GUARANTY BANCSHARES INC /TX/ - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from to .

Commission File Number: 001-38087

GUARANTY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



Texas	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)

(888) 572 - 9881

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


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

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

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

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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☒

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

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

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

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

As of November 1, 2019, there were 11,531,943 outstanding shares of the registrant’s common stock, par value $1.00 per share.

GUARANTY BANCSHARES, INC.


	PART I — FINANCIAL INFORMATION	Page

Item 1.	Financial Statements – (Unaudited)	3
	Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3
	Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 4.	Controls and Procedures	69

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71

SIGNATURES		72

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GUARANTY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

	(Unaudited)			(Audited)
	September 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	42,051		$	44,471
Federal funds sold		14,250			20,275
Interest-bearing deposits		2,347			6,764
Total cash and cash equivalents		58,648			71,510
Securities available for sale		221,345			232,975
Securities held to maturity		156,925			163,164
Loans held for sale		3,841			1,795
Loans, net		1,720,595			1,645,444
Accrued interest receivable		7,825			9,292
Premises and equipment, net		52,956			52,227
Other real estate owned		551			751
Cash surrender value of life insurance		34,280			26,301
Deferred tax asset		2,363			3,209
Core deposit intangible, net		4,066			4,706
Goodwill		32,160			32,160
Other assets		30,467			23,436
Total assets	$	2,326,022		$	2,266,970
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing	$	528,301		$	489,789
Interest-bearing		1,435,012			1,381,691
Total deposits		1,963,313			1,871,480
Securities sold under agreements to repurchase		11,363			12,228
Accrued interest and other liabilities		23,508			10,733
Federal Home Loan Bank advances		60,623			115,136
Subordinated debentures		11,310			12,810
Total liabilities		2,070,117			2,022,387
Commitments and contingencies (see Note 12)
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, 12,889,597 and 12,835,486 shares issued, and 11,534,393 and 11,829,868 shares outstanding, respectively		12,890			12,835
Additional paid-in capital		186,165			185,174
Retained earnings		92,947			80,088
Treasury stock, 1,355,204 and 1,005,618 shares at cost		(34,419	)		(24,352	)
Accumulated other comprehensive loss		(1,678	)		(9,162	)
Total shareholders' equity		255,905			244,583
Total liabilities and shareholders' equity	$	2,326,022		$	2,266,970

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Interest income
Loans, including fees	$	22,996	$	20,879	$	67,821		$	55,377
Securities
Taxable		1,417		1,526		4,543			4,713
Nontaxable		955		966		2,871			2,812
Federal funds sold and interest-bearing deposits		485		304		1,478			837
Total interest income		25,853		23,675		76,713			63,739

Interest expense
Deposits		5,304		4,670		16,681			11,948
FHLB advances and federal funds purchased		298		593		1,126			1,181
Subordinated debentures		156		173		495			516
Other borrowed money		12		10		35			34
Total interest expense		5,770		5,446		18,337			13,679

Net interest income		20,083		18,229		58,376			50,060
Provision for loan losses		100		500		1,250			1,750
Net interest income after provision for loan losses		19,983		17,729		57,126			48,310

Noninterest income
Service charges		978		921		2,693			2,661
Net realized gain (loss) on securities transactions		—		1		(22	)		(50	)
Net realized gain on sale of loans		910		637		2,070			1,871
Other income		2,728		1,990		7,547			6,648
Total noninterest income		4,616		3,549		12,288			11,130

Noninterest expense
Employee compensation and benefits		8,896		8,156		26,575			23,723
Occupancy expenses		2,448		2,217		7,336			6,076
Other expenses		4,091		4,654		12,388			12,431
Total noninterest expense		15,435		15,027		46,299			42,230

Income before income taxes		9,164		6,251		23,115			17,210
Income tax provision		1,634		1,160		4,205			3,126
Net earnings	$	7,530	$	5,091	$	18,910		$	14,084
Basic earnings per share	$	0.65	$	0.43	$	1.62		$	1.23
Diluted earnings per share	$	0.65	$	0.42	$	1.62		$	1.22

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net earnings	$	7,530		$	5,091		$	18,910		$	14,084
Other comprehensive income:
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the period		1,232			(1,592	)		9,716			(6,104	)
Amortization of net unrealized gains on held to maturity securities		5			6			14			28
Reclassification adjustment for net (gains) losses included in net earnings		—			(1	)		22			50
Tax effect		(260	)		334			(2,065	)		1,271
Unrealized gains (losses) on securities, net of tax		977			(1,253	)		7,687			(4,755	)
Unrealized holding (losses) gains arising during the period on interest rate swaps		(29	)		67			(203	)		263
Total other comprehensive income (loss)		948			(1,186	)		7,484			(4,492	)
Reclassification of certain tax effects from accumulated other comprehensive income		—			—			—			(486	)
Comprehensive income	$	8,478		$	3,905		$	26,394		$	9,106

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATMENTS 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			Total Shareholders’ Equity
For the Nine Months Ended September 30, 2019
Balance at December 31, 2018	$	—	$	12,835	$	185,174		$	80,088		$	(24,352	)	$	(9,162	)	$	244,583
Net earnings		—		—		—			18,910			—			—			18,910
Other comprehensive income		—		—		—			—			—			7,484			7,484
Exercise of stock options		—		24		529			—			—			—			553
Purchase of treasury stock		—		—		—			—			(10,067	)		—			(10,067	)
Restricted stock grants		—		31		(31	)		—			—			—			—
Stock based compensation		—		—		493			—			—			—			493
Dividends:
Common - $0.52 per share		—		—		—			(6,051	)		—			—			(6,051	)
Balance at September 30, 2019	$	—	$	12,890	$	186,165		$	92,947		$	(34,419	)	$	(1,678	)	$	255,905

For the Three Months Ended September 30, 2019
Balance at June 30, 2019	$	—	$	12,886	$	185,918		$	87,492		$	(33,549	)	$	(2,626	)	$	250,121
Net earnings		—		—		—			7,530			—			—			7,530
Other comprehensive income		—		—		—			—			—			948			948
Exercise of stock options		—		4		68			—			—			—			72
Purchase of treasury stock		—		—		—			—			(870	)		—			(870	)
Stock based compensation		—		—		179			—			—			—			179
Dividends:
Common - $0.18 per share		—		—		—			(2,075	)		—			—			(2,075	)
Balance at September 30, 2019	$	—	$	12,890	$	186,165		$	92,947		$	(34,419	)	$	(1,678	)	$	255,905

See accompanying notes to consolidated financial statements.

	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
For the Nine Months Ended September 30, 2018
Balance at December 31, 2017	$	—	$	11,921	$	155,601	$	66,037		$	(20,087	)	$	(6,127	)	$	207,345
Net earnings		—		—		—		14,084			—			—			14,084
Other comprehensive loss		—		—		—		—			—			(4,492	)		(4,492	)
Reclassification of certain tax effects from accumulated other comprehensive income		—		—		—		486			—			(486	)		—
Exercise of stock options		—		6		134		—			—			—			140
Purchase of treasury stock		—		—		—		—			(9	)		—			(9	)
Issuance of common stock		—		900		28,668		—			—			—			29,568
Stock based compensation		—		—		378		—			—			—			378
Dividends:
Common - $0.43 per share		—		—		—		(5,017	)		—			—			(5,017	)
Balance at September 30, 2018	$	—	$	12,827	$	184,781	$	75,590		$	(20,096	)	$	(11,105	)	$	241,997

For the Three Months Ended September 30, 2018
Balance at June 30, 2018	$	—	$	12,823	$	184,548	$	72,293		$	(20,087	)	$	(9,919	)	$	239,658
Net earnings		—		—		—		5,091			—			—			5,091
Other comprehensive loss		—		—		—		—			—			(1,186	)		(1,186	)
Exercise of stock options		—		4		90		—			—			—			94
Purchase of treasury stock		—		—		—		—			(9	)		—			(9	)
Stock based compensation		—		—		143		—			—			—			143
Dividends:
Common - $0.15 per share		—		—		—		(1,794	)		—			—			(1,794	)
Balance at September 30, 2018	$	—	$	12,827	$	184,781	$	75,590		$	(20,096	)	$	(11,105	)	$	241,997

See accompanying notes to consolidated financial statements.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net earnings	$	18,910		$	14,084
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation		2,914			2,457
Amortization		1,040			881
Deferred taxes		(1,219	)		577
Premium amortization, net of discount accretion		2,888			3,247
Net realized loss on securities transactions		22			50
Gain on sale of loans		(2,070	)		(1,871	)
Provision for loan losses		1,250			1,750
Origination of loans held for sale		(55,265	)		(56,276	)
Proceeds from loans held for sale		55,289			59,217
Write-down of other real estate and repossessed assets		—			392
Net loss on sale of premises, equipment, other real estate owned and other assets		19			478
Stock based compensation		493			378
Net change in accrued interest receivable and other assets		(13,943	)		(5,170	)
Net change in accrued interest payable and other liabilities		10,495			1,768
Net cash provided by operating activities		20,823			21,962

Cash flows from investing activities
Securities available for sale:
Purchases		(5,120	)		(124,914	)
Proceeds from sales		3,957			111,813
Proceeds from maturities and principal repayments		21,182			20,697
Securities held to maturity:
Proceeds from maturities and principal repayments		4,692			8,184
Cash paid in connection with acquisitions		—			(6,423	)
Cash received from acquired banks		—			24,927
Net originations of loans		(76,538	)		(138,024	)
Net purchases of premises and equipment		(3,643	)		(2,924	)
Net proceeds from sale of premises, equipment, other real estate owned and other assets		318			1,898
Net cash used in investing activities		(55,152	)		(104,766	)

See accompanying notes to consolidated financial statements.

	For the Nine Months Ended September 30,
	2019			2018
Cash flows from financing activities
Net change in deposits		91,833			(20,402	)
Net change in securities sold under agreements to repurchase		(865	)		(1,772	)
Proceeds from FHLB advances		156,000			325,000
Repayment of FHLB advances		(210,513	)		(251,513	)
Repayments of debentures		(1,500	)		(1,000	)
Purchase of treasury stock		(10,067	)		(9	)
Exercise of stock options		553			140
Cash dividends		(3,974	)		(5,017	)
Net cash provided by financing activities		21,467			45,427
Net change in cash and cash equivalents		(12,862	)		(37,377	)
Cash and cash equivalents at beginning of period		71,510			91,428
Cash and cash equivalents at end of period	$	58,648		$	54,051

Supplemental disclosures of cash flow information
Interest paid	$	18,269		$	13,137
Income taxes paid		4,011			4,008

Supplemental schedule of noncash investing and financing activities
Cash dividends accrued		2,077			—
Transfer loans to other real estate owned and repossessed assets		137			591
Common stock issued in acquisitions		—			29,568
Reclassification of certain tax effects from accumulated other comprehensive income		—			486

See accompanying notes to consolidated financial statements.

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, Dallas/Fort Worth, 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 making 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, Dallas/Fort Worth, 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 six wholly-owned non-bank subsidiaries, Guaranty Company, Inc., G B COM, INC., 2800 South Texas Avenue LLC, Pin Oak Realty Holdings, Inc., 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, 2018, included in Guaranty’s Annual Report on Form 10-K for the year ended December 31, 2018. 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.

(Continued)

10.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Recent Accounting Pronouncements:

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption was permitted. The Company adopted ASU 2018-02 in the first quarter of 2018 and reclassified its stranded tax effect of $486 within accumulated other comprehensive income to retained earnings at March 31, 2018.

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit loss" ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects that the transition will result in an increase to the allowance for loan losses upon adoption on January 1, 2020, although we are not yet prepared to disclosure the magnitude of the expected increase. The Company’s transition team has run parallel models for calculating the expected losses using various forecasts and qualitative factor adjustments, beginning in January 2019, to gain a comprehensive understanding of the impact that CECL and its underlying assumptions will have on the allowance upon adoption and through future periods. Documentation and model assumptions will continue to be refined during the fourth quarter of 2019.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU were effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We adopted this ASU on January 1, 2019, at which time we recorded a lease liability and a related right of use asset of $12.0 million. These are included in other assets and other liabilities on our consolidated balance sheets as of September 30, 2019, and required disclosures are included in Note 9.

NOTE 2 - ACQUISITIONS

On close of business June 1, 2018, the Company acquired 100% of the outstanding shares of capital stock of Westbound Bank, a Texas banking association (“Westbound”), in exchange for a combination of cash and shares of the Company’s common stock amounting to total consideration of $35,991. Under the terms of the acquisition, the Company issued 899,816 shares of the Company’s common stock in exchange for 2,311,952 shares of Westbound, representing 100% of the outstanding shares of common and preferred stock of Westbound. With the acquisition, the Company has expanded its market into the Houston metropolitan region. Results of operations of the acquired company were included in the Company’s results beginning June 2, 2018. The fair value of the common shares issued as part of the consideration paid for Westbound was determined based upon the closing price of the Company’s common shares on the acquisition date.

