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Table of Contents
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 June 30, 2021
OR
 
☐
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 August 2, 2021, there were 12,057,937 outstanding shares of the registrant’s common stock, par value $1.00 per share.
Table of Contents
GUARANTY BANCSHARES, INC.
 
 
       
    Page    
  
Item 1.
    Financial Statements – (Unaudited)   
 
3
 
     
 
3
 
     
 
4
 
     
 
5
 
     
 
6
 
     
 
8
 
     
 
10
 
Item 2.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations   
 
44
 
Item 3.
    Quantitative and Qualitative Disclosures about Market Risk   
 
84
 
Item 4.
    Controls and Procedures   
 
84
 
     
Item 1.
    Legal Proceedings   
 
85
 
Item 1A.
    Risk Factors   
 
85
 
Item 2.
    Unregistered Sales of Equity Securities and Use of Proceeds   
 
86
 
Item 3.
    Defaults Upon Senior Securities   
 
86
 
Item 4.
    Mine Safety Disclosures   
 
86
 
Item 5.
    Other Information   
 
86
 
Item 6.
    Exhibits   
 
87
 
  
 
88
 
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GUARANTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
 
     (Unaudited)
June 30,
2021		     (Audited)
December 31,
2020		  
ASSETS
                 
Cash and due from banks
    $ 37,611     $ 47,836  
Federal funds sold
      385,075       218,825  
Interest-bearing deposits
      24,532       85,130  
    
 
 
    
 
 
  
Total cash and cash equivalents
      447,218       351,791  
Securities available for sale
      446,636       380,795  
Loans held for sale
      5,088       5,542  
Loans, net of allowance for credit losses of $31,548 and $33,619, respectively
      1,856,277       1,831,737  
Accrued interest receivable
      8,801       9,834  
Premises and equipment, net
      54,405       55,212  
Other real estate owned
      227       404  
Cash surrender value of life insurance
      36,367       35,510  
Core deposit intangible, net
      2,573       2,999  
Goodwill
      32,160       32,160  
Other assets
      43,207       34,848  
    
 
 
    
 
 
  
Total assets
    $ 2,932,959     $ 2,740,832  
    
 
 
    
 
 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
Liabilities
                 
Deposits
                 
Noninterest-bearing
    $ 928,416     $ 779,740  
Interest-bearing
      1,604,610       1,506,650  
    
 
 
    
 
 
  
Total deposits
      2,533,026       2,286,390  
Securities sold under agreements to repurchase
      15,336       15,631  
Accrued interest and other liabilities
      28,058       25,257  
Line of credit
      —       12,000  
Federal Home Loan Bank advances
      49,000       109,101  
Subordinated debentures
      19,810       19,810  
    
 
 
    
 
 
  
Total liabilities
      2,645,230       2,468,189  
Commitments and contingencies (see Note 11)
             
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, 14,074,198 and 12,951,676 shares issued, and 12,057,937 and 10,935,415 shares outstanding, respectively
      14,074       12,952  
Additional paid-in capital
      223,822       188,032  
Retained earnings
      94,073       113,449  
Treasury stock, 2,016,261 shares at cost
      (51,419 )      (51,419 ) 
Accumulated other comprehensive income
      7,179       9,629  
    
 
 
    
 
 
  
Total shareholders’ equity
      287,729       272,643  
    
 
 
    
 
 
  
Total liabilities and shareholders’ equity
    $           2,932,959     $             2,740,832  
    
 
 
    
 
 
  
 
 
See accompanying notes to consolidated financial statements.
3. 
Table of Contents
GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(Dollars in thousands, except per share data)
 
 
     Three Months Ended
June 30,		     Six Months Ended
June 30,		  
     2021     2020     2021     2020  
Interest income
                                 
Loans, including fees
    $ 22,864     $ 24,139     $ 47,059     $ 46,656  
Securities
                                 
Taxable
      1,138       1,187       2,190       2,481  
Nontaxable
      1,053       1,086       2,092       2,061  
Federal funds sold and interest-bearing deposits
      229       169       456       635  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest income
      25,284       26,581       51,797       51,833  
    
 
 
    
 
 
    
 
 
    
 
 
  
                                  
Interest expense
                                 
Deposits
      1,493       3,040       3,096       7,461  
FHLB advances and federal funds purchased
      102       123       201       205  
Subordinated debentures
      188       176       376       319  
Other borrowed money
      24       60       156       97  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest expense
      1,807       3,399       3,829       8,082  
    
 
 
    
 
 
    
 
 
    
 
 
  
                                  
Net interest income
      23,477       23,182       47,968       43,751  
Provision for credit losses
      (1,000 )      12,100       (1,000 )      13,500  
    
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income after provision for credit losses
      24,477               11,082               48,968               30,251  
    
 
 
    
 
 
    
 
 
    
 
 
  
                                  
Noninterest income
                                 
Service charges
      855       571       1,684       1,479  
Net realized gain on sale of loans
      1,244       1,508       2,642       2,697  
Other income
      3,871       2,908       7,763       5,772  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest income
      5,970       4,987       12,089       9,948  
    
 
 
    
 
 
    
 
 
    
 
 
  
                                  
Noninterest expense
                                 
Employee compensation and benefits
      10,204       8,077       20,147       17,543  
Occupancy expenses
      2,833       2,550       5,520       5,027  
Other expenses
      4,666       4,557       9,348       9,021  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest expense
      17,703       15,184       35,015       31,591  
    
 
 
    
 
 
    
 
 
    
 
 
  
                                  
Income before income taxes
      12,744       885       26,042       8,608  
Income tax provision (benefit)
      2,312       (190 )      4,648       1,255  
    
 
 
    
 
 
    
 
 
    
 
 
  
Net earnings
    $         10,432     $ 1,075     $ 21,394     $ 7,353  
    
 
 
    
 
 
    
 
 
    
 
 
  
Basic earnings per share*
    $ 0.87     $ 0.09     $ 1.78     $ 0.59  
    
 
 
    
 
 
    
 
 
    
 
 
  
Diluted earnings per share*
    $ 0.85     $ 0.09     $ 1.75     $ 0.59  
    
 
 
    
 
 
    
 
 
    
 
 
  
* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
 
 
See accompanying notes to consolidated financial statements.
4. 
Table of Contents
GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
     Three Months Ended
June 30,		     Six Months Ended
June 30,		  
     2021     2020     2021     2020  
Net earnings
    $ 10,432     $ 1,075     $ 21,394     $ 7,353  
Other comprehensive (loss) income:
                                 
Unrealized (losses) gains on securities
                                 
Unrealized holding (losses) gains arising during the period
      (869 )      11,382       (3,700 )      12,486  
Unrealized gains on held to maturity securities transferred to available for sale
      —       —       —       2,265  
Amortization of net unrealized gains on held to maturity securities
      —       —       —       46  
Tax effect
      182       (2,390 )      778       (3,100 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Unrealized (losses) gains on securities, net of tax
      (687 )      8,992       (2,922 )      11,697  
Unrealized holding gains (losses) arising during the period on interest rate swaps
      23       (243 )      472       (829 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total other comprehensive (loss) income
      (664 )      8,749       (2,450 )      10,868  
    
