2.4 million for the three months ended March 31, 2020 and 2019, and for the year ended December 31, 2019, respectively.

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~~

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 from ~~260.5%~~143.9% at December 31, ~~2016~~2019 to ~~217.7%~~134.0% at ~~September 30, 2017.~~March 31, 2020. Non-performing loans increased to ~~$5.8~~$16.4 million at ~~September 30, 2017~~March 31, 2020, compared to ~~$4.4~~$11.3 million at December 31, ~~2016, which is attributable primarily to an increases~~2019, as described in ~~nonaccrual~~the preceding Nonperforming Assets section of Management’s Discussion and Analysis. The total balance of non-performing loans includes three SBA partially guaranteed loans with combined book balances of $8.7 million as of March 31, 2020 that were acquired from Westbound Bank 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.~~

June 2018.

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)

56.

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 March 31, 2020					As of December 31, 2019
	Amount		Percent to Total Loans			Amount		Percent to Total Loans
	(Dollars in thousands)
Commercial and industrial	$	2,924		13.32	%	$	2,056		12.69	%
Real estate:
Construction and development		2,578		11.75	%		2,378		14.68	%
Commercial real estate		9,761		44.47	%		6,853		42.30	%
Farmland		792		3.61	%		570		3.52	%
1-4 family residential		4,156		18.94	%		3,125		19.29	%
Multi-family residential		189		0.86	%		409		2.52	%
Total real estate		17,476		79.63	%		13,335		82.31	%
Consumer		696		3.17	%		614		3.79	%
Agricultural		281		1.28	%		197		1.21	%
Unallocated COVID-19 reserve		571		2.60	%		—		—	%
Total allowance for credit losses	$	21,948		100.00	%	$	16,202		100.00	%

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 %

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,~~March 31, 2020, the carrying amount of our investment securities totaled ~~$417.2~~$377.1 million, an increase of ~~$70.9~~$8.9 million, or ~~20.5%~~2.4%, compared to ~~$346.3~~$368.2 million as of December 31, ~~2016.~~2019. Investment securities represented ~~21.7%~~15.8% and ~~18.9%~~15.9% of total assets as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

Our investment portfolio consists of securities classified as available for sale. During the first quarter of 2020, we transferred all of our investment securities classified as held-to-maturity to available-for-sale in order to provide maximum flexibility to address liquidity and capital needs that may result from COVID-19. We believe these transfers are allowable under existing GAAP due to the isolated, non-recurring and usual events resulting from the pandemic.

As of March 31, 2020, securities available for sale ~~and~~totaled $377.1 million, which includes the transfer of securities from our held to ~~maturity.~~maturity portfolio, as well as purchases of municipal securities during the first quarter of 2020 at a cost of $19.6 million. As of ~~September 30, 2017,~~December 31, 2019, securities available for sale and securities held to maturity totaled ~~$238.1~~$212.7 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~~$155.5 million, respectively. Held to maturity ~~percentages~~securities represented ~~42.9%~~42.2% 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.2019. 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 March 31, 2020, the Company determined that all impaired available for sale securities experienced a decline in fair value below their amortized cost basis due to noncredit-related factors, therefore the Company carried no ACL with respect to our securities portfolio at March 31, 2020.

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

	As of March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Corporate bonds	$	19,648	$	144	$	103	$	19,689
Municipal securities		170,561		3,276		288		173,549
Mortgage-backed securities		93,979		2,508		67		96,420
Collateralized mortgage obligations		87,001		487		84		87,404
Total	$	371,189	$	6,415	$	542	$	377,062

(Continued)

57.

	As of December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Corporate bonds	$	19,667	$	592	$	—	$	20,259
Municipal securities		155,196		5,286		11		160,471
Mortgage-backed securities		98,332		748		348		98,732
Collateralized mortgage obligations		92,475		1,256		17		93,714
Total	$	365,670	$	7,882	$	376	$	373,176

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

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~~March 31, 2020 and December 31, ~~2016,~~2019, 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~~obligations.

Prior to ~~maturity and had a $1.5 million carrying value as~~adoption of ~~September 30, 2017.~~

~~Our~~ASC 326, management ~~evaluates~~evaluated securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions ~~warrant~~warranted 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~~December 31, 2019, no OTTI was recorded.