(Continued)

11.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Goodwill of $13,418 arising from the acquisition of Westbound consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. None of the goodwill is expected to be deductible for income tax purposes. The following table summarizes the consideration paid for Westbound:

Consideration:

	Westbound
Cash	$	6,423
Equity instruments		29,568
Fair value of total consideration transferred	$	35,991

Cash consideration includes contingent consideration related to an escrow agreement in which $1,750 was retained from amounts paid to Westbound shareholders for payment to Guaranty in the event that certain defined loan relationships experienced actual losses during the three year period following the close of the transaction on June 1, 2018. If the loans defined in the escrow agreement do experience losses, funds from the escrow account will be remitted to Guaranty. If the loans payoff or do not experience losses, funds from the escrow account will be remitted to Westbound shareholders according to terms set forth in the escrow agreement.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition, June 1, 2018.

	Westbound
Cash and due from banks	$	24,927
Investment securities available for sale		15,264
Loans, net of discount		154,687
Accrued interest receivable		651
Premises and equipment		8,625
Core deposit intangible		2,700
Other assets		9,205
Total assets acquired		216,059

Non-interest bearing deposits		40,595
Interest bearing deposits		140,826
Federal Home Loan Bank advances		10,500
Accrued interest and other liabilities		1,565
Total liabilities assumed		193,486

Net assets acquired		22,573

Total consideration paid		35,991

Goodwill	$	13,418

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date (“acquired performing loans”). The fair value adjustments were determined using discounted contractual cash flows. However, the Company believed that all contractual cash flows related to these financial instruments would be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Acquired performing loans had fair value and gross contractual amounts receivable of $154,687.

(Continued)

12.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 3 - MARKETABLE SECURITIES

The following tables summarize the amortized cost and fair value of securities available for sale and securities held to maturity as of September 30, 2019 and December 31, 2018 and the corresponding amounts of gross unrealized gains and losses:

September 30, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	19,686	$	533	$	—	$	20,219
Municipal securities		15,670		603		—		16,273
Mortgage-backed securities		87,946		676		555		88,067
Collateralized mortgage obligations		95,297		1,522		33		96,786
Total available for sale	$	218,599	$	3,334	$	588	$	221,345

Held to maturity:
Municipal securities	$	138,876	$	4,985	$	8	$	143,853
Mortgage-backed securities		15,119		188		43		15,264
Collateralized mortgage obligations		2,930		118		—		3,048
Total held to maturity	$	156,925	$	5,291	$	51	$	162,165

December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	19,743	$	—	$	789	$	18,954
Municipal securities		15,778		75		260		15,593
Mortgage-backed securities		93,083		52		3,676		89,459
Collateralized mortgage obligations		111,341		—		2,372		108,969
Total available for sale	$	239,945	$	127	$	7,097	$	232,975

Held to maturity:
Municipal securities	$	141,942	$	1,156	$	1,094	$	142,004
Mortgage-backed securities		17,163		54		500		16,717
Collateralized mortgage obligations		4,059		48		28		4,079
Total held to maturity	$	163,164	$	1,258	$	1,622	$	162,800

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company did not record any OTTI losses on any of its securities during the nine months ended September 30, 2019 or for the year ended December 31, 2018.

(Continued)

13.

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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, 2019 and December 31, 2018 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
September 30, 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		—			—		—			—		—			—
Mortgage-backed securities		—			—		(555	)		64,192		(555	)		64,192
Collateralized mortgage obligations		—			—		(33	)		2,965		(33	)		2,965
Total available for sale	$	—		$	—	$	(588	)	$	67,157	$	(588	)	$	67,157

Held to maturity:
Municipal securities	$	(6	)	$	3,016	$	(2	)	$	763	$	(8	)	$	3,779
Mortgage-backed securities		—			—		(43	)		7,287		(43	)		7,287
Collateralized mortgage obligations		—			13		—			—		—			13
Total held to maturity	$	(6	)	$	3,029	$	(45	)	$	8,050	$	(51	)	$	11,079

	Less Than 12 Months					12 Months or Longer					Total
December 31, 2018	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(453	)	$	11,236	$	(336	)	$	7,718	$	(789	)	$	18,954
Municipal securities		(17	)		2,219		(243	)		7,407		(260	)		9,626
Mortgage-backed securities		(89	)		7,173		(3,587	)		76,717		(3,676	)		83,890
Collateralized mortgage obligations		(79	)		9,232		(2,293	)		99,390		(2,372	)		108,622
Total available for sale	$	(638	)	$	29,860	$	(6,459	)	$	191,232	$	(7,097	)	$	221,092

Held to maturity:
Municipal securities	$	(512	)	$	55,793	$	(582	)	$	26,511	$	(1,094	)	$	82,304
Mortgage-backed securities		(21	)		1,478		(479	)		12,317		(500	)		13,795
Collateralized mortgage obligations		(28	)		2,171		—			—		(28	)		2,171
Total held to maturity	$	(561	)	$	59,442	$	(1,061	)	$	38,828	$	(1,622	)	$	98,270

The number of investment positions in an unrealized loss position totaled 26 at September 30, 2019. The securities in a loss position were composed of tax-exempt municipal bonds, corporate bonds, collateralized mortgage obligations and mortgage backed securities. Management believes the unrealized loss on the remaining securities is a function of the movement of interest rates since the time of purchase. Based on evaluation of available evidence, including recent changes in interest rates, credit rating information and 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 Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to have OTTI at September 30, 2019.

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)

14.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

As of September 30, 2019, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with fair values of approximately $240,348 and $259,557 at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Proceeds from sales	$	—	$	102,356		$	3,957		$	111,813
Gross gains		—		4			—			4
Gross losses		—		(3	)		(22	)		(54	)

There were no held to maturity securities sold during the three or nine months ended September 30, 2019 or 2018.

The contractual maturities at September 30, 2019 of available for sale and held to maturity securities at carrying value and estimated fair value are shown below. The Company invests in mortgage-backed securities and collateralized mortgage obligations that have expected maturities that differ from their contractual maturities. These differences arise because borrowers and/or issuers may have the right to call or prepay their obligation with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
September 30, 2019	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	1,023	$	1,027	$	2,150	$	2,164
Due after one year through five years		13,421		13,748		29,272		30,148
Due after five years through ten years		13,333		13,907		33,943		35,375
Due after ten years		7,579		7,810		73,511		76,166
Mortgage-backed securities		87,946		88,067		15,119		15,264
Collateralized mortgage obligations		95,297		96,786		2,930		3,048
Total Securities	$	218,599	$	221,345	$	156,925	$	162,165

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	September 30, 2019			December 31, 2018
Commercial and industrial	$	299,714		$	261,779
Real estate:
Construction and development		256,459			237,503
Commercial real estate		581,742			582,519
Farmland		61,073			67,845
1-4 family residential		406,880			393,067
Multi-family residential		58,198			38,386
Consumer		53,315			54,777
Agricultural		18,728			23,277
Overdrafts		330			382
Total loans		1,736,439			1,659,535
Net of:
Deferred loan costs		550			560
Allowance for loan losses		(16,394	)		(14,651	)
Total net loans	$	1,720,595		$	1,645,444

(Continued)

15.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following tables present the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method for the nine months ended September 30, 2019, for the year ended December 31, 2018 and for the nine months ended September 30, 2018:

For the Nine Months Ended September 30, 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		(152	)		215		863		(49	)		220			199		(28	)		(126	)		108			1,250
Loans charged-off		(49	)		—		—		—			(14	)		—		(32	)		—			(137	)		(232	)
Recoveries		507			—		1		—			3			—		95			89			30			725
Ending balance	$	2,057		$	2,135	$	6,889	$	594		$	3,077		$	830	$	600		$	201		$	11		$	16,394
Allowance ending balance:
Individually evaluated for impairment	$	—		$	—	$	1,186	$	62		$	20		$	—	$	—		$	—		$	—		$	1,268
Collectively evaluated for impairment		2,057			2,135		5,703		532			3,057			830		600			201			11			15,126
Ending balance	$	2,057		$	2,135	$	6,889	$	594		$	3,077		$	830	$	600		$	201		$	11		$	16,394
Loans:
Individually evaluated for impairment	$	302		$	1,325	$	17,222	$	133		$	2,337		$	—	$	—		$	64		$	—		$	21,383
Collectively evaluated for impairment		299,412		$	255,134		564,520		60,940			404,543			58,198		53,315			18,664			330			1,715,056
Ending balance	$	299,714		$	256,459	$	581,742	$	61,073		$	406,880		$	58,198	$	53,315		$	18,728		$	330		$	1,736,439

For the Year Ended December 31, 2018	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	$	1,581		$	1,724	$	4,585		$	523	$	3,022		$	629	$	602		$	187		$	6		$	12,859
Provision for loan losses		426			196		1,472			120		(196	)		2		127			(12	)		115			2,250
Loans charged-off		(367	)		—		(33	)		—		(93	)		—		(254	)		(2	)		(169	)		(918	)
Recoveries		111			—		1			—		135			—		90			65			58			460
Ending balance	$	1,751		$	1,920	$	6,025		$	643	$	2,868		$	631	$	565		$	238		$	10		$	14,651
Allowance ending balance:
Individually evaluated for impairment	$	64		$	4	$	341		$	78	$	6		$	—	$	—		$	—		$	—		$	493
Collectively evaluated for impairment		1,687			1,916		5,684			565		2,862			631		565			238			10			14,158
Ending balance	$	1,751		$	1,920	$	6,025		$	643	$	2,868		$	631	$	565		$	238		$	10		$	14,651
Loans:
Individually evaluated for impairment	$	1,022		$	1,250	$	7,153		$	140	$	1,383		$	—	$	—		$	408		$	—		$	11,356
Collectively evaluated for impairment		260,757		$	236,253		575,366			67,705		391,684			38,386		54,777			22,869			382			1,648,179
Ending balance	$	261,779		$	237,503	$	582,519		$	67,845	$	393,067		$	38,386	$	54,777		$	23,277		$	382		$	1,659,535

(Continued)

16.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

For the Nine Months Ended September 30, 2018	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	$	1,581		$	1,724	$	4,585		$	523	$	3,022		$	629	$	602		$	187		$	6		$	12,859
Provision for loan losses		138			119		1,329			100		(161	)		41		101			(3	)		86			1,750
Loans charged-off		(66	)		—		(32	)		—		(19	)		—		(175	)		(2	)		(117	)		(411	)
Recoveries		54			—		—			—		49			—		41			65			34			243
Ending balance	$	1,707		$	1,843	$	5,882		$	623	$	2,891		$	670	$	569		$	247		$	9		$	14,441
Allowance ending balance:
Individually evaluated for impairment	$	315		$	—	$	61		$	74	$	4		$	—	$	—		$	—		$	—		$	454
Collectively evaluated for impairment		1,392			1,843		5,821			549		2,887			670		569			247			9			13,987
Ending balance	$	1,707		$	1,843	$	5,882		$	623	$	2,891		$	670	$	569		$	247		$	9		$	14,441
Loans:
Individually evaluated for impairment	$	1,584		$	1,684	$	6,360		$	218	$	1,571		$	—	$	—		$	409		$	—		$	11,826
Collectively evaluated for impairment		247,174		$	227,623		592,793			64,991		390,885			38,523		53,947			23,775			326			1,640,037
Ending balance	$	248,758		$	229,307	$	599,153		$	65,209	$	392,456		$	38,523	$	53,947		$	24,184		$	326		$	1,651,863

Credit Quality

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

Assets are graded “pass” when the relationship exhibits acceptable credit risk and indicates repayment ability, tolerable collateral coverage and reasonable performance history. Lending relationships exhibiting potentially significant credit risk and marginal repayment ability and/or asset protection are graded “special mention.” Assets classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. Substandard graded loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets graded “doubtful” are substandard graded loans that have added characteristics that make collection or liquidation in full improbable. The Company typically measures impairment based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or based on the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent.

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

September 30, 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	$	299,358	$	254,527	$	561,933	$	60,792	$	405,635	$	58,198	$	53,495	$	18,493	$	1,712,431
Special mention		149		600		2,859		44		830		—		61		102		4,645
Substandard		207		1,332		16,950		237		415		—		89		133		19,363
Total	$	299,714	$	256,459	$	581,742	$	61,073	$	406,880	$	58,198	$	53,645	$	18,728	$	1,736,439

December 31, 2018	Commercial and industrial		Construction and development		Commercial real estate		Farmland		1-4 family residential		Multi-family residential		Consumer and Overdrafts		Agricultural		Total
Grade:
Pass	$	260,863	$	236,253	$	569,648	$	67,541	$	391,956	$	38,386	$	55,055	$	22,713	$	1,642,415
Special mention		224	—			5,691		49		514	—			48		115		6,641
Substandard		692		1,250		7,180		255		597	—			56		449		10,479
Total	$	261,779	$	237,503	$	582,519	$	67,845	$	393,067	$	38,386	$	55,159	$	23,277	$	1,659,535

(Continued)

17.