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive income
    $         9,768     $         9,824     $         18,944     $         18,221  
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
See accompanying notes to consolidated financial statements.
5. 
Table of Contents
GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
       Preferred  
Stock		        Common  
Stock		        Additional  
Paid-in
Capital		      Retained
  Earnings  		         Treasury    
Stock		     Accumulated
Other
Comprehensive
Income		     Total
 Shareholders’ 
Equity		  
For the Six Months Ended June 30, 2021
         
Balance at December 31, 2020
    $ —      $ 12,952      $ 188,032      $ 113,449     $ (51,419 )    $ 9,629     $ 272,643  
Net earnings
      —        —        —        21,394       —       —       21,394  
Other comprehensive loss
      —        —        —        —       —       (2,450 )      (2,450 ) 
10% stock dividend
      —        1,094        34,853        (35,947 )      —       —       —  
Exercise of stock options
      —        28        608        —       —       —       636  
Stock based compensation
      —        —        329        —       —       —       329  
Cash dividends:
         
Common - $0.40 per share
      —        —        —        (4,823 )      —       —       (4,823 ) 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance at June 30, 2021
    $ —      $ 14,074      $ 223,822      $ 94,073     $ (51,419 )    $ 7,179     $ 287,729  
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
                                                             
For the Three Months Ended June 30, 2021
         
Balance at March 31, 2021
    $ —      $ 14,070      $ 223,550      $ 86,053     $ (51,419 )    $ 7,843     $ 280,097  
Net earnings
      —        —        —        10,432       —       —       10,432  
Other comprehensive loss
      —        —        —        —       —       (664 )      (664 ) 
Exercise of stock options
      —        4        105        —       —       —       109  
Stock based compensation
      —        —        167        —       —       —       167  
Cash dividends:
         
Common - $0.20 per share
      —        —        —        (2,412 )      —       —       (2,412 ) 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance at June 30, 2021
    $ —      $ 14,074      $ 223,822      $ 94,073     $ (51,419 )    $ 7,179     $ 287,729  
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
 
 
See accompanying notes to consolidated financial statements.
6. 
Table of Contents
GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
       Preferred  
Stock		        Common  
Stock		        Additional  
Paid-in
Capital		      Retained
  Earnings  		         Treasury    
Stock		     Accumulated
Other
Comprehensive
Income		     Total
 Shareholders’ 
Equity		  
For the Six Months Ended June 30, 2020
         
Balance at December 31, 2019
    $ —      $ 12,905      $ 186,692      $ 98,239     $ (34,492 )    $ (1,793 )    $ 261,551  
Impact of adoption of ASC 326, net of tax of $955
      —        —        —        (3,593 )      —       —       (3,593 ) 
Net earnings
      —        —        —        7,353       —       —       7,353  
Other comprehensive income
      —        —        —        —       —       10,868       10,868  
Exercise of stock options
      —        3        69        —       —       —       72  
Purchase of treasury stock
      —        —        —        —       (13,477 )      —       (13,477 ) 
Stock based compensation
      —        —        312        —       —       —       312  
Cash dividends:
         
Common - $0.35 per share*
      —        —        —        (4,211 )      —       —       (4,211 ) 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance at June 30, 2020
    $ —      $ 12,908      $ 187,073      $ 97,788     $ (47,969 )    $ 9,075     $ 258,875  
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
                                                             
For the Three Months Ended June 30, 2020
         
Balance at March 31, 2020
    $ —      $ 12,908      $ 186,916      $ 98,805     $ (45,309 )    $ 326     $ 253,646  
Net earnings
      —        —        —        1,075       —       —       1,075  
Other comprehensive income
      —        —        —        —       —       8,749       8,749  
Purchase of treasury stock
      —        —        —        —       (2,660 )      —       (2,660 ) 
Stock based compensation
      —        —        157        —       —       —       157  
Dividends:
         
Common - $0.17 per share*
      —        —        —        (2,092 )      —       —       (2,092 ) 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance at June 30, 2020
    $ —      $ 12,908      $ 187,073      $ 97,788     $ (47,969 )    $ 9,075     $ 258,875  
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
 
*
Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
 
 
See accompanying notes to consolidated financial statements.
7. 
Table of Contents
GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
            For the Six Months Ended        
June 30,		  
            2021                     2020          
Cash flows from operating activities
                
Net earnings
   $ 21,394     $ 7,353  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                
Depreciation
     2,210       1,995  
Amortization
     679       673  
Deferred taxes
     (235 )      (2,175 ) 
Premium amortization, net of discount accretion
     2,200       1,908  
Gain on sale of loans
     (2,642 )      (2,697 ) 
Provision for credit losses
     (1,000 )      13,500  
Origination of loans held for sale
     (60,289 )      (69,170 ) 
Proceeds from loans held for sale
     63,385       67,041  
Write-down of other real estate and repossessed assets
     4       357  
Net gain on sale of premises, equipment, other real estate owned and other assets
     1       107  
Stock based compensation
     329       312  
Net change in accrued interest receivable and other assets
     (7,420 )      (6,409 ) 
Net change in accrued interest payable and other liabilities
     3,049       2,053  
   
 
 
    
 
 
  
Net cash provided by operating activities
   $ 21,665     $ 14,848  
   
 
 
    
 
 
  
                 
Cash flows from investing activities
                
Securities available for sale:
                
Purchases
   $ (112,178 )    $ (20,894 ) 
Proceeds from maturities and principal repayments
     40,437       22,552  
Securities held to maturity:
                
Proceeds from maturities and principal repayments
     —       3,024  
Net originations of loans
     (23,984 )      (246,637 ) 
Purchases of premises and equipment
     (1,409 )      (3,881 ) 
Proceeds from BOLI death benefit
     464       —  
Proceeds from sale of premises, equipment, other real estate owned and other assets
     155       339  
   
 
 
    
 
 
  
Net cash used in investing activities
   $ (96,515 )    $ (245,497 ) 
   
 
 
    
 
 
  
 
 
See accompanying notes to consolidated financial statements.
8. 
Table of Contents
GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
             For the Six Months Ended        
June 30,		  
     2021     2020  
Cash flows from financing activities
                 
Net change in deposits
    $ 246,636     $ 285,222  
Net change in securities sold under agreements to repurchase
      (295 )      6,314  
Proceeds from FHLB advances
      80,000       200,000  
Repayment of FHLB advances
      (140,101 )      (154,508 ) 
Proceeds from line of credit
      5,000       20,000  
Repayment of line of credit
      (17,000 )      (18,000 ) 
Proceeds from issuance of debentures
      —       10,000  
Repayments of debentures
      —       (500 ) 
Purchase of treasury stock
      —       (13,477 ) 
Exercise of stock options
      636       72  
Cash dividends
      (4,599 )      (4,194 ) 
    
 
 
    
 
 
  
Net cash provided by financing activities
    $ 170,277     $ 330,929  
    
 
 
    
 
 
  
Net change in cash and cash equivalents
      95,427       100,280  
Cash and cash equivalents at beginning of period
      351,791       90,714  
    
 
 
    
 
 
  
Cash and cash equivalents at end of period
    $ 447,218     $ 190,994  
    
 
 
    
 
 
  
                  
Supplemental disclosures of cash flow information
                 
Interest paid
    $ 4,068     $ 8,497  
Income taxes paid
      6,850       2,600  
                  
Supplemental schedule of noncash investing and financing activities
                 
Cash dividends accrued
      2,412       2,092  
Transfer of loans to other real estate owned and repossessed assets
      444       182  
Stock dividend
      35,947       —  
 