The following tables sets 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 March 31, 2020
	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	$	1,001		2.81	%	$	17,605		2.96	%	$	1,083		5.30	%	$	—		—		$	19,689		3.08	%
Municipal securities		4,114		3.02	%		34,118		3.12	%		51,723		3.36	%		83,594		3.16	%		173,549		3.21	%
Mortgage-backed securities		—		—			63,389		2.55	%		33,031		2.49	%		—		—			96,420		2.53	%
Collateralized mortgage obligations		1,556		3.44	%		85,848		2.68	%		—		—			—		—			87,404		2.69	%
Total	$	6,671		3.09	%	$	200,960		2.74	%	$	85,837		3.05	%	$	83,594		3.16	%	$	377,062		2.91	%

	As of December 31, 2019
	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	$	1,018		2.79	%	$	12,496		2.87	%	$	6,745		3.47	%	$	—		—		$	20,259		3.07	%
Municipal securities		2,189		3.10	%		31,497		3.02	%		39,951		3.40	%		82,127		3.07	%		155,764		3.14	%
Mortgage-backed securities		—		—			55,974		2.45	%		42,573		2.67	%		—		—			98,547		2.54	%
Collateralized mortgage obligations		1,652		3.44	%		91,952		2.70	%		—		—			—		—			93,604		2.72	%
Total	$	4,859		3.15	%	$	191,919		2.69	%	$	89,269		3.05	%	$	82,127		3.07	%	$	368,174		2.87	%

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 %

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~~6.41 years with an estimated effective duration of ~~4.63~~3.59 years as of ~~September 30, 2017.~~

March 31, 2020.

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, 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)

58.

The average yield of our securities portfolio was ~~2.92%~~2.91% as of ~~September 30, 2017 compared to 2.97%~~March 31, 2020, up from 2.87% as of December 31, ~~2016.~~2019. The ~~decrease~~improvement in average ~~yield as of September 30, 2017, compared to December 31, 2016, was~~yields resulted primarily ~~due to purchases of new mortgage-backed securities and collateralized mortgage obligations, which typically have a lower yield than do the~~from an increase in municipal securities ~~in our portfolio. Municipal securities decreased slightly~~yields from ~~$156.6 million at a yield of 3.58%,~~3.14% as of December 31, ~~2016,~~2019 to ~~$154.5 million at a yield of 3.60%~~3.21% as of ~~September 30, 2017, however,~~March 31, 2020. As of March 31, 2020, municipal securities ~~represent only 37.0%~~and mortgage backed securities comprised 46.0% and 25.6% of the ~~total investment~~ portfolio, ~~as September 30, 2017, compared to 45.2% of the total investment portfolio as~~respectively. As of December 31, ~~2016.~~

2019, municipal securities and mortgage backed securities comprised 42.3% and 26.8% of the portfolio, respectively.

Deposits

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

Total deposits as of ~~September 30, 2017~~March 31, 2020 were ~~$1.62~~$2.00 billion, an increase of ~~$40.5~~$43.6 million, or ~~2.6%~~2.2%, compared to ~~$1.58~~$1.96 billion as of December 31, ~~2016.~~

~~62.~~

2019.

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

	For the Three Months Ended March 31, 2020		For the Year Ended December 31, 2019		Dollar Change			Percent Change
	(Dollars in thousands)
NOW and interest-bearing demand accounts	$	276,121	$	264,483	$	11,638			4.40	%
Savings accounts		75,078		71,940		3,138			4.36	%
Money market accounts		611,861		609,741		2,120			0.35	%
Certificates and other time deposits		512,447		514,051		(1,604	)		(0.31	%)
Total interest-bearing deposits		1,475,507		1,460,215		15,292			1.05	%
Noninterest-bearing demand accounts		524,263		500,895		23,368			4.67	%
Total deposits	$	1,999,770	$	1,961,110	$	38,660			1.97	%

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 %

The aggregate amount of certificates and other time deposits in denominations of $100,000 or more as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 was ~~$190.4~~$375.9 million and ~~$218.6~~$387.5 million, respectively.