Table of Contents

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, loans 90 days or more past due continuing to accrue interest and loans classified as nonperforming as of:

September 30, 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	$	664	$	88	$	—	$	752	$	298,962	$	299,714	$	—
Real estate:
Construction and development		1,498		—		99		1,597		254,862		256,459		—
Commercial real estate		1,960		278		521		2,759		578,983		581,742		—
Farmland		255		—		—		255		60,818		61,073		—
1-4 family residential		4,819		890		414		6,123		400,757		406,880		—
Multi-family residential		—		—		—		—		58,198		58,198		—
Consumer		341		81		90		512		52,803		53,315		—
Agricultural		65		—		—		65		18,663		18,728		—
Overdrafts		—		—		—		—		330		330		—
Total	$	9,602	$	1,337	$	1,124	$	12,063	$	1,724,376	$	1,736,439	$	—

December 31, 2018	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	$	209	$	493	$	266	$	968	$	260,811	$	261,779	$	—
Real estate:
Construction and development		735		2,816		—		3,551		233,952		237,503		—
Commercial real estate		1,803		3		3,227		5,033		577,486		582,519		—
Farmland		485		—		—		485		67,360		67,845		—
1-4 family residential		2,849		666		596		4,111		388,956		393,067		—
Multi-family residential		—		—		—		—		38,386		38,386		—
Consumer		526		51		56		633		54,144		54,777		—
Agricultural		105		59		41		205		23,072		23,277		—
Overdrafts		—		—		—		—		382		382		—
Total	$	6,712	$	4,088	$	4,186	$	14,986	$	1,644,549	$	1,659,535	$	—

The following table presents information regarding nonaccrual loans as of:

	September 30, 2019		December 31, 2018
Commercial and industrial	$	15	$	366
Real estate:
Construction and development		106		—
Commercial real estate		6,966		3,700
Farmland		133		140
1-4 family residential		3,403		1,567
Consumer		214		66
Agricultural		44		52
Total	$	10,881	$	5,891

(Continued)

18.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Impaired Loans and Troubled Debt Restructurings

A troubled debt restructuring (“TDR”) is a restructuring in which a bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with original contractual terms of the loan. Loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance nonperforming loans and TDRs.

The outstanding balances of TDRs are shown below:

	September 30, 2019		December 31, 2018
Nonaccrual TDRs	$	118	$	335
Performing TDRs		7,297		861
Total	$	7,415	$	1,196
Specific reserves on TDRs	$	184	$	—

The following tables present loans by class, modified as TDRs, that occurred during the nine months ended September 30, 2019, the twelve months ended December 31, 2018 and the nine months ended September 30, 2018:

Nine Months Ended September 30, 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 no TDRs that subsequently defaulted through September 30, 2019.

Year Ended December 31, 2018	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial and industrial		3	$	504	$	504
1-4 family residential		1		78		78
Total		4	$	582	$	582

There was one TDR that subsequently defaulted, therefore remained on nonaccrual status as of December 31, 2018. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the year ended December 31, 2018.

Nine Months Ended September 30, 2018	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
1-4 family residential		1	$	15	$	15
Farmland		1		78		78
Total		2	$	93	$	93

(Continued)

19.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

There were no TDRs that subsequently defaulted through September 30, 2018. 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, 2018.

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

September 30, 2019	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	302	$	302	$	—	$	239
Real estate:
Construction and development		1,325		1,325		—		938
Commercial real estate		3,923		3,923		—		3,115
Farmland		—		—		—		—
1-4 family residential		2,283		2,283		—		1,225
Multi-family residential		—		—		—		—
Consumer		—		—		—		—
Agricultural		64		64		—		175
Subtotal		7,897		7,897		—		5,692
With allowance recorded:
Commercial and industrial		—		—		—		61
Real estate:
Construction and development		—		—		—		—
Commercial real estate		13,299		13,299		1,186		5,892
Farmland		133		133		62		102
1-4 family residential		54		54		20		73
Multi-family residential		—		—		—		—
Consumer		—		—		—		—
Agricultural		—		—		—		—
Subtotal		13,486		13,486		1,268		6,128
Total	$	21,383	$	21,383	$	1,268	$	11,820

(Continued)

20.

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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, 2018	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	837	$	837	$	—	$	842
Real estate:
Construction and development		720		720		—		518
Commercial real estate		5,168		5,168		—		5,138
Farmland		—		—		—		62
1-4 family residential		1,223		1,223		—		1,132
Multi-family residential		—		—		—		54
Consumer		—		—		—		—
Agricultural		408		408		—		456
Subtotal		8,356		8,356		—		8,202
With allowance recorded:
Commercial and industrial		185		185		64		300
Real estate:
Construction and development		530		530		4		44
Commercial real estate		1,985		1,985		341		677
Farmland		140		140		78		147
1-4 family residential		160		160		6		128
Multi-family residential		—		—		—		—
Consumer		—		—		—		—
Agricultural		—		—		—		52
Subtotal		3,000		3,000		493		1,348
Total	$	11,356	$	11,356	$	493	$	9,550

During the nine months ended September 30, 2019 and 2018, total interest income and cash-based interest income recognized on impaired loans was minimal.

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

At September 30, 2019 and December 31, 2018, securities sold under agreements to repurchase totaled $11,363 and $12,228, respectively.

The Company has a $25,000 revolving line of credit, which had no outstanding balance at quarter end, bears interest at the prime rate, with interest payable quarterly, and matures in March 2020.

(Continued)

21.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Federal Home Loan Bank (FHLB) advances as of September 30, 2019, were as follows:

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

Year	Current Weighted Average Rate			Principal Due
2019		1.83	%	$	45,000
2020		2.09	%		6,500
2021		1.87	%		1,500
2022		1.99	%		1,500
2023		—			—
Thereafter		1.76	%		6,000
					60,500

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

Year

Current

Weighted

Average Rate

2021

1.38

123

60,623

NOTE 6 - SUBORDINATED DEBENTURES

Subordinated debentures are made up of the following as of:

	September 30, 2019		December 31, 2018
Trust II Debentures	$	3,093	$	3,093
Trust III Debentures		2,062		2,062
DCB Trust I Debentures		5,155		5,155
Other debentures		1,000		2,500
	$	11,310	$	12,810

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).

	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

(Continued)

22.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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, 2019 and December 31, 2018. 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

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

Trust II Debentures

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

On any interest payment date on or after October 30, 2012 and prior to maturity date, the debentures are redeemable for cash at the option of the Company, on at least 30, but not more than 60 days’ 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 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, which carried a rate of 4.00%, matured and was repaid in January 2019.

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. A further $1,000 of other debentures matured and were paid off in full in July of 2018 and another $1,000 of debentures matured and were paid off in full in July of the current year. The remaining $1,000 of debentures were issued at par value of $500 each with rates of 4.50% and 5.00% and maturity dates of January 1, 2020 and July 1, 2020, respectively. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount

(Continued)

23.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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.

NOTE 7 - STOCK OPTIONS

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. The maximum number of shares of common stock that may be issued pursuant to stock-based awards under the Plan equals 1,000,000 shares, all of which may be subject to incentive stock option treatment. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. Currently outstanding option awards have vesting periods ranging from 5 to 10 years and have 10-year contractual terms.

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

A summary of activity in the Plan during the nine months ended September 30, 2019 and 2018 follows:

Nine Months Ended September 30, 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		35,000			29.85		9.61		26
Exercised		(22,172	)		24.93		5.29		125
Forfeited		(26,400	)		29.53		8.20		46
Balance, September 30, 2019		524,300		$	26.63		6.38	$	2,255

Exercisable at end of period		235,680		$	25.22		5.42	$	1,307

Nine Months Ended September 30, 2018	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		469,044		$	25.11		7.32	$	2,623
Granted		90,000			32.59		9.72		—
Exercised		(6,000	)		23.33		5.98		41
Forfeited		(11,800	)		23.41		5.74		81
Balance, September 30, 2018		541,244		$	26.41		7.12	$	2,320

Exercisable at end of period		171,184		$	24.29		5.81	$	1,024

(Continued)

24.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

A summary of nonvested activity in the Plan during the nine months ended September 30, 2019 and 2018 follows:

Nine Months Ended September 30, 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		35,000			29.85		9.61		26
Vested		(54,340	)		28.10		7.48		172
Forfeited		(23,600	)		33.03		9.18		46
Balance, September 30, 2019		288,620		$	27.78		7.16	$	949

Nine Months Ended September 30, 2018	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at beginning of year		334,400		$	25.72		7.91	$	1,673
Granted		90,000			32.59		9.72		—
Vested		(44,940	)		26.19		8.04		199
Forfeited		(9,400	)		29.38		7.20		81
Balance, September 30, 2018		370,060		$	27.39		7.72	$	1,297

As of September 30, 2019, there was $2,255 of total unrecognized compensation expense related to unvested stock options granted under the Plan. The expense is expected to be recognized over a weighted-average period of 3.48 years.

The Company granted options under the Plan during the first nine months of 2019 and 2018. Expense of $493 and $378 was recorded during the nine months ended September 30, 2019 and 2018, respectively.

Restricted Stock Awards and Units

A summary of activity in the Plan during the nine months ended September 30, 2019 and 2018 follows:

Nine Months Ended September 30, 2019	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		2,398		$	31.57
Granted		30,500			30.25
Exercised		(1,439	)		31.57
Forfeited		—			—
Balance, September 30, 2019		31,459		$	29.33

Exercisable at end of period		—		$	—

(Continued)

25.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Nine Months Ended September 30, 2018	Number of Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		2,398	$	31.57
Granted		—		—
Exercised		—		—
Forfeited		—		—
Balance, September 30, 2018		2,398	$	31.57

Exercisable at end of period		959	$	—

A summary of nonvested activity in the Plan during the nine months ended September 30, 2019 and 2018 follows:

Nine Months Ended September 30, 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		(480	)		31.57
Forfeited		—			—
Balance, September 30, 2019		31,459		$	29.33

Nine Months Ended September 30, 2018	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		2,398		$	31.57
Granted		—			—
Vested		(959	)		31.57
Forfeited		—			—
Balance, September 30, 2018		1,439		$	31.57

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

	September 30, 2019		September 30, 2018
Intrinsic value of options exercised	$	125	$	41
Cash received from options exercised		553		140
Weighted average fair value of options granted		16.75		5.62

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.

NOTE 8 - EMPLOYEE BENEFITS

KSOP

The Company maintains an Employee Stock Ownership Plan containing Section 401(k) provisions covering substantially all employees (“KSOP”). The plan provides for a matching contribution of up to 5% of a participant’s qualified compensation starting January 1, 2016. Guaranty’s total contributions accrued or paid during the nine months ended September 30, 2019 and 2018 totaled $973 and $856, respectively.

(Continued)

26.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

As of September 30, 2019 and December 31, 2018, the number of shares held by the KSOP were 1,262,078 and 1,333,496, respectively. There were no unallocated shares to plan participants as of September 30, 2019 or as of December 31, 2018. 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 $34,280 and $26,301 as of September 30, 2019 and December 31, 2018, respectively.

Expense related to these plans totaled $504 and $419 for the nine months ended September 30, 2019 and 2018, respectively, and $502 for the year ended December 31, 2018. This expense is included in employee compensation and benefits on the Company’s consolidated statements of earnings. The recorded liability totaled approximately $4,023 and $3,667 as of September 30, 2019 and December 31, 2018, respectively and is included in accrued interest and other liabilities on the Company’s consolidated balance sheets.

Bonus Plan

The Company has a bonus plan that rewards officers and employees based on performance of individual business units of the Company. Earnings and growth performance goals for each business unit and for the Company as a whole are established at the beginning of the calendar year and approved annually by Guaranty’s board of directors. The bonus plan provides for a predetermined bonus amount to be contributed to the employee bonus pool based on (i) earnings target and growth for individual business units and (ii) achieving certain pre-tax return on average equity and pre-tax return on average asset levels for the Company as a whole. These bonus amounts are established annually by Guaranty’s board of directors. The bonus expense under this plan for the nine months ended September 30, 2019 and 2018 totaled $2,304 and $2,170, respectively, and $2,943 for the year ended December 31, 2018. This expense is included in employee compensation and benefits on the consolidated statements of earnings.

NOTE 9 – 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 5 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 September 30, 2019, operating lease right-of-use assets and liabilities were both $11.4 million.