 
See accompanying notes to consolidated financial statements.
9. 
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 granting loans throughout its markets and investing in securities issued by the U.S. Treasury, U.S. government agencies and state and political subdivisions. The Company’s primary lending products are real estate, commercial and consumer loans. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ abilities to honor contracts is dependent on the economy of the State of Texas and primarily the economies of East Texas, 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 Asset Management, LLC (formerly 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, 2020, included in Guaranty’s Annual Report on Form 10-K for the year ended December 31, 2020. 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.
COVID-19
: On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, of which virus variants continue to spread through the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19, and its subsequent variants, could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company.
Government leaders and the Federal Reserve have taken several actions designed to mitigate the economic fallout resulting from the coronavirus. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law on March 27, 2020, authorized more than $2 trillion to battle COVID-19 and its economic effects, including immediate cash relief for individual citizens, loan programs for small businesses, support for hospitals and other medical providers, and various types of economic relief for impacted businesses and industries. The goal of CARES Act was to prevent severe economic downturn. The CARES Act also provided for temporary interest only or payment deferral modifications for loans without classifying them as troubled debt restructurings under current accounting rules. Additional government-backed hardship relief measures were signed into law in early 2021, as well as extension of many of the CARES Act provisions, with further measures currently being considered.
 
 
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10. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 16, 2020, the Federal Open Market Committee reduced the target federal funds rate range to 0.00% to 0.25%, at which it remains as of June 30, 2021.​​​​​​​ These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations, as well as business and consumer confidence. As a result of the spread of COVID-19 and its variants, economic uncertainties have arisen which can negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impact remains unknown at this time.​​​​​​​
Recent Accounting Pronouncements
:
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which replaces the existing incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842: Leases. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale securities that management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted the Current Expected Credit Losses (CECL) standard (Accounting Standards Update 2016-13 or ASC 326) on January 1, 2020. The day one impact of adopting CECL resulted in an allowance increase of $4,548, or 28.1%, from December 31, 2019. The day one increase was primarily due to recognizing expected lifetime losses in the portfolio and adding an economic forecast based upon our assumptions on
January 1, 2020
. The Company made significant additional provisions during the year ended December 31, 2020 as a result of CECL model assumptions driven by COVID-19 and related uncertainties.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326. The Company recorded a decrease to retained earnings of $3,593, net of tax effects of $955, as of January 1, 2020 for the cumulative effect of adopting ASC 326.
Allowance for Credit Losses:
Available for Sale Debt Securities
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether or not it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the securities amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of the cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected are less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
 
 
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11. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Changes in the allowance for credit losses are recorded as provisions for or reversal of credit loss expense. Losses are charged against the allowance when management believes an available-for-sale security is uncollectible or when either of the criteria regarding intent to sell or required to sell is met. Accrued interest receivable on available for sale debt securities is excluded from the estimate of credit losses.
Loans
The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected over the lifetime of the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We use the weighted-average remaining maturity method (WARM method) as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a segment at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors.
The allowance for credit losses is measured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan portfolio segments include both regulatory call report codes and by internally identified risk ratings for our commercial loan segments and by delinquency status for our consumer loan segments. We also have separately identified our mortgage warehouse loans, internally originated SBA loans, SBA loans acquired from Westbound Bank in 2018 and loans originated under the Paycheck Protection Program (“PPP”) for inherent risk analysis. Accrued interest receivable on loans is excluded from the estimate of credit losses.
 
 
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12. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Below is a summary of the segments and certain of the inherent risks in the Company’s loan portfolio:
 
Commercial and industrial:
   
This portfolio segment includes general secured and unsecured commercial loans which are not secured by real estate or may be secured by real estate but made for the primary purpose of a short term revolving line of credit. Credit risk inherent in this portfolio segment include fluctuations in the local and national economy.
Construction and development:
   
This portfolio segment includes all loans for the purpose of construction, including both business and residential structures; and real estate development loans, including non-agricultural vacant land. Credit risk inherent in this portfolio include fluctuations in property values, unemployment, and changes in the local and national economy.
Commercial real estate:
   
The commercial real estate portfolio segment includes all commercial loans that are secured by real estate, other than those included in the construction and development, farmland, multi-family, and 1-4 family residential segments. Risks inherent in this portfolio segment include fluctuations in property values and changes in the local and national economy impacting the sale of the finished structures.
Farmland:
   
The farmland portfolio includes loans that are secured by real estate that is used or usable for agricultural purposes, including land used for crops, livestock production, grazing & pastureland and timberland. This segment includes land with a 1-4 family residential structure if the value of the land exceeds the value of the residence. Risks inherent in this portfolio segment include adverse changes in climate, fluctuations in feed and cattle prices and changes in property values.
Consumer:
   
This portfolio segment consists of non-real estate loans to consumers. This includes secured and unsecured loans such as auto and personal loans. The risks inherent in this portfolio segment include those factors that would impact the consumer’s ability to meet their obligations under the loan. These include increases in the local unemployment rate and fluctuations in consumer and business sales.
1-4 family residential:
   
This portfolio segment includes loans to both commercial and consumer borrowers secured by real estate for housing units of up to four families. Risks inherent in this portfolio segment include increases in the local unemployment rate, changes in the local economy and factors that would impact the value of the underlying collateral, such as changes in property values.
Multi-family residential:
   
This portfolio segment includes loans secured by structures containing five or more residential housing units. Risks inherent in this portfolio segment include increases to the local unemployment rate, changes in the local economy, and factors that would impact property values.
Agricultural:
   
The agricultural portfolio segment includes loans to individuals and companies in the dairy and cattle industries and farmers. Loans in the segment are secured by collateral including cattle, crops and equipment. Risks inherent in this portfolio segment include adverse changes in climate and fluctuations in feed and cattle prices.
 
 
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13. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The following groups of loans are considered to carry specific similar inherent risk characteristics, which the Bank considers separately during its calculation of the allowance for credit losses. These groups of loans are reported within the segments identified in the previous table.
 
Mortgage Warehouse:
   
The mortgage warehouse portfolio includes loans in which we purchase mortgage loan ownership interests from unaffiliated mortgage originators that are generally held by us for a period of less than 30-days, typically 5-10 days before they are sold to an approved investor. These loans are consistently underwritten based on standards established by the approved investor. Risks inherent in this portfolio include borrower or mortgage originator fraud.
SBA – Acquired Loans
   
The SBA – acquired loans segment consists of partially SBA guaranteed loans that were acquired from Westbound Bank in June 2018. These loans are commercial real estate and commercial and industrial in nature and were underwritten with guidelines that are less conservative than our Company. Risks inherent in this portfolio include increases in interest rates, as most are variable rate loans, generally lower levels of borrower equity, less conservative underwriting guidelines, fluctuations in real estate values and changes in the local and national economy.
SBA – Originated Loans
   
The SBA – originated loans segment consists of loans that are partially guaranteed by the SBA and were originated and underwritten by Guaranty Bank & Trust loan officers. Risks inherent in this portfolio include increases in interest rates due to variable rate structures, generally lower levels of borrower equity or net worth, fluctuations in real estate values and changes in the local and national economy.
SBA – Paycheck Protection
Program Loans
   