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

	As of March 31, 2020
	Amount		Weighted Average Interest Rate
	(Dollars in thousands)
Under 3 months	$	89,573		2.23	%
3 to 6 months		116,370		2.32	%
6 to 12 months		116,367		1.64	%
12 to 24 months		34,391		1.74	%
24 to 36 months		10,592		1.97	%
36 to 48 months		6,742		2.55	%
Over 48 months		1,882		1.95	%
Total	$	375,917		2.03	%

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 %

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)

59.

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~~March 31, 2020 and December 31, ~~2016,~~2019, total borrowing capacity of ~~$471.4~~$529.4 million and ~~$400.4~~$560.6 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within 54 years. As of ~~September 30, 2017,~~March 31, 2020, approximately ~~$1.0~~$1.36 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 rate loans in our portfolio. The following table presents our FHLB borrowings by maturity and weighted average rate as of ~~September 30, 2017:~~March 31, 2020:

	Balance		Weighted Average Interest Rate
	(Dollars in thousands)
Less than 90 days	$	60,000		0.59	%
90 days to less than one year		1,500		1.74	%
One to three years		3,114		1.91	%
After three to five years		6,000		1.76	%
After five years		—		—
Total	$	70,614		0.77	%

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.~~

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~~March 31, 2020 and December 31, ~~2016, $142.0~~2019, $190.5 million and ~~$168.3~~$178.7 million, respectively, were available under this arrangement. As of ~~September 30, 2017,~~March 31, 2020 and December 31, 2019, approximately ~~$184.4~~$244.0 million and $178.7 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, 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 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 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 in May 2017 with a portion of the proceeds of our initial public offering and a $500,000 par value debenture, which carried a rate of 2.5%, matured and was repaid in July 2017. The remaining $500,000 debenture has a rate of 4.0% and matures in January 2019.

(Continued)

60.

In December 2015, wethe Company issued $5.0 million in debentures, of which $2.5 million were issued to directors and other related parties. ~~In May 2017, $2.0~~As of December 31, 2019 $4.5 million of the ~~$2.5 million~~debentures had been repaid. The remaining $500,000 debenture was issued at par value of ~~debentures issued to related parties were repaid~~$500,000 with a ~~portion~~rate of 5.00% and maturity date of 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 ~~proceeds~~face amount of ~~our initial public offering. The remaining $3.0~~the debenture redeemed, plus all accrued interest.

On May 1, 2020, the Company issued $10.0 million in debentures ~~were issued~~to directors and other related parties. The debentures have stated maturity dates between November 1, 2020 and November 1, 2024, and bear interest at fixed annual rates between 1.00% and 4.00%. The Company will pay interest semi-annually on May 1st and November 1st in arrears during the ~~principal~~term of the debentures. The debentures are redeemable by the Company at its option, in whole in or part, at any time on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of ~~$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.~~

the debenture redeemed, plus all accrued but unpaid interest.

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

~~64.~~

~~revolving~~and in March 2020, we renewed that line of credit. The line of credit bears interest at the prime rate, ~~plus 0.50%,~~ with quarterly interest payments, and matures in March ~~2018. During the second quarter~~2021. As 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 of September 30, 2017,~~March 31, 2020, there was noa $20.0 million 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~~three months ended ~~September 30, 2017~~March 31, 2020 and the year ended December 31, ~~2016,~~2019, 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~~March 31, 2020 and December 31, ~~2016,~~2019, we maintained three federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate ~~$70~~$55.0 million in federal funds. There were no funds under these lines of credit outstanding as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above in Other Borrowingsprovides an additional source of liquidity.

(Continued)

61.

Subsequent to March 31, 2020, and to provide additional liquidity for the SBA Paycheck Protection Program, we obtained a six-month advance of $100.0 million from the FHLB at a fixed interest rate of 0.25%, maturing October 13, 2020 and with no prepayment penalty. As of May 4, 2020, we have SBA approved loans of approximately $209.6 million under the program and expect the duration of these loans, many of which are expected to be forgiven, to be less than 6 months.

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~~$2.33 billion for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~$1.8~~$2.32 billion for the year ended December 31, ~~2016.~~2019.