Operating lease expense for operating leases accounted for under ASC 842 for the nine months ended September 30, 2019 was approximately $1,306, 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:

(Continued)

27.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

	As of September 30, 2019
Operating leases
Operating lease right-of-use assets	$	11,360
Operating lease liabilities		11,433

Weighted average remaining lease term
Operating leases	10 years
Weighted average discount rate
Operating leases		2.74	%

The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2023 and thereafter. Minimum future lease payments under these non-cancelable operating leases in excess of one year as of September 30, 2019, are as follows:


2019	$	444
2020		1,536
2021		1,340
2022		1,229
2023		1,219
Thereafter		7,340
Total lease payments		13,108
Less: interest		(1,675	)
Present value of lease liabilities	$	11,433

As of September 30, 2019, the Company has no additional operating leases commencing subsequent to the quarter end date.

NOTE 10 - INCOME TAXES

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations; however, such changes do not currently impact us.

As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, we remeasured our deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. Notwithstanding the foregoing, we are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts.

Income tax expense was as follows for:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Income tax expense for the period	$	1,634		$	1,160		$	4,205		$	3,126
Effective tax rate		17.83	%		18.56	%		18.19	%		18.16	%

(Continued)

28.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The effective tax rates differ from the statutory federal tax rate of 21% for the three and nine months ended September 30, 2019 and 2018, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank owned life insurance.

NOTE 11 - 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 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. Management believes that entering into the interest rate swaps exposed the Company to variability in their fair value due to changes in the level of interest rates. It is the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this liability to other liabilities of the Company. To meet this objective, the Company utilizes interest rate swaps as an asset/liability management strategy to hedge the change in value of the cash flows due to changes in expected interest rate assumptions.

Interest rate swaps with notional amounts totaling $5,000 as of September 30, 2019 and December 31, 2018, were designated as cash flow hedges of the debentures and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income.

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

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

September 30, 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		6.50	$	356
$	3,000		7.505	%	3 month LIBOR plus 3.35%	10/30/2012		3.08	$	240

December 31, 2018
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		7.25	$	220
$	3,000		7.505	%	3 month LIBOR plus 3.35%	10/30/2012		3.83	$	173

(Continued)

29.

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GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Interest expense recorded on these swap transactions totaled $495 and $516 during the nine months ended September 30, 2019 and 2018, respectively, and $687 for the year ended December 31, 2018. This expense is reported as a component of interest expense on the debentures. At September 30, 2019, the Company expected none of the unrealized loss to be reclassified as a reduction of interest expense during the remainder of 2019.

NOTE 12 - 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 the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below. If the commitment were funded, the Company would be entitled to seek recovery from the customer. As of September 30, 2019 and December 31, 2018, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

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

	Contract or Notional Amount
	September 30, 2019		December 31, 2018
Commitments to extend credit	$	381,699	$	342,523
Letters of credit		9,069		11,675

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, 2019, the Company had letters of credit of $2,000 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.

NOTE 13 - 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)

30.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015, with certain transition provisions that were fully phased in on January 1, 2019. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and or Tier 1 capital to adjusted quarterly average assets (as defined). Management believes, as of September 30, 2019 and December 31, 2018 that the Bank met all capital adequacy requirements to which it was subject.

The Basel III Capital Rules, among other things, have (i) introduced a new capital measure called “Common Equity Tier I” (“CETI”), (ii) specified that Tier I capital consist of CETI and “Additional Tier I Capital” instruments meeting specified requirements, (iii) defined CETI narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CETI and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.

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

As of September 30, 2019 and December 31, 2018, the Company’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Company must maintain minimum total risk-based, CETI, Tier 1 risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since September 30, 2019 that management believes have changed the Company’s category.

The Federal Reserve’s guidelines regarding the capital treatment of trust preferred securities limits restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred securities is less than the limit of 25% of Tier I capital, net of goodwill, the rules permit the inclusion of $10,310 of trust preferred securities in Tier I capital at September 30, 2019 and December 31, 2018. Additionally, the rules provide that trust preferred securities would no longer qualify for Tier I capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the subordinated debentures.

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
September 30, 2019
Total capital to risk-weighted assets:
Consolidated	$	248,009		13.22	%	$	150,082		8.00	%	$	196,983		10.50	%			n/a
Bank		246,851		12.89	%		153,230		8.00	%		201,114		10.50	%	$	191,537		10.00	%
Tier 1 capital to risk-weighted assets:
Consolidated		231,615		12.35	%		112,562		6.00	%		159,462		8.50	%			n/a
Bank		230,457		12.03	%		114,922		6.00	%		162,807		8.50	%		153,230		8.00	%
Tier 1 capital to average assets:⁽¹⁾
Consolidated		231,615		10.16	%		91,205		4.00	%		91,205		4.00	%			n/a
Bank		230,457		10.04	%		91,784		4.00	%		91,784		4.00	%		114,730		5.00	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		221,305		11.80	%		84,421		4.50	%		131,322		7.00	%			n/a
Bank		230,457		12.03	%		86,192		4.50	%		134,076		7.00	%		124,499		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.

(Continued)

31.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

	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, 2018
Total capital to risk-weighted assets:
Consolidated	$	241,791		13.25	%	$	146,020		8.00	%	$	191,651		10.50	%			n/a
Bank		242,142		13.27	%		146,015		8.00	%		191,645		10.50	%	$	182,519		10.00	%
Tier 1 capital to risk-weighted assets:
Consolidated		227,140		12.44	%		109,515		6.00	%		155,146		8.50	%			n/a
Bank		227,491		12.46	%		109,511		6.00	%		155,141		8.50	%		146,015		8.00	%
Tier 1 capital to average assets:
Consolidated		227,140		10.16	%		89,422		4.00	%		89,422		4.00	%			n/a
Bank		227,491		10.18	%		89,414		4.00	%		89,414		4.00	%		111,768		5.00	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		216,830		11.88	%		82,136		4.50	%		127,768		7.00	%			n/a
Bank		227,491		12.46	%		82,134		4.50	%		127,763		7.00	%		118,637		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.

NOTE 14 - FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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

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

Marketable Securities: The fair values for marketable securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

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

(Continued)

32.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on the present value of estimated future cash flows using the loan's existing rate or, if repayment is expected solely from the collateral, the fair value of collateral, less costs to sell. 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).

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

As of September 30, 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	$	88,067		$	—	$	88,067		$	—
Collateralized mortgage obligations		96,786			—		96,786			—
Municipal securities		16,273			—		16,273			—
Corporate bonds		20,219			—		20,219			—
Loans held for sale		3,841			—		—			3,841
Cash surrender value of life insurance		34,280			—		34,280			—
SBA servicing assets		706			—		—			706
Derivative instrument assets		596			—		596			—
Derivative instrument liabilities		(596	)		—		(596	)		—

Assets at fair value on a nonrecurring basis:
Impaired loans		20,115			—		—			20,115
Other real estate owned		551			—		—			551

(Continued)

33.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

As of December 31, 2018	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	$	89,459		$	—	$	89,459		$	—
Collateralized mortgage obligations		108,969			—		108,969			—
Municipal securities		15,593			—		15,593			—
Corporate bonds		18,954			—		18,954			—
Derivative instruments		(392	)		—		(392	)		—

Assets at fair value on a nonrecurring basis:
Impaired loans		10,863			—		—			10,863
Other real estate owned		751			—		—			751

There were no transfers between Level 2 and Level 3 during the nine months ended September 30, 2019 or for the year ended December 31, 2018.

Nonfinancial Assets and Nonfinancial Liabilities

Nonfinancial assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2019 and 2018 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in current earnings. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

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

	September 30, 2019			December 31, 2018			September 30, 2018
Other real estate owned remeasured at initial recognition:
Carrying value of other real estate owned prior to remeasurement	$	137		$	542		$	180
Charge-offs recognized in the allowance for loan losses		(9	)		(25	)		(23	)
Fair value of other real estate owned remeasured at initial recognition	$	128		$	517		$	157

Other real estate owned remeasured subsequent to initial recognition:
Carrying value of other real estate owned prior to remeasurement	$	—		$	599		$	599
Write-downs included in collection and other real estate owned expense		—			(56	)		(56	)
Fair value of other real estate owned remeasured subsequent to initial recognition	$	—		$	543		$	543

(Continued)

34.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
September 30, 2019
Impaired loans	$	20,115	Fair value of collateral - sales comparison approach	Selling costs or other normal adjustments: Real estate Equipment	10%-20% (16%) 10%-20% (12%)
Other real estate owned	$	551	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, 2018
Impaired loans	$	10,863	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	$	751	Appraisal value of collateral	Selling costs or other normal adjustments	10%-20% (16%)

The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of September 30, 2019 and December 31, 2018, are as follows:

	Fair value measurements as of September 30, 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	$	58,648	$	58,648	$	—	$	—	$	58,648
Marketable securities held to maturity		156,925		—		162,165		—		162,165
Loans, net		1,720,595		—		—		1,719,467		1,719,467
Accrued interest receivable		7,825		—		7,825		—		7,825
Nonmarketable equity securities		11,644		—		11,644		—		11,644
Cash surrender value of life insurance		34,280		—		34,280		—		34,280
Financial liabilities:
Deposits	$	1,963,313	$	1,432,490	$	534,075	$	—	$	1,966,565
Securities sold under repurchase agreements		11,363		—		11,363		—		11,363
Accrued interest payable		1,719		—		1,719		—		1,719
Federal Home Loan Bank advances		60,623		—		60,634		—		60,634
Subordinated debentures		11,310		—		9,153		—		9,153

(Continued)

35.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

	Fair value measurements as of December 31, 2018 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	$	71,510	$	71,510	$	—	$	—	$	71,510
Marketable securities held to maturity		163,164		—		162,800		—		162,800
Loans, net		1,645,444		—		—		1,630,600		1,630,600
Accrued interest receivable		9,292		—		9,292		—		9,292
Nonmarketable equity securities		14,937		—		14,937		—		14,937
Cash surrender value of life insurance		26,301		—		26,301		—		26,301
Financial liabilities:
Deposits	$	1,871,480	$	1,435,985	$	434,647	$	—	$	1,870,632
Securities sold under repurchase agreements		12,228		—		12,228		—		12,228
Accrued interest payable		1,651		—		1,651		—		1,651
Federal Home Loan Bank advances		115,136		—		114,934		—		114,934
Subordinated debentures		12,810		—		10,724		—		10,724

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

Cash and Cash Equivalents

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

Loans, net

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

Cash Surrender Value of Life Insurance

The carrying amounts of bank-owned life insurance approximate their fair value.

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)

36.

Table of Contents

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 15 - 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.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Numerator:
Net earnings (basic)	$	7,530	$	5,091	$	18,910	$	14,084
Net earnings (diluted)	$	7,530	$	5,091	$	18,910	$	14,084

Denominator:
Weighted-average shares outstanding (basic)		11,550,335		11,962,654		11,674,298		11,452,968
Effect of dilutive securities:
Common stock equivalent shares from stock options		62,538		70,780		58,844		100,539
Weighted-average shares outstanding (diluted)		11,612,873		12,033,434		11,733,142		11,553,507

Net earnings per share
Basic	$	0.65	$	0.43	$	1.62	$	1.23
Diluted	$	0.65	$	0.42	$	1.62	$	1.22

(Continued)

37.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Report”) and any subsequent Quarterly Reports on Form 10-Q, other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018. Unless the context indicates otherwise, references in this Report to “we,” “our,” “us,” and the “Company” refer to Guaranty Bancshares, Inc., a Texas corporation, and its consolidated subsidiaries. References in this Report to “Guaranty Bank & Trust” and the “Bank” refer to Guaranty Bank & Trust, N.A., a national banking association and our wholly-owned consolidated subsidiary.

General

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

We currently operate 30 banking locations in the East Texas, Dallas/Fort Worth, Central Texas and greater Houston regions of the state. Our principal executive office is located at 16475 Dallas Parkway, Suite 600, Addison, Texas, 75001 and our telephone number is (888) 572-9881. Our website address is 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.

Certain Events Affecting Year-over-Year Comparability

Acquisition of Westbound Bank. The Company completed the acquisition of Westbound Bank (Westbound), a Texas banking association, on June 1, 2018. This acquisition increased total assets by $216.1 million, loans by $154.7 million (net of discount) and deposits by $181.4 million. The comparability of the Company’s consolidated results of operations for the nine months ended September 30, 2019 and September 30, 2018 are affected by this acquisition.

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.

(Continued)

38.

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 Losses

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

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

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

In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our portfolio is impacted by delinquency status and debt service coverage generated by our borrowers’ businesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, 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 loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for loan losses. If delinquencies and defaults were to increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

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

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

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39.

Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan’s observable market price. As of September 30, 2019 and December 31, 2018, all significant impaired loans had been determined to be collateral dependent and the allowance for loss had been measured utilizing the estimated fair value of the collateral.