Loans originated under the PPP are 100% government guaranteed by the SBA. As a result, the loans are excluded from the segments above and a minimal reserve estimate was applied to this segment of loans for purposes of calculating the credit loss provision.
In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our portfolio is impacted by delinquency status and debt service coverage generated by our borrowers’ businesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for credit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for credit losses, which would adversely affect our results of operations and financial condition. Delinquency statistics are updated at least monthly.
Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial and industrial, construction, and commercial real estate loans. Internal risk ratings are a key factor that impact management’s estimates of loss factors used in determining the amount of the allowance for credit losses. Internal risk ratings are updated on a continuous basis.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
 
 
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14. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Credit Quality Indicators - The Company monitors the credit quality of the loans in the various segments by identifying and evaluating credit quality indicators specific to each segment class. This information is incorporated into management’s analysis of the adequacy of the allowance for credit losses. Information for the credit quality indicators is updated monthly or quarterly for classified assets and at least annually for the remainder of the portfolio.
The following is a discussion of the primary credit quality indicators most closely monitored for the loan portfolio, by class:
 
Commercial and industrial:
   
In assessing risk associated with commercial loans, management considers the business’s cash flow and the value of the underlying collateral to be the primary credit quality indicators.
Construction and development:
   
In assessing the credit quality of construction loans, management considers the ability of the borrower to make principal and interest payments in the event that they are unable to sell the completed structure to be a primary credit quality indicator. For real estate development loans, management also considers the likelihood of the successful sale of the constructed properties in the development.
Commercial real estate:
   
Management considers the strength of the borrower’s cash flows, changes in property values and occupancy status to be key credit quality indicators of commercial real estate loans.
Farmland:
   
In assessing risk associated with farmland loans, management considers the borrower’s cash flows and underlying property values to be key credit quality indicators.
Consumer:
   
Management considers delinquency status to be the primary credit quality indictor of consumer loans. Others include the debt to income ratio of the borrower, the borrower’s credit history, the availability of other credit to the borrower, the borrower’s past-due history, and, if applicable, the value of the underlying collateral to be primary credit quality indicators.
1-4 family residential:
   
Management considers delinquency status to be the primary credit quality indictor of 1-4 family residential loans. Others include changes in the local economy, changes in property values, and changes in local unemployment rates to be key credit quality indicators of the loans in the 1-4 family residential loan segment.
Multi-family residential:
   
Management considers changes in the local economy, changes in property values, vacancy rates and changes in local unemployment rates to be key credit quality indicators of the loans in the multifamily loan segment.
Agricultural:
   
In assessing risk associated with agricultural loans, management considers the borrower’s cash flows, the value of the underlying collateral and sources of secondary repayment to be primary credit quality indicators.
From time to time, we modify our loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by us that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. We review each troubled debt restructured loan and determine on a case by case basis if the loan can be grouped with its like segment for allowance consideration or whether it should be individually evaluated for a specific allowance for credit loss allocation. If individually evaluated, an allowance for credit loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral.
 
 
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15. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
In response to the COVID-19 pandemic, the Bank provided financial relief to many of its customers through a 3-month principal and interest payment deferral program or an up to 6-month interest only program. Pursuant to the CARES Act and the April 7, 2020 Interagency guidance and GAAP, these loan modifications, and certain subsequent modifications, are not considered to be troubled debt restructurings.
Reserve for Unfunded Commitments
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Company. The allowance for credit losses on off balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Effect of Stock Splits and Stock Dividends on Prior Period Presentation
: Earnings and dividends per share and weighted average shares outstanding are presented as if all stock splits and stock dividends were effective from the earliest period presented through the date of issuance of the financial statements. Unless indicated otherwise, other share amounts have not been adjusted.
NOTE 2 - MARKETABLE SECURITIES
The following tables summarize the amortized cost and fair value of securities available for sale as of June 30, 2021 and as of December 31, 2020 and the corresponding amounts of gross unrealized gains and losses:
 
June 30, 2021
    Amortized
Cost		      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		      Estimated
Fair
Value		  
Available for sale:
                                    
U.S. government agencies
    $ 10,014      $ 134      $ —      $ 10,148  
Corporate bonds
      39,153        1,356        78        40,431  
Municipal securities
      162,219        9,634        40        171,813  
Mortgage-backed securities
      155,970        2,140        794        157,316  
Collateralized mortgage obligations
      65,282        1,660        14        66,928  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total available for sale
    $       432,638      $       14,924      $       926      $       446,636  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
December 31, 2020
    Amortized
Cost		      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		      Estimated
Fair
Value		  
Available for sale:
                                    
Corporate bonds
    $ 29,608      $ 1,382      $ 8      $ 30,982  
Municipal securities
      164,668        11,036        —        175,704  
Mortgage-backed securities
      104,210        3,041        87        107,164  
Collateralized mortgage obligations
      64,611        2,335        1        66,945  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total available for sale
    $       363,097      $       17,794      $       96      $       380,795  
    
 
 
     
 
 
     
 
 
     
 
 
  
There is no allowance for credit losses recorded for our available for sale debt securities as of June 30, 2021 or December 31, 2020.
 
 
(Continued)
16. 
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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 June 30, 2021 and December 31, 2020, for which no allowance for credit losses has been recorded, 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  
June 30, 2021
    Gross
Unrealized
Losses		     Estimated
Fair
Value		      Gross
Unrealized
Losses		      Estimated
Fair
Value		      Gross
Unrealized
Losses		     Estimated
Fair
Value		  
Available for sale:
                                   
Corporate bonds
    $ (78 )    $ 7,708      $ —      $ —      $ (78 )    $ 7,708  
Municipal securities
      (40 )      4,486        —        —        (40 )      4,486  
Mortgage-backed securities
      (794 )      81,619        —        —        (794 )      81,619  
Collateralized mortgage obligations
      (14 )      3,549        —        —        (14 )      3,549  
    
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Total available for sale
    $   (926 )    $ 97,362      $ —      $ —      $   (926 )    $   97,362  
    
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
 
     Less Than 12 Months      12 Months or Longer      Total  
December 31, 2020
    Gross
Unrealized
Losses		     Estimated
Fair
Value		      Gross
Unrealized
Losses		     Estimated
Fair
Value		      Gross
Unrealized
Losses		     Estimated
Fair
Value		  
Available for sale:
                                                   
Corporate bonds
    $ (8 )    $ 2,493      $   —     $ —      $ (8 )    $ 2,493  
Mortgage-backed securities
        (87 )      25,775        —       —        (87 )      25,775  
Collateralized mortgage obligations
      —       —        (1 )      106        (1 )      106  
    
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
Total available for sale
    $ (95 )    $   28,268      $ (1 )    $   106      $ (96 )    $   28,374  
    
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
There were 25 investments in an unrealized loss position with no recorded allowance for credit losses at June 30, 2021. The securities in a loss position were composed of collateralized mortgage obligations, and mortgage backed securities. Management evaluates available for sale debt securities in an unrealized loss position to determine whether the impairment is due to credit-related factors or noncredit-related factors. With respect to the collateralized mortgage obligations and mortgage-backed securities issued by the U.S. Government and its agencies, the Company has determined that a decline in fair value is not due to credit-related factors. The Company monitors the credit quality of other debt securities through the use of credit ratings and other factors specific to an individual security in assessing whether or not the decline in fair value of municipal or corporate securities, relative to their amortized cost, is due to credit-related factors. Triggers to prompt further investigation of securities when the fair value is less than the amortized cost are when a security has been downgraded and falls below an A credit rating, and the security’s unrealized loss exceeds 20% of its book value. Consideration is given to (1) the extent to which fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. Based on evaluation of available evidence, management believes the unrealized losses on the securities as of June 30, 2021 is not credit-related. Management does not have the intent to sell any of these securities and believes that it is more likely than not the Company will not have to sell any such securities before recovery of cost. The fair values are expected to recover as the securities approach their maturity date or repricing date or if market yields for the investments decline.
Mortgage-backed securities and collateralized mortgage obligations are backed by pools of mortgages that are insured or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association or the Government National Mortgage Association.
As of June 30, 2021, there were no holdings of securities of any one issuer, other than the collateralized mortgage obligations and mortgage-backed securities issued by the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.
 