	For the Three Months Ended March 31, 2020			For the Year Ended December 31, 2019
Sources of Funds:
Deposits:
Noninterest-bearing		22.54	%		21.60	%
Interest-bearing		63.45	%		62.97	%
Advances from FHLB		1.00	%		2.50	%
Line of credit		0.15	%		—
Subordinated debentures		0.46	%		0.51	%
Securities sold under agreements to repurchase		0.55	%		0.47	%
Accrued interest and other liabilities		0.93	%		1.02	%
Shareholders’ equity		10.92	%		10.93	%
Total		100.00	%		100.00	%

Uses of Funds:
Loans		72.27	%		72.16	%
Securities available for sale		9.47	%		9.89	%
Securities held to maturity		6.21	%		6.86	%
Nonmarketable equity securities		0.40	%		0.49	%
Federal funds sold		2.99	%		1.89	%
Interest-bearing deposits in other banks		3.25	%		2.32	%
Other noninterest-earning assets		5.41	%		6.39	%
Total		100.00	%		100.00	%

Average noninterest-bearing deposits to average deposits		26.22	%		25.54	%
Average loans to average deposits		85.09	%		86.13	%

~~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 %

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~~$49.9 million, or ~~9.5%~~3.0%, for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 compared to the same period in ~~2016.~~2019. 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,~~March 31, 2020, we had ~~$339.9~~$411.1 million in outstanding commitments to extend credit and ~~$9.3~~$8.5 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, ~~2016,~~2019, we had ~~$297.6~~$440.7 million in outstanding commitments to extend credit and ~~$8.9~~$9.1 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~~March 31, 2020 and December 31, ~~2016,~~2019, 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,~~March 31, 2020, we had cash and cash equivalents of ~~$95.1~~$146.9 million, compared to ~~$127.5~~$90.7 million as of December 31, ~~2016.~~2019. The ~~decrease~~increase was primarily due to ~~a decrease~~an increase in federal funds sold of ~~$26.4~~$36.0 million and an increase in interest-bearing deposits of $40.7 million.

~~66.~~

(Continued)

62.

Capital Resources

Total shareholders’ equity ~~increased~~decreased to ~~$207.3~~$253.6 million as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$141.9~~$261.6 million as of December 31, ~~2016 (including KSOP-owned shares), an increase~~2019, a decrease of ~~$65.3~~$7.9 million, or ~~46.0%~~3.0%. The ~~increase~~decrease from December 31, ~~2016~~2019 was primarily the result of the ~~issuance of new shares~~repurchase of common stock ~~in connection with our initial public offering in May 2017, as well as $11.6 million in net earnings~~through the Company’s share buyback program for the ~~nine~~three 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.

March 31, 2020.

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~~March 31, 2020 and December 31, ~~2016,~~2019, 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 more 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:

	March 31, 2020					December 31, 2019
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Guaranty Bancshares, Inc.

Total capital (to risk weighted assets)	$	249,729		12.65	%	$	253,793		13.29	%
Tier 1 capital (to risk weighted assets)		227,781		11.53	%		237,591		12.44	%
Tier 1 capital (to average assets)		227,781		9.97	%		237,591		10.29	%
Common equity tier 1 risk-based capital		217,471		11.01	%		227,281		11.90	%

Guaranty Bank & Trust, N.A.

Total capital (to risk weighted assets)	$	268,880		13.62	%	$	249,643		13.07	%
Tier 1 capital (to risk weighted assets)		246,932		12.50	%		233,441		12.22	%
Tier 1 capital (to average assets)		246,932		10.80	%		233,441		10.11	%
Common equity tier 1 risk-based capital		246,932		12.50	%		233,441		12.22	%

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 %

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments as of ~~September 30, 2017~~March 31, 2020 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.

	As of March 31, 2020
	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	$	425,153	$	62,879	$	14,865	$	—	$	502,897
Advances from FHLB		61,500		3,114		6,000		—		70,614
Subordinated debentures		500		—		—		10,310		10,810
Operating leases		58		467		278		10,582		11,385
Total	$	487,211	$	66,460	$	21,143	$	20,892	$	595,706

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

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

(Continued)

63.

customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of ~~the date indicated~~March 31, 2020 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

	As of March 31, 2020
	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	$	2,786	$	2,239	$	380	$	3,058	$	8,463
Commitments to extend credit		252,314		62,016		32,735		64,022		411,087
Total	$	255,100	$	64,255	$	33,115	$	67,080	$	419,550

~~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

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 January 1, 2020, the adoption date of ASC 326, and as of March 31, 2020, and determined the likelihood to be improbable. Therefore, no ACL was recorded for standby and commercial letters of credit as of March 31, 2020.