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

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

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

Real estate loans are also subject to underwriting standards and processes similar to commercial and industrial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate 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.

We utilize methodical credit standards and analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated as well as the underlying collateral, if secured, which must be perfected. The relatively small individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes risk.

Marketable Securities

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

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

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40.

Fair Values of Financial Instruments

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

Emerging Growth Company

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

Discussion and Analysis of Results of Operations for the Nine Months Ended September 30, 2019 and 2018

Results of Operations

The following discussion and analysis of our results of operations compares our results of operations for the nine months ended September 30, 2019 with the nine months ended September 30, 2018. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

Net earnings were $18.9 million for the nine months ended September 30, 2019, as compared to $14.1 million for the nine months ended September 30, 2018. The following table presents key earnings data for the periods indicated:

	For the Nine Months Ended September 30,
	2019			2018
	(Dollars in thousands, except per share data)
Net earnings	$	18,910		$	14,084
Net earnings per common share
-basic		1.62			1.23
-diluted		1.62			1.22
Net interest margin⁽¹⁾		3.65	%		3.46	%
Net interest rate spread⁽²⁾		3.22	%		3.12	%
Return on average assets		1.09	%		0.90	%
Return on average equity		10.06	%		8.43	%
Average equity to average total assets		10.87	%		10.69	%
Dividend payout ratio		32.10	%		34.96	%

(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 loan losses, was $58.4 million compared to $50.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively, an increase of $8.3 million, or 16.6%. The increase in net interest income was comprised of a $13.0 million, or 20.4%, increase in interest income offset by a $4.7 million, or 34.1%, increase in interest expense. The change in interest income was primarily attributable to a $192.1 million, or 12.9%, increase in average loans outstanding for the nine months ended September 30, 2019, compared to the

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nine months ended September 30, 2018, further improved by a 42 basis point 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 Central Texas markets. The $4.7 million increase in interest expense for the nine months ended September 30, 2019 was primarily related to a $157.2 million, or 12.0%, increase in average interest-bearing deposits, which also had an average rate increase of 30 basis points over the same period in 2018. The majority of the average deposit balance increase was due to organic growth, primarily in savings accounts, certificates and other time deposits, driven in part by favorable rates that were offered in our Central Texas, Houston and Dallas/Fort Worth metroplex markets. For the nine months ended September 30, 2019, net interest margin and net interest spread were 3.65% and 3.22%, respectively, compared to 3.46% and 3.12% for the same period in 2018, 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 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 months ended September 30, 2019 and 2018, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

	For the Nine Months Ended September 30,
	2019								2018
	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⁾	$	1,676,047		$	67,821		5.41	%	$	1,483,961		$	55,377		4.99	%
Securities available for sale		230,816			4,372		2.53			237,619			4,400		2.48
Securities held to maturity		160,061			3,042		2.54			169,211			3,125		2.47
Nonmarketable equity securities		12,106			471		5.20			8,826			300		4.54
Interest-bearing deposits in other banks		56,755			1,007		2.37			35,437			537		2.03
Total interest-earning assets		2,135,785			76,713		4.80			1,935,054			63,739		4.40
Allowance for loan losses		(15,483	)							(13,589	)
Noninterest-earning assets		191,189								161,855
Total assets	$	2,311,491							$	2,083,320
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,463,457		$	16,681		1.52	%	$	1,306,244		$	11,948		1.22	%
Advances from FHLB and fed funds purchased		62,268			1,126		2.42			88,200			1,181		1.79
Subordinated debentures		12,107			502		5.54			13,477			516		5.12
Securities sold under agreements to repurchase		10,710			28		0.35			12,749			34		0.36
Total interest-bearing liabilities		1,548,542			18,337		1.58			1,420,670			13,679		1.29
Noninterest-bearing liabilities:
Noninterest-bearing deposits		490,088								432,871
Accrued interest and other liabilities		21,575								7,120
Total noninterest-bearing liabilities		511,663								439,991
Shareholders’ equity		251,286								222,659
Total liabilities and shareholders’ equity	$	2,311,491							$	2,083,320
Net interest rate spread⁽²⁾							3.22	%							3.12	%
Net interest income				$	58,376							$	50,060
Net interest margin⁽³⁾							3.65	%							3.46	%

(1) Includes average outstanding balances of loans held for sale of $2.3 million and $1.8 million for the nine months ended September 30, 2019 and 2018, 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 3.66% and 3.47% for the nine months ended September 30, 2019 and 2018, respectively, using a marginal tax rate of 21%.

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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 Nine Months Ended September 30, 2019 vs. 2018
	Increase (Decrease)
	Due to Change in					Total Increase
	Volume			Rate		(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	7,189		$	5,255	$	12,444
Securities available for sale		(127	)		99		(28	)
Securities held to maturity		(170	)		87		(83	)
Nonmarketable equity securities		112			59		171
Interest-earning deposits in other banks		325			145		470
Total increase in interest income	$	7,329		$	5,645	$	12,974

Interest-bearing liabilities:
Interest-bearing deposits	$	1,438		$	3,295	$	4,733
Advances from FHLB and fed funds purchased		(348	)		293		(55	)
Subordinated debentures		(53	)		39		(14	)
Securities sold under agreements to repurchase		(6	)		—		(6	)
Total increase in interest expense		1,031			3,627		4,658
Increase in net interest income	$	6,298		$	2,018	$	8,316

Provision for Loan Losses

The provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management based on factors such as historical loss experience, trends in classified and past due loans, volume and growth in the loan portfolio, current economic conditions in our markets and value of the underlying collateral. Loans are charged off against the allowance for loan losses when determined appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.

The provision for loan losses for the nine months ended September 30, 2019 was $1.3 million compared to $1.8 million for the nine months ended September 30, 2018. The decrease in the provision expense resulted from a recovery of $487,000 that was received during the third quarter from proceeds of a life insurance policy that collateralized a loan that was charged-off several years ago, thus reducing the need for additional provision in the third quarter of 2019, along with relatively stable risk ratings and qualitative factors that contributed to the calculated reserve needed during the period. Net recoveries were $493,000 for the nine months ended September 30, 2019, compared to $168,000 in net charge-offs for the same period in 2018.

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.

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The following table presents components of noninterest income for the nine months ended September 30, 2019 and 2018 and the period-over-period variations in the categories of noninterest income:

	For The Nine Months Ended September 30,						Increase (Decrease)
	2019			2018			2019 vs. 2018
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	2,693		$	2,661		$	32
Merchant and debit card fees		3,124			2,637			487
Fiduciary income		1,305			1,179			126
Gain on sales of loans		2,070			1,871			199
Bank-owned life insurance income		560			418			142
Loss on sales of investment securities		(22	)		(50	)		28
Loan processing fee income		433			458			(25	)
Other noninterest income		2,125			1,956			169
Total noninterest income	$	12,288		$	11,130		$	1,158

Total noninterest income increased $1.2 million, or 10.4%, for the nine months ended September 30, 2019 compared to the same period in 2018. Material changes in the components of noninterest income are discussed below.

Merchant and Debit Card Fees. We earn interchange income related to the activity of our customers’ merchant debit card usage. Debit card interchange income was $3.1 million for the nine months ended September 30, 2019, compared to $2.6 million for the same period in 2018, an increase of $487,000, or 18.5%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during 2019.

Fiduciary Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $1.3 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $126,000, or 10.7%. The revenue increase resulted primarily from 38 new accounts that opened in 2019, 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. The fair value of managed assets held as of September 30, 2019 was $319.3 million, of which $162.1 million or 50.8%, were in custody-only services. The fair value of managed assets held as of September 30, 2018 was $297.8 million, of which $149.0 million, or 50.0%, were in custody-only services.

Gain on Sales of Loans. We originate long-term fixed-rate mortgage loans for resale into the secondary market. We sold 273 loans for $55.3 million for the nine months ended September 30, 2019 compared to 281 loans for $59.2 million for the nine months ended September 30, 2018. Gain on sale of loans was $2.1 million for the nine months ended September 30, 2019, an increase of $199,000, or 10.6%, compared to $1.9 million for the same period in 2018. We also began selling Small Business Administration (SBA) loans on the secondary market during the current year, with a net realized gain on sales of SBA loans totaling $209,000 through the third quarter of 2019.

Bank-Owned Life Insurance. 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 $142,000, or 34.0%, for the nine months ended September 30, 2019, compared to the same period in 2018. The increase in income is primarily due to $7.0 million of additional policies purchased in June of 2019 on the lives of existing officers of the Company.

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

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occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, professional and regulatory fees, including FDIC assessments, data processing expenses, and advertising and promotion expenses.

For the nine months ended September 30, 2019, noninterest expense totaled $46.3 million, an increase of $4.1 million, or 9.6%, compared to $42.2 million for the nine months ended September 30, 2018. The following table presents, for the periods indicated, the major categories of noninterest expense:

	For The Nine Months Ended September 30,				Increase (Decrease)
	2019		2018		2019 vs. 2018
	(Dollars in thousands)
Employee compensation and benefits	$	26,575	$	23,723	$	2,852
Non-staff expenses:
Occupancy expenses		7,336		6,076		1,260
Amortization		1,040		881		159
Software and technology		2,439		1,849		590
FDIC insurance assessment fees		173		479		(306	)
Legal and professional fees		1,999		2,549		(550	)
Advertising and promotions		1,132		994		138
Telecommunication expense		508		476		32
ATM and debit card expense		891		857		34
Director and committee fees		685		802		(117	)
Other noninterest expense		3,521		3,544		(23	)
Total noninterest expense	$	46,299	$	42,230	$	4,069

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 $26.6 million for the nine months ended September 30, 2019, an increase of $2.9 million, or 12.0%, compared to $23.7 million for the same period in 2018. The increase resulted partially from the addition of 22 full time equivalent employees, from 454 as of September 30, 2018 to 476 as of September 30, 2019, in order to continue growing our two de novo locations in Austin and Fort Worth, Texas, and to support operational growth, as well annual salary increases.

Occupancy Expenses. Occupancy expenses were $7.3 million for the nine months ended September 30, 2019, compared to $6.1 million for the same period in 2018, an increase of $1.3 million, or 20.7%. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $2.9 million for the nine months ended September 30, 2019, up from $2.2 million in the same period of the prior year. The increase in occupancy expenses was due primarily to an increase in depreciation expense combined with lease expense increases of $904,000, due to relocating into new permanent locations in both Austin and Fort Worth, as well as our new corporate offices in Addison, and adoption of the new Accounting Standards Codification 842, Leases.

Amortization. Amortization expenses increased $159,000, or 18.0%, from $881,000 for the nine months ended September 30, 2018 to $1.0 million for the nine months ended September 30, 2019. The increase is due primarily to the amortization of deposit premiums associated with the Westbound acquisition on June 1, 2018.

Software and Technology. Software and technology expenses increased $590,000, or 31.9%, from $1.8 million for the nine months ended September 30, 2018 to $2.4 million for the nine months ended September 30, 2019. The increase is attributable primarily to company growth in online banking licensing and volume, remote deposit licensing and volume, a core system operational review that is completed every 2-3 years, investments in security/monitoring software, and overall licensing and volume increases due to growth.

FDIC Insurance Assessment Fees. FDIC insurance assessment fees decreased $306,000, or 63.9%, from $479,000 for the nine months ended September 30, 2018 to $173,000 for the nine months ended September 30, 2019. The decrease resulted from an FDIC assessment credit of $534,000 that was received in January 2019 and will be used to satisfy our FDIC assessment fees provided that the insurance fund ratio continues to exceed 1.35 or until the credit is extinguished.

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Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were $2.0 million and $2.5 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $550,000, or 21.6%. The decrease resulted in part from decreased legal expense of $314,000 due to legal costs associated with the acquisition of Westbound in the prior year and a Fiserv expense incurred in July of 2018 that increased professional fees expense by $122,000, which was not present in the first nine months of 2019.

Advertising and Promotions. Advertising and promotion related expenses were $1.1 million and $994,000 for the nine months ended September 30, 2019 and 2018, respectively. The increase of $138,000, or 13.9%, was primarily due to increases in advertising expense in our growth markets, especially Dallas/Fort Worth, Central Texas and Houston.

Director and Committee Fees. Director and committee fees were $685,000 and $802,000 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $117,000, or 14.6%, primarily because the inside statutory and advisory directors are no longer paid a director fee as of March 2019.

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, 2019 and 2018, income tax expense totaled $4.2 million and $3.1 million, respectively. Our effective tax rates for the nine months ended 2019 and 2018 were 18.19% and 18.16%, respectively.

Discussion and Analysis of Results of Operations for the Three Months Ended September 30, 2019 and 2018

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, 2019 with the three months ended September 30, 2018. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

Net earnings were $7.5 million for the three months ended September 30, 2019, as compared to $5.1 million for the three months ended September 30, 2018. Basic earnings per share were $0.65 for the three months ended September 30, 2019 compared to $0.43 during the same period in 2018.