 
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17. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Securities with fair values of approximately $299,031 and $314,962 at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.
There were no securities sold during the three or six months ended June 30, 2021 or 2020.
The contractual maturities at June 30, 2021 of available for sale 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  
June 30, 2021
    Amortized
Cost		      Estimated
Fair
Value		  
Due within one year
    $ 2,817      $ 2,850  
Due after one year through five years
      54,849        57,225  
Due after five years through ten years
      78,842        82,309  
Due after ten years
      74,878        80,008  
Mortgage-backed securities
      155,970        157,316  
Collateralized mortgage obligations
      65,282        66,928  
    
 
 
     
 
 
  
Total Securities
    $             432,638      $             446,636  
    
 
 
     
 
 
  
NOTE 3 - LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the Company’s loan portfolio by type of loan as of:
 
     June 30, 2021     December 31, 2020  
Commercial and industrial
    $ 424,624     $ 445,771  
Real estate:
                 
Construction and development
      264,002       270,407  
Commercial real estate
      608,464       594,216  
Farmland
      94,525       78,508  
1-4 family residential
      389,616       389,096  
Multi-family residential
      42,086       21,701  
Consumer
      51,795       51,044  
Agricultural
      14,608       15,734  
Overdrafts
      444       342  
    
 
 
    
 
 
  
Total loans
(1)
      1,890,164       1,866,819  
Net of:
                 
Deferred loan fees, net
      (2,339 )      (1,463 ) 
Allowance for credit losses
      (31,548 )      (33,619 ) 
    
 
 
    
 
 
  
Total net loans
(1)
    $                 1,856,277     $                 1,831,737  
    
 
 
    
 
 
  
(1) Excludes accrued interest receivable on loans of $5.8 million and $7.0 million as of June 30, 2021 and December 31, 2020, respectively, which is presented separately on the consolidated balance sheets.
 
 
(Continued)
18. 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The Company’s estimate of the allowance for credit losses (“ACL”) reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The following tables present the activity in the ACL by class of loans for the six months ended June 30, 2021, for the year ended December 31, 2020 and for the six months ended June 30, 2020:
 
For the Six Months Ended
June 30, 2021
   Commercial
and
industrial		     Construction
and
development		     Commercial
real
estate		     Farmland     1-4 family
residential		    
Multi-family

residential		     Consumer     Agricultural     Overdrafts     Total  
Allowance for credit losses:
                                                                                
Beginning balance
   $ 4,033     $ 4,735     $ 15,780     $ 1,220     $ 6,313     $ 363     $ 929     $ 239     $ 7     $ 33,619  
Provision for credit losses
     (329 )      (914 )      167       19       (162 )      255       (34 )      (49 )      47       (1,000 ) 
Loans charged-off
     (238 )      —       (760 )      —       —       —       (76 )      —       (84 )      (1,158 ) 
Recoveries
     11       1       11       —       —       —       28       —           36       87  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
   $      3,477     $      3,822     $      15,198     $      1,239     $       6,151     $          618     $    847     $       190     $         6     $         31,548  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
For the Year Ended
December 31, 2020
   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, prior to adoption of ASC 326
   $ 2,056     $ 2,378     $ 6,853     $ 570     $ 3,125     $ 409     $ 602     $ 197     $ 12     $ 16,202  
Impact of adopting ASC 326
     546       323       2,228       26       1,339       (50 )      72       73       (9 )      4,548  
Provision for loan losses
     1,398       2,034       6,698       624       1,915       4       373       (33 )      187       13,200  
Loans charged-off
     (68 )      —       —       —       (68 )      —       (155 )      (18 )      (234 )      (543 ) 
Recoveries
     101       —       1       —       2       —       37       20       51       212  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
   $ 4,033     $ 4,735     $ 15,780     $ 1,220     $ 6,313     $ 363     $ 929     $ 239     $ 7     $   33,619  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
For the Six Months Ended
June 30, 2020
   Commercial
and
industrial		     Construction
and
development		     Commercial
real
estate		     Farmland     1-4 family
residential		    
Multi-family

residential		     Consumer     Agricultural     Overdrafts     Unallocated     Total  
Allowance for loan losses:
                                                                                        
Beginning balance
   $ 2,056     $ 2,378     $ 6,853     $ 570     $ 3,125     $ 409     $ 602     $ 197     $ 12     $ —     $ 16,202  
Impact of adopting ASC 326
     546       323       2,228       26       1,339       (50 )      72       73       (9 )      —       4,548  
Provision for loan losses
     1,491       2,193       6,567       654       1,729       245       364       114       60       83       13,500  
Loans charged-off
     (43 )      —       —       —       (59 )      —       (80 )      (18 )      (83 )      —       (283 ) 
Recoveries
     86       —       —       —       2       —       17       20       27       —       152  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
   $ 4,136     $ 4,894     $ 15,648     $ 1,250     $ 6,136     $ 604     $ 975     $ 386     $ 7     $ 83     $   34,119  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
(Continued)
19. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
During the year ended December 31, 2020, a total allowance for credit losses provision of $13.2 million was recorded primarily to account for the estimated impact of COVID-19 on credit quality and resulted largely from changes to individual loan risk ratings, as well as COVID-specific qualitative factors primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were impacted by the effects of COVID-19. There was a reverse provision for ACL of $1.0 million during the second quarter of 2021, partially due to the aforementioned COVID-specific qualitative factors established during 2020 being reduced during the second quarter of 2021 by approximately 14 basis points across the loan portfolio in order to capture the improvements that have occurred to macro-economic factors evaluated at the onset of the pandemic, as well as upgrades to risk ratings for certain loans that were downgraded at the onset of COVID as a precautionary measure. Although management is cautiously optimistic about improving economic trends, it is possible that the economic effects of the pandemic could continue beyond 2021, particularly if COVID variants result in widespread health issues that cause an increase in social distancing measures.
The Company uses the weighted-average remaining maturity (“WARM”) method as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate containing loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a segment at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted, using qualitative factors, for current conditions and for reasonable and supportable forecast periods. Qualitative loss factors are based on the Company’s judgement of company, market, industry or business specific data, differences in loan-specific risk characteristics such as underwriting standards, portfolio mix, risk grades, delinquency level, or term. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. Additionally, we have adjusted for changes in expected environmental and economic conditions, such as changes in unemployment rates, property values, and other relevant factors over the next 12 to 24 months. Management adjusted the historical loss experience for these expectations. No reversion adjustments were necessary, as the starting point for the Company’s estimate was a cumulative loss rate covering the expected contractual term of the portfolio.
The ACL is measured on a collective segment basis when similar risk characteristics exist. Our loan portfolio is segmented first by regulatory call report code, and second, by internally identified risk grades for our commercial loan segments and by delinquency status for our consumer loan segments. We also have separate segments for our warehouse lines of credit, for our internally originated SBA loans, for our SBA loans acquired from Westbound Bank and for SBA-guaranteed PPP loans. Consistent forecasts of the loss drivers are used across the loan segments. For loans that do not share general risk characteristics with segments, we estimate a specific reserve on an individual basis. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of collateral for collateral-dependent loans.
Assets are graded “pass” when the relationship exhibits acceptable credit risk and indicates repayment ability, tolerable collateral coverage and reasonable performance history. Lending relationships exhibiting potentially significant credit risk and marginal repayment ability and/or asset protection are graded “special mention.” Assets classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. Substandard graded loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets graded “doubtful” are substandard graded loans that have added characteristics that make collection or liquidation in full improbable. Loans that are on nonaccrual status are generally classified as substandard.
In general, the loans in our portfolio have low historical credit losses. The Company closely monitors economic conditions and loan performance trends to manage and evaluate the exposure to credit risk. Key factors tracked by the Company and utilized in evaluating the credit quality of the loan portfolio include trends in delinquency ratios, the level of nonperforming assets, borrower’s repayment capacity, and collateral coverage.
 