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 upon adoption of ASC 326 or as of March 31, 2020.

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.

(Continued)

64.

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

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

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

~~69.~~

standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a twelve-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 15.0% for a 100 basis point shift, 20.0% for a 200 basis point shift and 30.0% for a 300 basis point shift.

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

	March 31, 2020						December 31, 2019
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		0.79	%		(10.17	)%		0.25	%		(0.85	)%
+200		(0.09	)%		(5.97	)%		0.30	%		1.17	%
+100		(0.28	)%		(2.77	)%		0.14	%		0.93	%
Base		—			—			—			—
-100		(0.83	)%		2.77	%		(1.78	)%		(7.11	)%

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%)

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.

(Continued)

65.

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

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure 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 March 31,						As of December 31,
	2020			2019			2019
	(Dollars in thousands, except per share data)
Tangible Common Equity
Total shareholders’ equity	$	253,646		$	250,310		$	261,551
Adjustments:
Goodwill		(32,160	)		(32,160	)		(32,160	)
Core deposit intangible, net		(3,639	)		(4,493	)		(3,853	)
Total tangible common equity	$	217,847		$	213,657		$	225,538
Common shares outstanding⁽¹⁾		11,128,556			11,803,786			11,547,443
Book value per common share	$	22.79		$	21.21		$	22.65
Tangible book value per common share	$	19.58		$	18.10		$	19.53

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~~0, 66,202 and ~~8,066~~43,492 shares of common stock issuable upon exercise of outstanding stock options as of ~~September 30, 2017, September 30, 2016 and~~March 31, 2020, December 31, ~~2016,~~2019 and March 31, 2019, 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.

(Continued)

66.

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.~~

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

	As of March 31, 2020			As of December 31, 2019
	(Dollars in thousands)
Tangible Common Equity
Total shareholders’ equity	$	253,646		$	261,551
Adjustments:
Goodwill		(32,160	)		(32,160	)
Core deposit intangible, net		(3,639	)		(3,853	)
Total tangible common equity	$	217,847		$	225,538
Tangible Assets
Total assets	$	2,390,984		$	2,318,444
Adjustments:
Goodwill		(32,160	)		(32,160	)
Core deposit intangible, net		(3,639	)		(3,853	)
Total tangible assets	$	2,355,185		$	2,282,431

Total Shareholders' Equity to Total Assets		10.61	%		11.28	%
Tangible Common Equity to Tangible Assets		9.25	%		9.88	%

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

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 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;

~~our ability to prudently manage our growth and execute~~

•

risks associated with our acquisition and de novo branching 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;

(Continued)

67.

•

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

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

•

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

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

•

changes in the value of collateral securing our loans;

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

•

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

~~changes in the value of collateral securing our loans;~~

•

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

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

•

liquidity risks associated with our business;

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

•

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;

~~72.~~

•

volatility and direction of market interest rates;

•

change in regulatory requirements to maintain minimum capital levels;

~~liquidity risks associated with our business;~~

•

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

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

•

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

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

•

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

~~operational risks associated with our business;~~

•

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

~~volatility and direction of market interest rates;~~

•

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

~~change in regulatory requirements to maintain minimum capital levels;~~

•

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

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

•

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;

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

•

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

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

•

the other factors that are described under the caption “Risk Factors” or referenced in this report, our Annual Report on Form 10-K for the year ended December 31, 2019, and other risks included in the Company’s filings with the SEC.

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

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

natural disasters and adverse weather, acts of terrorism (including cyber attacks), an outbreak of hostilities or other international or domestic calamities, catastrophic events including storms, droughts, tornados and flooding, and other matters beyond our control;

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

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

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

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

~~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.

(Continued)

68.

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~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~74.~~

(Continued)

69.

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, 2019, 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, 2019, with the exception of:

The novel coronavirus disease 2019 (“COVID-19”) pandemic is adversely affecting us and our customers, employees and third-party service providers, and the adverse impacts on our business, financial position, operations and prospects could be significant.