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

	For the Three Months Ended September 30,
	2019			2018
	(Dollars in thousands, except per share data)
Net earnings	$	7,530		$	5,091
Net earnings per common share
-basic		0.65			0.43
-diluted		0.65			0.42
Net interest margin⁽¹⁾		3.71	%		3.50	%
Net interest rate spread⁽²⁾		3.28	%		3.12	%
Return on average assets		1.28	%		0.91	%
Return on average equity		11.73	%		8.39	%
Average equity to average total assets		10.94	%		10.86	%
Dividend payout ratio		27.69	%		35.25	%

(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.

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46.

Net Interest Income

Net interest income, before the provision for loan losses, was $20.1 million for the three months ended September 30, 2019, compared to $18.2 million for the three months ended September 30, 2018, an increase of $1.9 million, or 10.2%. The increase in net interest income was comprised of a $2.2 million, or 9.2%, increase in interest income offset by a $324,000, or 5.9%, increase in interest expense. The increase in interest income was primarily attributable to an $80.5 million, or 5.0%, increase in average loans outstanding for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, further improved by a 25 basis point 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 Central Texas markets. The $324,000 increase in interest expense for the three months ended September 30, 2019 was primarily related to a $92.4 million, or 6.7%, increase in average interest-bearing deposits, which had an average rate increase of only eight basis points. The increase was partially offset by a $67.7 million decrease in the average balance of Federal Home Loan Bank advances during the quarter, despite a rate increase of 36 basis points over the same period in 2018. The majority of the average deposit balance increase was due to organic growth, primarily in savings accounts, certificates and other time deposits, driven in part by favorable rates that were offered in our Central Texas, Houston and Dallas/Fort Worth metroplex markets. For the three months ended September 30, 2019, net interest margin and net interest spread were 3.71% and 3.28%, respectively, compared to 3.51% and 3.12% for the same period in 2018, 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 major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended September 30, 2019 and 2018, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

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47.

	For the Three Months Ended September 30,
	2019								2018
	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⁾	$	1,698,742		$	22,996		5.37	%	$	1,618,199		$	20,879		5.12	%
Securities available for sale		225,714			1,371		2.41			239,993			1,465		2.42
Securities held to maturity		158,000			1,001		2.51			166,080			1,026		2.45
Nonmarketable equity securities		12,011			162		5.35			10,351			115		4.41
Interest-bearing deposits in other banks		56,174			323		2.28			32,545			190		2.32
Total interest-earning assets		2,150,641			25,853		4.77			2,067,168			23,675		4.54
Allowance for loan losses		(16,082	)							(14,096	)
Noninterest-earnings assets		194,044								182,587
Total assets	$	2,328,603							$	2,235,659
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	1,467,502		$	5,304		1.43	%	$	1,375,138		$	4,670		1.35	%
Advances from FHLB and fed funds purchased		50,016			298		2.36			117,758			593		2.00
Subordinated debentures		11,527			161		5.54			12,821			173		5.35
Securities sold under agreements to repurchase		10,549			7		0.26			12,571			10		0.32
Total interest-bearing liabilities		1,539,594			5,770		1.49			1,518,288			5,446		1.42
Noninterest-bearing liabilities:
Noninterest-bearing deposits		511,343								465,838
Accrued interest and other liabilities		22,878								8,705
Total noninterest-bearing liabilities		534,221								474,543
Shareholders’ equity		254,788								242,828
Total liabilities and shareholders’ equity	$	2,328,603							$	2,235,659
Net interest rate spread⁽²⁾							3.28	%							3.12	%
Net interest income				$	20,083							$	18,229
Net interest margin⁽³⁾							3.71	%							3.50	%

(1) Includes average outstanding balances of loans held for sale of $3.0 million and $1.9 million for the three months ended September 30, 2019 and 2018, 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 3.71% and 3.51% for the three months ended September 30, 2019 and 2018, respectively, using a marginal tax rate of 21%.

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48.

	For the Three Months Ended September 30, 2019 vs. 2018
	Increase (Decrease)
	Due to Change in						Total Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	1,031		$	1,086		$	2,117
Securities available for sale		(86	)		(8	)		(94	)
Securities held to maturity		(49	)		24			(25	)
Nonmarketable equity securities		18			29			47
Interest-earning deposits in other banks		137			(4	)		133
Total increase in interest income	$	1,051		$	1,127		$	2,178

Interest-bearing liabilities:
Interest-bearing deposits	$	312		$	322		$	634
Advances from FHLB and fed funds purchased		(339	)		44			(295	)
Subordinated debentures		(17	)		5			(12	)
Securities sold under agreements to repurchase		(2	)		(1	)		(3	)
Total (decrease) increase in interest expense		(46	)		370			324
Increase in net interest income	$	1,097		$	757		$	1,854

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2019 was $100,000 compared to $500,000 for the three months ended September 30, 2018. The loan loss provision during both periods is directly related to loan growth during the respective periods, however, the provision was partially offset in the current period due to a recovery of $487,000 that was received during the quarter from proceeds of a life insurance policy that collateralized a loan that was charged-off several years ago, thus reducing the need for additional provision in the third quarter of 2019. Net recoveries were $551,000 for the three months ended September 30, 2019 compared to net charge-offs of $51,000 for the same period in 2018.

Noninterest Income

The following table presents components of noninterest income for the three months ended September 30, 2019 and 2018 and the period-over-period variations in the categories of noninterest income:

	For The Three Months Ended September 30,				Increase (Decrease)
	2019		2018		2019 vs. 2018
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	978	$	921	$	57
Merchant and debit card fees		1,096		937		159
Fiduciary income		446		402		44
Gain on sales of loans		910		637		273
Bank-owned life insurance income		247		157		90
Gain on sales of investment securities		—		1		(1	)
Loan processing fee income		157		158		(1	)
Other noninterest income		782		336		446
Total noninterest income	$	4,616	$	3,549	$	1,067

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49.

Total noninterest income increased $1.1 million, or 30.1%, for the three months ended September 30, 2019 compared to the same period in 2018. 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 generally predictable component of our non-interest income. Service fee income was $978,000 for the three months ended September 30, 2019 compared to $921,000 for the same period in 2018, an increase of $57,000, or 6.2%. The increase was primarily due to an increase in insufficient fund income of approximately $55,000 from the same quarter in 2018.

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 $1.1 million for the three months ended September 30, 2019 compared to $937,000 for the same period in 2018, an increase of $159,000, or 17.0%. The increase was primarily due to growth in the number of demand deposit accounts and debit card usage volume during the third quarter of 2019.

Fiduciary Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $446,000 for the three months ended September 30, 2019, an increase of $44,000, or 10.9%, compared to $402,000 for the same period in 2018. The revenue increase resulted primarily from 8 new accounts that opened during the three months ended September 30, 2019, 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. Our custody-only assets are carried in a tiered percentage rate fee schedule that is charged against market value.

Gain on Sale of Loans. We originate long-term fixed-rate mortgage loans for resale into the secondary market. We sold 107 loans for $22.0 million for the three months ended September 30, 2019 compared to 99 loans for $21.1 million for the three months ended September 30, 2018. Gain on sale of loans was $910,000 for the three months ended September 30, 2019, an increase of $273,000, or 42.9%, compared to $637,000 for the same period in 2018. We also began selling Small Business Administration (SBA) loans on the secondary market during the current year, with a net realized gain on sales of SBA loans totaling $177,000 during the third quarter of 2019.

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 $90,000, or 57.3%, for the three months ended September 30, 2019 compared to the same period in 2018, primarily due to $7.0 million of additional policies purchased in June of 2019 on the lives of existing officers of the Company.

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 $446,000, or 132.7%, for the three months ended September 30, 2019 compared to the same period in 2018 due primarily to valuation adjustments and losses on sales of repossessed assets during the third quarter of 2018 that reduced other noninterest income by $594,000, which were not present in the third quarter of 2019. This was partially offset by a decline in SBA servicing revenue of $57,000 from the same quarter of the prior year.

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50.

Noninterest Expense

For the three months ended September 30, 2019, noninterest expense totaled $15.4 million, an increase of $408,000, or 2.7%, compared to $15.0 million for the three months ended September 30, 2018. The following table presents, for the periods indicated, the major categories of noninterest expense:

	For The Three Months Ended September 30,				Increase (Decrease)
	2019		2018		2019 vs. 2018
	(Dollars in thousands)
Employee compensation and benefits	$	8,896	$	8,156	$	740
Non-staff expenses:
Occupancy expenses		2,448		2,217		231
Amortization		342		349		(7	)
Software and technology		885		636		249
FDIC insurance assessment fees		—		164		(164	)
Legal and professional fees		686		948		(262	)
Advertising and promotions		339		335		4
Telecommunication expense		165		170		(5	)
ATM and debit card expense		310		289		21
Director and committee fees		220		255		(35	)
Other noninterest expense		1,144		1,508		(364	)
Total noninterest expense	$	15,435	$	15,027	$	408

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 $8.9 million for the three months ended September 30, 2019, an increase of $740,000, or 9.1%, compared to $8.2 million for the same period in 2018. The increase resulted from annual salary increases and from the addition of 22 full time equivalent employees, from 454 as of September 30, 2018 to 476 as of September 30, 2019, in order to continue growing our two de novo locations in Austin and Fort Worth, Texas, as well other employees that were added to support operational growth.

Occupancy Expenses. Occupancy expenses were $2.4 million for the three months ended September 30, 2019, compared to $2.2 million for the same period in 2018, an increase of $231,000, or 10.4%. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $960,000 for the three months ended September 30, 2019 and $783,000 for the three months ended September 30, 2018. The increase was due primarily to relocating into a new permanent location in Austin, as well as our new corporate offices in Addison, and adoption of the new Accounting Standards Codification 842, Leases.

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 $885,000 for the three months ended September 30, 2019, compared to $636,000 for the same period in 2018, an increase of $249,000, or 39.2%. The increase is attributable primarily to company growth in online banking licensing and volume, investments in security/monitoring software, and overall licensing and volume increases due to growth.

FDIC Insurance Assessment Fees. There were no FDIC insurance assessment fees booked in the third quarter of 2019, a decrease of $164,000, or 100.0%, from the three months ended September 30, 2018. The decrease resulted from an FDIC assessment credit of $534,000 that was received in January 2019, eliminating our expense for the three months ended September 30, 2019.

Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were $686,000 for the three months ended September 30, 2019, a decrease of $262,000, or 27.6%, compared to $948,000 for the same period in 2018. The decrease was primarily the result of legal and professional expenses incurred in connection with the acquisition of Westbound during the same quarter of the prior year.

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 $310,000 for the three months ended September 30, 2019, an increase

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51.

of $21,000, or 7.3%, compared to $289,000 for the same period in 2018 as a result of increased ATM and debit card usage by our customers.

Director and Committee Fees. Director and committee fees were $220,000 and $255,000 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $35,000, or 13.7%, primarily because the inside statutory and advisory directors are no longer paid a director fee as of March 2019.

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, losses incurred on problem assets, OREO related expenses, gains or losses on the sale of OREO, business development expenses (e.g., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense decreased to $1.1 million for the three months ended September 30, 2019, compared to $1.5 million for the same period in 2018, a decrease of $364,000, or 24.1%. The decrease was primarily due to decreases in loan and filing expenses of $139,000 and other real estate expense of $99,000. Other decreases resulted from a reduction in travel and lodging expenses of $44,000 and decreases in losses sustained of $38,000.

Income Tax Expense

For the three months ended September 30, 2019 and 2018, income tax expense totaled $1.6 million and $1.2 million, respectively. Our effective tax rates for the three months ended September 30, 2019 and 2018 were 17.83% and 18.56%, respectively.

Discussion and Analysis of Financial Condition as of September 30, 2019

Assets

Our total assets increased $59.1 million, or 2.60%, from $2.27 billion as of December 31, 2018 to $2.33 billion as of September 30, 2019. Our asset growth was primarily due to increases in total loans of $76.9 million, the cash surrender value of life insurance of $8.0 million and other assets of $7.0 million, which resulted primarily from the recording of a $12.0 million right of use lease asset upon adoption of ASC 842 on January 1, 2019. These increases were partially offset by a reduction in total securities available for sale and held to maturity of $11.6 million and $6.2 million, respectively, and decreases in cash and cash equivalents of $12.9 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, 2019, total loans were $1.7 billion, an increase of $76.9 million, or 4.6%, from the December 31, 2018 balance of $1.66 billion. In addition to these amounts, $3.8 million and $1.8 million in loans were classified as held for sale as of September 30, 2019 and December 31, 2018, respectively.

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52.