 
(Continued)
20. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of June 30, 2021:
 
June 30, 2021
    2021      2020      2019     2018     2017     Prior     Revolving
Loans
Amortized
Cost		     Total  
Commercial and industrial:
                                                                   
Pass
    $ 211,052      $ 67,442      $ 24,286     $ 10,741     $ 6,105     $ 20,334     $ 83,765     $ 423,725  
Special mention
      30        105        —       —       27       —       —       162  
Substandard
      —        284        62       226       46       33       —       651  
Nonaccrual
      —        —        41       4       —       2       39       86  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total commercial and industrial loans
    $   211,082      $   67,831      $   24,389     $   10,971     $ 6,178     $ 20,369     $   83,804     $   424,624  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Charge-offs
    $ —      $ —      $ (145 )    $ (67 )    $ (19 )    $ —     $ (7 )    $ (238 ) 
Recoveries
      —        —        —       —       —       1       10       11  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ (145 )    $ (67 )    $ (19 )    $ 1     $ 3     $ (227 ) 
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Construction and development:
                                                                   
Pass
    $ 75,324      $ 95,313      $ 41,751     $ 8,414     $ 17,464     $ 16,080     $ 7,054     $ 261,400  
Special mention
      —        793        —       —       967       —       —       1,760  
Substandard
      —        —        609       3       —       —       —       612  
Nonaccrual
      —        —        230       —       —       —       —       230  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total construction and development loans
    $ 75,324      $ 96,106      $ 42,590     $ 8,417     $ 18,431     $ 16,080     $ 7,054     $ 264,002  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Charge-offs
    $ —      $ —      $ —     $ —     $ —     $ —     $ —     $ —  
Recoveries
      —        —        —       —       —       1       —       1  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ —     $ —     $ —     $ 1     $ —     $ 1  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Commercial real estate:
                                                                   
Pass
    $ 59,861      $ 99,816      $ 71,480     $ 65,798     $ 46,928     $ 186,791     $ 13,461     $ 544,135  
Special mention
      406        —        1,610       3,298       4,630       1,843       —       11,787  
Substandard
      —        7,072        2,391       10,943       13,210       18,204       —       51,820  
Nonaccrual
      —        —        —       162       202       358       —       722  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total commercial real estate loans
    $ 60,267      $   106,888      $ 75,481     $ 80,201     $ 64,970     $   207,196     $ 13,461     $ 608,464  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Charge-offs
    $ —      $ —      $ (17 )    $ —     $ (472 )    $ (271 )    $ —     $ (760 ) 
Recoveries
      —        —        —       —       11       —       —       11  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ (17 )    $ —     $ (461 )    $ (271 )    $ —     $ (749 ) 
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Farmland:
                                                                   
Pass
    $ 28,867      $ 13,528      $ 9,286     $ 9,158     $ 5,494     $ 22,182     $ 5,750     $ 94,265  
Special mention
      —        —        —       —       —       30       —       30  
Substandard
      —        —        —       —       —       121       —       121  
Nonaccrual
      —        —        —       —       —       109       —       109  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total farmland loans
    $ 28,867      $ 13,528      $ 9,286     $ 9,158     $ 5,494     $ 22,442     $ 5,750     $ 94,525  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                    
Charge-offs
    $ —      $ —      $ —     $ —     $ —     $ —     $ —     $ —  
Recoveries
      —        —        —       —       —       —       —       —  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ —     $ —     $ —     $ —     $ —     $ —  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
(Continued)
21. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
June 30, 2021
    2021     2020     2019     2018     2017     Prior     Revolving
Loans
Amortized
Cost		     Total  
1-4 family residential:
                                                                 
Pass
    $ 54,740     $ 76,540     $ 57,049     $ 43,069     $ 30,548     $ 114,346     $ 11,120     $ 387,412  
Special mention
      —       —       —       —       27       —       —       27  
Substandard
      —       —       —       —       —       —       —       —  
Nonaccrual
      —       —       227       310       230       1,410       —       2,177  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total 1-4 family residential loans
    $ 54,740     $ 76,540     $ 57,276     $ 43,379     $ 30,805     $ 115,756     $ 11,120     $ 389,616  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
Recoveries
      —       —       —       —       —       —       —       —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Multi-family residential:
                                                                 
Pass
    $ 12,271     $ 4,828     $ 4,426     $ 15,480     $ 593     $ 3,601     $ 206     $ 41,405  
Special mention
      —       —       —       —       —       —       —       —  
Substandard
      —       —       —       —       681       —       —       681  
Nonaccrual
      —       —       —       —       —       —       —       —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total multi-family residential loans
    $ 12,271     $ 4,828     $ 4,426     $ 15,480     $ 1,274     $ 3,601     $ 206     $ 42,086  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
Recoveries
      —       —       —       —       —       —       —       —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Consumer and overdrafts:
                                                                 
Pass
    $ 15,248     $ 16,834     $ 7,234     $ 6,807     $ 1,051     $ 804     $ 4,005     $ 51,983  
Special mention
      —       8       2       —       —       —       —       10  
Substandard
      —       —       —       —       —       —       —       —  
Nonaccrual
      —       44       84       106       12       —       —       246  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total consumer loans and overdrafts
    $ 15,248     $ 16,886     $ 7,320     $ 6,913     $ 1,063     $ 804     $ 4,005     $ 52,239  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ (87 )    $ (18 )    $ (38 )    $ (16 )    $ (1 )    $ —     $ —     $ (160 ) 
Recoveries
      36       3       —       8       2       15       —       64  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ (51 )    $ (15 )    $ (38 )    $ (8 )    $ 1     $ 15     $ —     $ (96 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Agricultural:
                                                                 
Pass
    $ 1,535     $ 2,330     $ 1,232     $ 1,222     $ 333     $ 652     $ 7,153     $ 14,457  
Special mention
      —       —       —       —       27       —       —       27  
Substandard
      —       —       5       33       46       17       —       101  
Nonaccrual
      —       —       —       23       —       —       —       23  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total agricultural loans
    $ 1,535     $ 2,330     $ 1,237     $ 1,278     $ 406     $ 669     $ 7,153     $ 14,608  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
Recoveries
      —       —       —       —       —       —       —       —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Total loans:
                                                                 