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. Governmental responses to the pandemic have 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, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and 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. These changes have a significant adverse effect on the markets in which we conduct our business and the demand for our products and services.

Business and consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn has influenced the recognition of credit losses in our loan portfolios and has increased our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Disruptions to our customers' businesses could also result in declines in, among other things, wealth management revenue. These developments as a consequence of the pandemic are materially impacting our business and the businesses of our customers and are expected to have a material adverse effect on our financial results for 2020, as evidenced by our first quarter results.

In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including restricting employee travel, directing employees to work from home insofar as is possible, cancelling in-person meetings and implementing our business continuity plans and protocols to the extent necessary. We may take further such actions that we determine are in the best interest of our employees, customers and communities or as may be required by government order. These actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance that these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially

(Continued)

70.

affected going forward. For instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.

COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact on the markets in which we operate and on our business, operations and financial condition could deepen.

As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity and results of operations:

•

Demand for our products and services may decline, making it difficult to grow assets and income.

•

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income.

•

Collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase.

•

Our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond any applicable modification periods, which will adversely affect our net income.

•

The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

•

As the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income.

•

A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend.

•

Our trust and wealth management revenues may decline with continuing market turmoil.

•

A prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets.

•

We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us, and

•

Federal Deposit Insurance Corporation premiums may increase and the agency experiences additional resolution costs.

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

~~There were no sales~~

In In June 2019, the Company announced the adoption a stock repurchase program that authorized the repurchase of ~~equity securities~~up to 500,000 shares of the Company’s common stock. On March 13, 2020, the Company announced the termination of that stock repurchase program and 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 ~~Company during~~board of directors. All repurchases shown in the ~~period covered by this Report that~~table below 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 soldmade pursuant to ~~the underwriters’ full exercise of their option to purchase additional shares,~~these stock repurchase programs 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.open market purchases, privately negotiated transactions or other means.

(Continued)

71.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January, 2020		8,700	$	30.99		8,700		456,330
February, 2020		114,886	$	30.66		114,886		341,444
March, 2020		298,301	$	23.55		298,301		1,043,143
Total		421,887				421,887

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

~~75.~~

Item 6.Exhibits


Exhibit Number
~~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*		~~The following materials from Guaranty Bancshares’ Quarterly Report on Form 10-Q for~~
101.INS		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 Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed with this Quarterly Report on Form 10-Q

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

~~76.~~

(Continued)

72.

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: May 8, 2020
~~Date: November 13, 2017~~		/s/ Tyson T. Abston
		Tyson T. Abston
		Chairman of the Board & Chief Executive Officer

Date: May 8, 2020



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

~~77.~~

73.



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		GNTY	NASDAQ Global Select Market



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

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



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. ☒



	~~(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~~March 31, 2020 and December 31, ~~2016~~2019	4	3
		Consolidated Statements of Earnings for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	6	4
		Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	7	5
		Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	8	6
		Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	9	7
		Notes to Consolidated Financial Statements	11	9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	40	41
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	74	68
Item 4.		Controls and Procedures	74	68

		PART II — OTHER INFORMATION
~~Item 1.~~	~~Legal Proceedings~~	75
Item ~~1A.~~ 1.	~~Risk Factors~~	75Legal Proceedings		70
Item 1A.		Risk Factors		70
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	75	71
Item 3.		Defaults Upon Senior Securities	75	72
Item 4.		Mine Safety Disclosures	75	72
Item 5.		Other Information	75	72
Item 6.	~~Exhibits~~	76Exhibits		72
~~SIGNATURES~~
77SIGNATURES				73



	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



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		)



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



	Available for Sale				Held to Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	—	$	—	$	2,683	$	2,693
Due after one year through five years	1,086		1,096		5,126		5,292
Due after five years through ten years	17,756		17,924		43,228		44,785
Due after ten years	7,769		7,464		95,956		96,403
Mortgage-backed securities	91,801		90,958		23,337		23,549
Collateralized mortgage obligations	120,580		120,691		8,751		8,429
Total Securities	$	238,992	$	238,133	$	179,081	$	181,151



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



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




	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



	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		%



	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 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	%



	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	%



	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	%



	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	%



	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,						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