Total loans, excluding those held for sale, as a percentage of deposits, were 88.4% and 88.7% as of September 30, 2019 and December 31, 2018, respectively. Total loans, excluding those held for sale, as a percentage of total assets, were 74.7% and 73.2% as of September 30, 2019 and December 31, 2018, respectively.

The following table summarizes our loan portfolio by type of loan and dollar change and percentage change from December 31, 2018 to September 30, 2019:

	As of September 30, 2019		As of December 31, 2018		Dollar Change			Percent Change
	(Dollars in thousands)
Commercial and industrial	$	299,714	$	261,779	$	37,935			14.49	%
Real estate:
Construction and development		256,459		237,503		18,956			7.98	%
Commercial real estate		581,742		582,519		(777	)		(0.13	)%
Farmland		61,073		67,845		(6,772	)		(9.98	)%
1-4 family residential		406,880		393,067		13,813			3.51	%
Multi-family residential		58,198		38,386		19,812			51.61	%
Consumer and overdrafts		53,645		55,159		(1,514	)		(2.74	)%
Agricultural		18,728		23,277		(4,549	)		(19.54	)%
Total loans held for investment	$	1,736,439	$	1,659,535	$	76,904			4.63	%

Total loans held for sale	$	3,841	$	1,795	$	2,046			113.98	%

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 $11.9 million in nonperforming assets as of September 30, 2019, compared to $7.6 million as of December 31, 2018. We had $10.9 million in nonperforming loans as of September 30, 2019, compared to $5.9 million as of December 31, 2018. The increase in nonperforming loans and assets results primarily from three Small Business Administration (SBA) partially guaranteed loans with combined book balances of $5.7 million as of September 30, 2019 that were acquired from Westbound Bank in June 2018. Management is currently in the process of working with these borrowers to effectuate a plan which would allow for these loans to return to a performing status in the future. Excluding these partially SBA guaranteed loans, for which we expect minimal losses, non-performing assets as a percentage of total loans at September 30, 2019 would be 0.36%.

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53.

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

	September 30, 2019			December 31, 2018
	(Dollars in thousands)
Nonaccrual loans	$	10,881		$	5,891
Accruing loans 90 or more days past due		—			—
Total nonperforming loans		10,881			5,891
Other real estate owned:
Commercial real estate, construction and development, and farmland		—			34
Residential real estate		551			717
Total other real estate owned		551			751
Repossessed assets owned		500			971
Total other assets owned		1,051			1,722
Total nonperforming assets	$	11,932		$	7,613
Restructured loans-nonaccrual	$	118		$	335
Restructured loans-accruing	$	7,297		$	861
Ratio of nonperforming loans to total loans⁽¹⁾⁽²⁾		0.63	%		0.35	%
Ratio of nonperforming assets to total assets		0.51	%		0.34	%

(1) Excludes loans held for sale of $3.8 million and $1.8 million as of September 30, 2019 and December 31, 2018, respectively.
(2) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.

The following table presents nonaccrual loans by category as of:

	September 30, 2019		December 31, 2018
Commercial and industrial	$	15	$	366
Real estate:
Construction and development		106		—
Commercial real estate		6,966		3,700
Farmland		133		140
1-4 family residential		3,403		1,567
Consumer		214		66
Agricultural		44		52
Total	$	10,881	$	5,891

Potential Problem Loans

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

Credits rated special mention show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

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

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54.

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

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

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

	September 30, 2019
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	299,358	$	149	$	207	$	—	$	—	$	299,714
Real estate:
Construction and development		254,527		600		1,332		—		—		256,459
Commercial real estate		561,933		2,859		16,950		—		—		581,742
Farmland		60,792		44		237		—		—		61,073
1-4 family residential		405,635		830		415		—		—		406,880
Multi-family residential		58,198		—		—		—		—		58,198
Consumer		53,495		61		89		—		—		53,645
Agricultural		18,493		102		133		—		—		18,728
Total	$	1,712,431	$	4,645	$	19,363	$	—	$	—	$	1,736,439

	December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	260,863	$	224	$	692	$	—	$	—	$	261,779
Real estate:
Construction and development		236,253	—			1,250		—		—		237,503
Commercial real estate		569,648		5,691		7,180		—		—		582,519
Farmland		67,541		49		255		—		—		67,845
1-4 family residential		391,956		514		597		—		—		393,067
Multi-family residential		38,386	—		—			—		—		38,386
Consumer		55,055		48		56		—		—		55,159
Agricultural		22,713		115		449		—		—		23,277
Total	$	1,642,415	$	6,641	$	10,479	$	—	$	—	$	1,659,535

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please see “Critical Accounting Policies-Allowance for Loan Losses.”

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

•

for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

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55.

•

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, 2019, the allowance for loan losses totaled $16.4 million, or 0.94%, of total loans, excluding those held for sale. As of December 31, 2018, the allowance for loan losses totaled $14.7 million, or 0.88%, of total loans, excluding those held for sale. The increase in allowance is due to general reserves for organic loan growth, specific allocations on impaired assets and slightly higher qualitative factors in general allocation in recognition of certain macroeconomic trends in commercial and industrial and commercial real estate lending.

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

	As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
	2019			2018			2018
	(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	1,676,047		$	1,483,961		$	1,524,792
Gross loans outstanding at end of period⁽²⁾		1,736,439			1,651,863			1,659,535
Allowance for loan losses at beginning of the period		14,651			12,859			12,859
Provision for loan losses		1,250			1,750			2,250
Charge offs:
Commercial and industrial		49			66			367
Real estate:
Commercial real estate		—			32			33
1-4 family residential		14			19			93
Consumer		32			175			254
Agriculture		—			2			2
Overdrafts		137			117			169
Total charge-offs		232			411			918
Recoveries:
Commercial and industrial		507			54			111
Real estate:
Commercial real estate		1			—			1
1-4 family residential		3			49			135
Consumer		95			41			90
Agriculture		89			65			65
Overdrafts		30			34			58
Total recoveries		725			243			460
Net (recoveries) charge-offs		(493	)		168			458
Allowance for loan losses at end of period	$	16,394		$	14,441		$	14,651
Ratio of allowance to end of period loans⁽²⁾		0.94	%		0.87	%		0.88	%
Ratio of net charge-offs to average loans⁽¹⁾		-0.03	%		0.01	%		0.03	%

(1) Includes average outstanding balances of loans held for sale of $2.3 million, $1.8 million and $1.7 million for the nine months ended September 30, 2019 and 2018, and for the year ended December 31, 2018, respectively.
(2) Excludes loans held for sale of $3.8 million, $826,000 and $1.8 million for the nine months ended September 30, 2019 and 2018, and for the year ended December 31, 2018, respectively.

The ratio of allowance for loan losses to non-performing loans decreased from 248.7% at December 31, 2018 to 150.7% at September 30, 2019. Non-performing loans increased to $10.9 million at September 30, 2019, compared to

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56.

$5.9 million at December 31, 2018, which is attributable primarily to three Small Business Administration (SBA) partially guaranteed loans with combined book balances of $5.7 million as of September 30, 2019 that were acquired from Westbound Bank in June 2018. Management is currently in the process of working with these borrowers to effectuate a plan which would allow for these loans to return to a performing status in the future.

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

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

	As of September 30, 2019					As of December 31, 2018
	Amount		Percent to Total Loans			Amount		Percent to Total Loans
	(Dollars in thousands)
Commercial and industrial	$	2,057		12.55	%	$	1,751		11.96	%
Real estate:
Construction and development		2,135		13.02	%		1,920		13.10	%
Commercial real estate		6,889		42.02	%		6,025		41.12	%
Farmland		594		3.62	%		643		4.39	%
1-4 family residential		3,077		18.77	%		2,868		19.58	%
Multi-family residential		830		5.06	%		631		4.31	%
Total real estate		13,525		82.49	%		12,087		82.50	%
Consumer		611		3.73	%		575		3.92	%
Agricultural		201		1.23	%		238		1.62	%
Total allowance for loan losses	$	16,394		100.00	%	$	14,651		100.00	%

Securities

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of September 30, 2019, the carrying amount of our investment securities totaled $378.3 million, a decrease of $17.8 million, or 4.5%, compared to $396.1 million as of December 31, 2018. Investment securities represented 16.3% and 17.5% of total assets as of September 30, 2019 and December 31, 2018, respectively.

Our investment portfolio consists of securities classified as available for sale and held to maturity. As of September 30, 2019, securities available for sale and securities held to maturity totaled $221.3 million and $156.9 million, respectively. As of December 31, 2018, securities available for sale and securities held to maturity totaled $233.0 million and $163.2 million, respectively. Held to maturity securities represented 41.5% of our investment portfolio as of September 30, 2019 and 41.2% as of December 31, 2018. We generally seek to maintain 50.0% or less of our portfolio in held to maturity securities. We have the intent and ability to hold our held to maturity securities until maturity or call and any policy exceptions will be approved by our board of directors. The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

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57.

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

	As of September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Corporate bonds	$	19,686	$	533	$	—	$	20,219
Municipal securities		154,546		5,588		8		160,126
Mortgage-backed securities		103,065		864		598		103,331
Collateralized mortgage obligations		98,227		1,640		33		99,834
Total	$	375,524	$	8,625	$	639	$	383,510

	As of December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Corporate bonds	$	19,743	$	—	$	789	$	18,954
Municipal securities		157,720		1,231		1,354		157,597
Mortgage-backed securities		110,246		106		4,176		106,176
Collateralized mortgage obligations		115,400		48		2,400		113,048
Total	$	403,109	$	1,385	$	8,719	$	395,775

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, 2019 and December 31, 2018, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages, non-U.S. agency mortgage-backed securities or corporate collateralized mortgage obligations.

Our management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. As of September 30, 2019, no OTTI was recorded.

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

	As of September 30, 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	$	1,027		2.77	%	$	12,474		2.87	%	$	6,718		3.47	%	$	—		—		$	20,219		3.06	%
Municipal securities		2,148		3.10	%		30,547		3.01	%		41,133		3.39	%		81,321		3.05	%		155,149		3.13	%
Mortgage-backed securities		—		—			50,919		2.40	%		52,267		2.82	%		—		—			103,186		2.61	%
Collateralized mortgage obligations		13		3.95	%		99,703		2.70	%		—		—			—		—			99,716		2.70	%
Total	$	3,188		3.00	%	$	193,643		2.68	%	$	100,118		3.10	%	$	81,321		3.05	%	$	378,270		2.87	%

	As of December 31, 2018
	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	$	—		—		$	10,852		2.77	%	$	8,102		3.43	%	$	—		—		$	18,954		3.05	%
Municipal securities		762		1.73	%		19,062		2.93	%		51,246		3.28	%		86,465		3.01	%		157,535		3.08	%
Mortgage-backed securities		—		—			54,429		2.49	%		52,193		2.66	%		—		—			106,622		2.57	%
Collateralized mortgage obligations		352		3.88	%		100,882		2.66	%		11,794		2.88	%		—		—			113,028		2.68	%
Total	$	1,114		2.41	%	$	185,225		2.64	%	$	123,335		2.99	%	$	86,465		3.01	%	$	396,139		2.83	%

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58.

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities typically cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and, consequently, the average life of this security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 6.39 years with an estimated effective duration of 3.40 years as of September 30, 2019.

As of September 30, 2019 and December 31, 2018, respectively, we did not own securities of any one issuer, other than the U.S. government and its agencies, for which aggregate adjusted cost exceeded 10.0% of the consolidated shareholders’ equity.

The average yield of our securities portfolio was 2.87% as of September 30, 2019, up from 2.83% as of December 31, 2018. The improvement in average yields resulted primarily from an increase in municipal securities yields from 3.08% as of December 31, 2018 to 3.13% as of September 30, 2019. Additionally, the average yield on mortgage backed securities increased from 2.57% to 2.61% during the same period. As of September 30, 2019, municipal securities and mortgage backed securities comprised 41.0% and 27.3% of the portfolio, respectively. As of December 31, 2018, municipal securities and mortgage backed securities comprised 39.8% and 26.9% 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, 2019 were $1.96 billion, an increase of $91.8 million, or 4.9%, compared to $1.87 billion as of December 31, 2018.

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

	For the Nine Months Ended September 30, 2019		For the Year Ended December 31, 2018		Dollar Change			Percent Change
	(Dollars in thousands)
NOW and interest-bearing demand accounts	$	271,584	$	256,726	$	14,858			5.79	%
Savings accounts		71,223		67,917		3,306			4.87	%
Money market accounts		610,025		646,115		(36,090	)		(5.59	%)
Certificates and other time deposits		510,625		353,986		156,639			44.25	%
Total interest-bearing deposits		1,463,457		1,324,744		138,713			10.47	%
Noninterest-bearing demand accounts		490,088		446,560		43,528			9.75	%
Total deposits	$	1,953,545	$	1,771,304	$	182,241			10.29	%

The aggregate amount of time deposits in denominations of $100,000 or more as of September 30, 2019 and December 31, 2018 was $396.5 million and $304.1 million, respectively.