Pass
    $ 458,898     $ 376,631     $ 216,744     $ 160,689     $ 108,516     $ 364,790     $ 132,514     $ 1,818,782  
Special mention
      436       906       1,612       3,298       5,678       1,873       —       13,803  
Substandard
      —       7,356       3,067       11,205       13,983       18,375       —       53,986  
Nonaccrual
      —       44       582       605       444       1,879       39       3,593  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total loans
    $   459,334     $   384,937     $   222,005     $   175,797     $   128,621     $   386,917     $   132,553     $   1,890,164  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ (87 )    $ (18 )    $ (200 )    $ (83 )    $ (492 )    $ (271 )    $ (7 )    $ (1,158 ) 
Recoveries
      36       3       —       8       13       17       10       87  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Total current period net (charge-offs) recoveries
    $ (51 )    $ (15 )    $ (200 )    $ (75 )    $ (479 )    $ (254 )    $ 3     $ (1,071 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
(Continued)
22. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of December 31, 2020:
 
December 31, 2020
    2020      2019      2018     2017      2016      Prior      Revolving
Loans
Amortized
Cost		     Total  
Commercial and industrial:
                                                                      
Pass
    $ 278,687      $ 30,563      $ 12,860     $ 4,366      $ 6,131      $ 16,294      $ 90,074     $ 438,975  
Special mention
      124        119        222       4,040        1,324        —        —       5,829  
Substandard
      —        307        540       50        43        —        —       940  
Nonaccrual
      —        —        13       —        14        —        —       27  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Total commercial and industrial loans
    $ 278,811      $ 30,989      $ 13,635     $ 8,456      $ 7,512      $ 16,294      $   90,074     $ 445,771  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Charge-offs
    $ —      $ —      $ (43 )    $ —      $ —      $ —      $ (25 )    $ (68 ) 
Recoveries
      —        —        43       —        —        14        44       101  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ —     $ —      $ —      $ 14      $ 19     $ 33  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Construction and development:
                                                                      
Pass
    $ 118,590      $ 76,926      $ 26,212     $ 24,524      $ 7,742      $ 10,507      $ 3,266     $ 267,767  
Special mention
      356        —        —       990        —        —        —       1,346  
Substandard
      —        609        5       —        680        —        —       1,294  
Nonaccrual
      —        —        —       —        —        —        —       —  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Total construction and development loans
    $ 118,946      $ 77,535      $ 26,217     $ 25,514      $ 8,422      $ 10,507      $ 3,266     $ 270,407  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Charge-offs
    $ —      $ —      $ —     $ —      $ —      $ —      $ —     $ —  
Recoveries
      —        —        —       —        —        —        —       —  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ —     $ —      $ —      $ —      $ —     $ —  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Commercial real estate:
                                                                      
Pass
    $ 91,819      $ 80,753      $ 89,542     $ 72,311      $ 86,946      $ 123,463      $ 5,890     $ 550,724  
Special mention
      —        2,716        3,542       849        5,724        449        —       13,280  
Substandard
      —        —        2,010       4,913        4,445        8,240        —       19,608  
Nonaccrual
      —        1,140        151       4,158        4,769        386        —       10,604  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Total commercial real estate loans
    $ 91,819      $   84,609      $   95,245     $   82,231      $   101,884      $   132,538      $ 5,890     $   594,216  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Charge-offs
    $ —      $ —      $ —     $ —      $ —      $ —      $ —     $ —  
Recoveries
      —        —        —       —        —        1        —       1  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ —     $ —      $ —      $ 1      $ —     $ 1  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Farmland:
                                                                      
Pass
    $ 17,444      $ 12,668      $ 10,327     $ 6,620      $ 9,904      $ 15,402      $ 5,864     $ 78,229  
Special mention
      —        —        —       —        —        35        —       35  
Substandard
      —        —        —       —        —        129        —       129  
Nonaccrual
      —        —        —       —        —        115        —       115  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Total farmland loans
    $ 17,444      $ 12,668      $ 10,327     $ 6,620      $ 9,904      $ 15,681      $ 5,864     $ 78,508  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
                                                                       
Charge-offs
    $ —      $ —      $ —     $ —      $ —      $ —      $ —     $ —  
Recoveries
      —        —        —       —        —        —        —       —  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
  Current period net
    $ —      $ —      $ —     $ —      $ —      $ —      $ —     $ —  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
 
 
(Continued)
23. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
December 31, 2020
    2020     2019     2018     2017     2016     Prior     Revolving
Loans
Amortized
Cost		     Total  
1-4 family residential:
                                                                 
Pass
    $ 87,578     $ 62,937     $ 52,087     $ 37,224     $ 43,858     $ 93,486     $ 10,091     $ 387,261  
Special mention
      —       —       —       —       —       168       —       168  
Substandard
      —       —       —       —       —       —       —       —  
Nonaccrual
      —       —       326       44       163       1,134       —       1,667  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total 1-4 family residential loans
    $ 87,578     $ 62,937     $ 52,413     $ 37,268     $ 44,021     $ 94,788     $ 10,091     $ 389,096  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ —     $ —     $ —     $ —     $ (9 )    $ (59 )    $ —     $ (68 ) 
Recoveries
      —       —       —       —       —       2       —       2  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —     $ —     $ —     $ —     $ (9 )    $ (57 )    $ —     $ (66 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Multi-family residential:
                                                                 
Pass
    $ 5,889     $ 4,498     $ 3,617     $ 1,371     $ 1,737     $ 4,391     $ 198     $ 21,701  
Special mention
      —       —       —       —       —       —       —       —  
Substandard
      —       —       —       —       —       —       —       —  
Nonaccrual
      —       —       —       —       —       —       —       —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total multi-family residential loans
    $ 5,889     $ 4,498     $ 3,617     $ 1,371     $ 1,737     $ 4,391     $ 198     $ 21,701  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
Recoveries
      —       —       —       —       —       —       —       —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Consumer and overdrafts:
                                                                 
Pass
    $ 24,740     $ 11,176     $ 9,369     $ 1,701     $ 735     $ 513     $ 2,825     $ 51,059  
Special mention
      16       83       9       7       —       —       —       115  
Substandard
      —       —       —       —       —       —       —       —  
Nonaccrual
      24       36       131       20       1       —       —       212  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total consumer loans and overdrafts
    $ 24,780     $ 11,295     $ 9,509     $ 1,728     $ 736     $ 513     $ 2,825     $ 51,386  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ (243 )    $ (63 )    $ (31 )    $ (43 )    $ (3 )    $ (6 )    $ —     $ (389 ) 
Recoveries
      49       2       12       8       4       13       —       88  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ (194 )    $ (61 )    $ (19 )    $ (35 )    $ 1     $ 7     $ —     $ (301 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Agricultural:
                                                                 
Pass
    $ 3,489     $ 1,718     $ 1,893     $ 607     $ 273     $ 189     $ 7,408     $ 15,577  
Special mention
      —       —       —       36       —       —       —       36  
Substandard
      —       7       10       —       24       —       —       41  
Nonaccrual
      —       —       33       —       45       2       —       80  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total agricultural loans
    $ 3,489     $ 1,725     $ 1,936     $ 643     $ 342     $ 191     $ 7,408     $ 15,734  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ —     $ —     $ (18 )    $ —     $ —     $ —     $ —     $ (18 ) 
Recoveries
      —       —       —       —       20       —       —       20  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Current period net
    $ —     $ —     $ (18 )    $ —     $ 20     $ —     $ —     $ 2  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Total loans:
                                                                 