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59.

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

	As of September 30, 2019
	Amount		Weighted Average Interest Rate
	(Dollars in thousands)
Under 3 months	$	71,844		2.18	%
3 to 6 months		88,450		2.17	%
6 to 12 months		179,923		2.37	%
12 to 24 months		30,705		1.88	%
24 to 36 months		12,331		1.92	%
36 to 48 months		9,447		2.27	%
Over 48 months		3,847		2.47	%
Total	$	396,547		2.24	%

Borrowings

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

Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2019 and December 31, 2018, total borrowing capacity of $530.2 million and $563.8 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within 5 years. As of September 30, 2019, approximately $1.33 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, 2019:

	Balance		Weighted Average Interest Rate
	(Dollars in thousands)
Less than 90 days	$	45,000		1.83	%
90 days to less than one year		6,500		2.09	%
One to three years		3,127		1.91	%
After three to five years		6,000		1.76	%
After five years		—		—
Total	$	60,627		1.85	%

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, 2019 and December 31, 2018, $176.8 million and $193.9 million, respectively, were available under this arrangement. As of September 30, 2019 and December 31, 2018, approximately $226.6 million and $241.9 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of September 30, 2019 and December 31, 2018, 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

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60.

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.

In July 2015, we issued subordinated debentures that 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 had a rate of 4.0%, matured and was repaid in January 2019.

In December 2015, we issued $5.0 million in debentures, of which $2.5 million were issued to directors and other related parties. In May 2017, $2.0 million of the $2.5 million of debentures issued to related parties were repaid with a portion of the proceeds of our initial public offering. A further $1.0 million of other debentures matured and were paid off in full in July of 2018 and another $1.0 million of debentures matured and were paid off in full in July of the current year. The remaining $1.0 million of debentures were issued at par value of $500,000 each with rates of 4.50% and 5.00% and maturity dates of January 1, 2020 and July 1, 2020.

Other Borrowings. We have historically used a line of credit with a correspondent bank as a source of funding for working capital needs, the payment of dividends when there is a temporary timing difference in cash flows, and repurchases of equity securities. In March 2017, we entered into an unsecured revolving line of credit for $25.0 million, and in March 2019, we renewed that line of credit. The line of credit bears interest at the prime rate, with quarterly interest payments, and matures in March 2020. As of September 30, 2019, there was no outstanding balance on the line of credit.

Liquidity and Capital Resources

Liquidity

Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months ended September 30, 2019 and the year ended December 31, 2018, liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Although access to purchased funds from correspondent banks and overnight advances from the FHLB and the Federal Reserve Bank of Dallas are available and have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of September 30, 2019 and December 31, 2018, we maintained three federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate $55.0 million in federal funds. There were no funds under these lines of credit outstanding as of September 30, 2019 and December 31, 2018. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above provides an additional source of liquidity.

(Continued)

61.

The following table illustrates, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated. Average assets were $2.31 billion for the nine months ended September 30, 2019 and $2.13 billion for the year ended December 31, 2018.

	For the Nine Months Ended September 30, 2019			For the Year Ended December 31, 2018
Sources of Funds:
Deposits:
Noninterest-bearing		21.20	%		20.98	%
Interest-bearing		63.31	%		62.24	%
Advances from FHLB		2.69	%		4.43	%
Subordinated debentures		0.52	%		0.63	%
Securities sold under agreements to repurchase		0.46	%		0.60	%
Accrued interest and other liabilities		0.94	%		0.41	%
Shareholders’ equity		10.88	%		10.71	%
Total		100.00	%		100.00	%

Uses of Funds:
Loans		71.84	%		70.99	%
Securities available for sale		9.99	%		11.12	%
Securities held to maturity		6.92	%		7.89	%
Nonmarketable equity securities		0.52	%		0.45	%
Federal funds sold		1.96	%		1.39	%
Interest-bearing deposits in other banks		2.46	%		0.28	%
Other noninterest-earning assets		6.31	%		7.88	%
Total		100.00	%		100.00	%

Average noninterest-bearing deposits to average deposits		25.09	%		25.21	%
Average loans to average deposits		85.80	%		86.08	%

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 $192.1 million, or 12.9%, for the nine months ended September 30, 2019 compared to the same period in 2018. 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, 2019, we had $381.7 million in outstanding commitments to extend credit and $9.1 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2018, we had $342.5 million in outstanding commitments to extend credit and $11.7 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, 2019 and December 31, 2018, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of September 30, 2019, we had cash and cash equivalents of $58.6 million, compared to $71.5 million as of December 31, 2018. The decrease was primarily due to a decrease in federal funds sold of $6.0 million and a decrease in interest-bearing deposits of $4.4 million.

Capital Resources

Total shareholders’ equity increased to $255.9 million as of September 30, 2019, compared to $244.6 million as of December 31, 2018, an increase of $11.3 million, or 4.6%. The increase from December 31, 2018 was primarily the result of $18.9 million in net earnings for the nine months ended September 30, 2019, and a change in accumulated other comprehensive income of $7.5 million, related primarily to the decrease in the unrealized losses on securities held for sale. The increases were offset by repurchases of shares of our common stock for $0.0 million and by the payment of dividends of $1.8 million.

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62.

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, 2019 and December 31, 2018, we were in compliance with all applicable regulatory capital requirements at the bank and bank holding company levels, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

The following table presents our regulatory capital ratios as of:

	September 30, 2019					December 31, 2018
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Guaranty Bancshares, Inc.

Total capital (to risk weighted assets)	$	248,009		13.22	%	$	241,791		13.25	%
Tier 1 capital (to risk weighted assets)		231,615		12.35	%		227,140		12.44	%
Tier 1 capital (to average assets)		231,615		10.16	%		227,140		10.16	%
Common equity tier 1 risk-based capital		221,305		11.80	%		216,830		11.88	%

Guaranty Bank & Trust, N.A.

Total capital (to risk weighted assets)	$	246,851		12.89	%	$	242,142		13.27	%
Tier 1 capital (to risk weighted assets)		230,457		12.03	%		227,491		12.46	%
Tier 1 capital (to average assets)		230,457		10.04	%		227,491		10.18	%
Common equity tier 1 risk-based capital		230,457		12.03	%		227,491		12.46	%

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments as of September 30, 2019 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.

	As of September 30, 2019
	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	$	444,997	$	61,875	$	21,568	$	—	$	528,440
Advances from FHLB		51,500		3,127		6,000		—		60,627
Subordinated debentures	$	1,000		—		—		10,310		11,310
Total	$	497,497	$	65,002	$	27,568	$	10,310	$	600,377

Off-Balance Sheet Items

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

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63.

Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of September 30, 2019 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

	As of September 30, 2019
	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	$	516	$	5,115	$	380	$	3,058	$	9,069
Commitments to extend credit		239,198		46,848		51,884		43,769		381,699
Total	$	239,714	$	51,963	$	52,264	$	46,827	$	390,768

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

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

Interest Rate Sensitivity and Market Risk

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

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

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

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

(Continued)

64.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

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

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

	September 30, 2019						December 31, 2018
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		(0.67	)%		(11.24	)%		0.62	%		(15.33	)%
+200		(0.25	)%		(5.23	)%		0.52	%		(8.02	)%
+100		0.01	%		(1.76	)%		0.24	%		(3.03	)%
Base		—			—			—			—
-100		(1.14	)%		(5.31	)%		(0.41	)%		(0.46	)%

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 deflation.

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

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

(Continued)

65.

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

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

We believe that the tangible book value per common share measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

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

	As of September 30,						As of December 31,
	2019			2018			2018
	(Dollars in thousands, except per share data)
Tangible Common Equity
Total shareholders’ equity	$	255,905		$	241,997		$	244,583
Adjustments:
Goodwill		(32,160	)		(32,160	)		(32,160	)
Core deposit intangible		(4,066	)		(4,919	)		(4,706	)
Total tangible common equity	$	219,679		$	204,918		$	207,717
Common shares outstanding⁽¹⁾		11,534,393			11,964,472			11,829,868
Book value per common share	$	22.19		$	20.23		$	20.68
Tangible book value per common share	$	19.05		$	17.13		$	17.56

(1) Excludes the dilutive effect, if any, of 58,844, 90,940 and 100,539 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.

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

We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.

(Continued)

66.

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

	As of September 30, 2019			As of December 31, 2018
	(Dollars in thousands)
Tangible Common Equity
Total shareholders’ equity	$	255,905		$	244,583
Adjustments:
Goodwill		(32,160	)		(32,160	)
Core deposit intangible		(4,066	)		(4,706	)
Total tangible common equity	$	219,679		$	207,717
Tangible Assets
Total assets	$	2,326,022		$	2,266,970
Adjustments:
Goodwill		(32,160	)		(32,160	)
Core deposit intangible		(4,066	)		(4,706	)
Total tangible assets	$	2,289,796		$	2,230,104

Total Shareholders' Equity to Total Assets		11.00	%		10.79	%
Tangible Common Equity to Tangible Assets		9.59	%		9.31	%

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 losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of the operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

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

•

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

•

risks associated with our acquisition and de novo branching strategy;

•

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

•

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

•

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

•

liquidity risks associated with our business;

•

changes in market interest rates that affect pricing of our loans and deposits and our net interest income, margin and spread;

•

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

•

operational risks associated with our business;

•

risks associated with our owner-occupied commercial real estate loan and other commercial real estate loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;

(Continued)

67.

•

risks associated with our commercial and industrial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure such loans;

•

the accuracy and sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and other estimates;

•

risk of deteriorating asset quality and higher loan charge-offs, as well as the time and effort necessary to resolve nonperforming assets;

•

potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

•

potential fluctuations in the market value and liquidity of the securities we hold for sale;

•

risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets;

•

our ability to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting;

•

our ability to keep pace with technological change or difficulties when implementing new technologies;

•

risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network security;

•

our ability to comply with privacy laws and properly safeguard personal, confidential or proprietary information;

•

risks associated with data processing system failures and errors;

•

potential risk of environmental liability related to owning or foreclosing on real property;

•

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

•

our ability to maintain adequate liquidity and to raise necessary capital to fund our growth strategy and operations or to meet increased minimum regulatory capital levels;

•

our ability to comply with various governmental, accounting and regulatory requirements applicable to financial institutions;

•

the impact of recent and future legislative and regulatory changes, including changes in banking, securities, accounting and tax laws, regulations and policies and their application by our regulators;

•

governmental monetary and fiscal policies, including the policies of the Federal Reserve;

•

systemic risks associated with the soundness of other financial institutions;

•

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

•

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

•

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

•

natural disasters and adverse weather, acts of terrorism (including cyberattacks), 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; and

•

the other factors that are described or referenced in our Annual Report on Form 10-K for the year ended December 31, 2018 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

(Continued)

68.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures:

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

Changes in internal control over financial reporting:

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

Item 1A. Risk Factors

In evaluating an investment in the Company’s common stock, investors should consider carefully, among other things, information under the heading “Cautionary Notice Regarding Forward-Looking Statements” in this Form 10-Q, the risk factors previously disclosed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and other risks that the Company may disclose or has disclosed in the Company’s filings with the SEC. The Company’s business could be harmed by any of these risks. The trading price of the Company’s common stock could decline due to any of these risks, and investors may lose all or part of their investment.

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

In June 2018, the Company announced the adoption a stock repurchase program that authorized the repurchase of up to 500,000 shares of the Company’s common stock. The Company announced the termination of that stock repurchase program and the adoption of a new stock repurchase program on June 13, 2019, which also authorized the repurchase of up to 500,000 shares of the Company common stock. The stock repurchase program will be effective until the earlier of June 13, 2021 or the date all shares authorized for repurchase under the program have been repurchased, unless shortened or extended by the board of directors. All repurchases shown in the table below were made pursuant to these stock repurchase programs in open market purchases, privately negotiated transactions or other means.

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
July 1 - 31, 2019		902	$	30.00		902		495,723
August 1 - 31, 2019		17,536	$	29.84		17,536		478,187
September 1 - 30, 2019		10,707	$	29.84		10,707		467,480
Total		29,145				29,145

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

(Continued)

70.

Item 6. Exhibits

Exhibit Number		Description of Exhibit

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

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

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.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

______________________________

* Filed with this Quarterly Report on Form 10-Q

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

(Continued)

71.

SIGNATURES

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

		GUARANTY BANCSHARES, INC.
		(Registrant)

Date: November 7, 2019		/s/ Tyson T. Abston
		Tyson T. Abston
		Chairman of the Board & Chief Executive Officer

Date: November 7, 2019		/s/ Clifton A. Payne
		Clifton A. Payne

		Chief Financial Officer & Director

72.