Pass
    $   628,236     $   281,239     $   205,907     $   148,724     $   157,326     $   264,245     $   125,616     $   1,811,293  
Special mention
      496       2,918       3,773       5,922       7,048       652       —       20,809  
Substandard
      —       923       2,565       4,963       5,192       8,369       —       22,012  
Nonaccrual
      24       1,176       654       4,222       4,992       1,637       —       12,705  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total loans
    $ 628,756     $ 286,256     $ 212,899     $ 163,831     $ 174,558     $ 274,903     $ 125,616     $ 1,866,819  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
                                                                  
Charge-offs
    $ (243 )    $ (63 )    $ (92 )    $ (43 )    $ (12 )    $ (65 )    $ (25 )    $ (543 ) 
Recoveries
      49       2       55       8       24       30       44       212  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
  Total current period net (charge-offs) recoveries
    $ (194 )    $ (61 )    $ (37 )    $ (35 )    $ 12     $ (35 )    $ 19     $ (331 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
(Continued)
24. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
There were no loans classified in the “doubtful” or “loss” risk rating categories as of June 30, 2021 and December 31, 2020.
The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of June 30, 2021:
 
           Real Estate           
      Non-RE      
            Total            Allowance for
Credit Losses
      Allocation      		  
Commercial and industrial
    $ 123      $ —      $ 123      $ 42  
Real estate:
                  
Construction and development
      609        —        609        210  
Commercial real estate
      4,602        —        4,602        948  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 5,334      $ —      $ 5,334      $ 1,200  
    
 
 
     
 
 
     
 
 
     
 
 
  
The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of December 31, 2020:
 
           Real Estate                  Non-RE                  Total            Allowance for
Credit Losses
      Allocation      		  
Commercial and industrial
    $ 129      $ —      $ 129      $ 44  
Real estate:
                  
Construction and development
      609        —        609        208  
Commercial real estate
      9,989        —        9,989        2,048  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 10,727      $ —      $     10,727      $ 2,300  
    
 
 
     
 
 
     
 
 
     
 
 
  
The following tables summarize the payment status of loans in the Company’s total loan portfolio, including an aging of delinquent loans and loans 90 days or more past due continuing to accrue interest as of:
 
June 30, 2021
    30 to 59 Days
Past Due		      60 to 89 Days
Past Due		      90 Days
and Greater
Past Due		      Total
Past Due		      Current      Total
Loans		      Recorded
Investment >
90 Days and
Accruing		  
Commercial and industrial
    $ 45      $ 38      $ 59      $ 142      $ 424,482      $ 424,624      $ —  
Real estate:
                                                               
Construction and development
      64        236        230        530        263,472        264,002        —  
Commercial real estate
      40        278        206        524        607,940        608,464        —  
Farmland
      95        —        —        95        94,430        94,525        —  
1-4 family residential
      1,315        63        641        2,019        387,597        389,616        —  
Multi-family residential
      —        —        —        —        42,086        42,086        —  
Consumer
      178        18        85        281        51,514        51,795        —  
Agricultural
      42        —        —        42        14,566        14,608        —  
Overdrafts
      —        —        —        —        444        444        —  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $     1,779      $     633      $     1,221      $   3,633      $   1,886,531      $   1,890,164      $         —  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
 
(Continued)
25. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
December 31, 2020
    30 to 59 Days
Past Due		      60 to 89 Days
Past Due		      90 Days
and Greater
Past Due		      Total
Past Due		      Current      Total
Loans		      Recorded
Investment >
90 Days and
Accruing		  
Commercial and industrial
    $ 385      $ 25      $ 22      $ 432      $ 445,339      $ 445,771      $ —    
Real estate:
                                                               
Construction and
development
      256        —          —          256        270,151        270,407        —    
Commercial real
estate
      1,094        —          10,105        11,199        583,017        594,216        —    
Farmland
      117        3        —          120        78,388        78,508        —    
1-4 family residential
      2,097        556        127        2,780        386,316        389,096        —    
Multi-family residential
      —          —          —          —          21,701        21,701        —    
Consumer
      383        124        97        604        50,440        51,044        —    
Agricultural
      50        46        45        141        15,593        15,734        —    
Overdrafts
      —          —          —          —          342        342        —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $     4,382      $     754      $     10,396      $   15,532      $   1,851,287      $   1,866,819      $         —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Troubled Debt Restructurings
A troubled debt restructuring (“TDR”) is a restructuring in which a bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.
The outstanding balances of TDRs are shown below:
 
                                                               
       June 30, 2021          December 31, 2020    
Nonaccrual TDRs
    $ 86      $ 90  
Performing TDRs
      9,535        9,626  
    
 
 
     
 
 
  
Total
    $ 9,621      $ 9,716  
    
 
 
     
 
 
  
Specific reserves on TDRs
    $ —        $ —    
    
 
 
     
 
 
  
There was one loan modified as a TDR that occurred during the six months ended June 30, 2021. No TDRs have subsequently defaulted during 2021, and the TDRs described above have not increased the allowance for credit losses and have not resulted in any charge-offs during the six months ended June 30, 2021.
The following table presents the loan by class, modified as a TDR that occurred during the six months ended June 30, 2021:
 
Six Months Ended June 30, 2021
    Number
of
      Contracts      		     
Pre-Modification

Outstanding
Recorded
  Investment  		     
Post-Modification

Outstanding
Recorded
  Investment  		  
Troubled Debt Restructurings:
         
Commercial and industrial
      1      $ 17      $ 17  
    
 
 
     
 
 
     
 
 
  
Total
      1      $ 17      $ 17  
    
 
 
     
 
 
     
 
 
  
The following table presents loans by class, modified as TDRs that occurred during the year ended December 31, 2020:
 
Year Ended December 31, 2020
    Number
of
      Contracts      		     
Pre-Modification

Outstanding
Recorded
  Investment  		     
Post-Modification

Outstanding
Recorded
  Investment  		  
Troubled Debt Restructurings:
                           
Construction and development
      2      $ 1,289      $ 1,081  
Commercial and industrial
      1        129        85  
Commercial real estate
      1        1,017        670  
    
 
 
     
 
 
     
 
 
  
Total
      4      $ 2,435      $ 1,836  
    
 
 
     
 
 
     
 
 
  
 
 
(Continued)
26. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
There were no TDRs that subsequently defaulted during 2020, and the TDRs described above did not increase the allowance for credit losses and resulted in no charge-offs during the year ended December 31, 2020.
There were no loans modified as TDRs during the six months ended June 30, 2020.
NOTE 4 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER DEBT
At June 30, 2021 and December 31, 2020, securities sold under agreements to repurchase totaled $15,336 and $15,631, respectively.
The Company has an unsecured $25,000 revolving line of credit, which had no outstanding balance at June 30, 2021, bears interest at the greater of (i) the prime rate, which was 3.25% at June 30, 2021, or (ii) the rate floor of 3.50%, with interest payable quarterly, and matures in March 2022.
Federal Home Loan Bank (FHLB) advances, as of June 30, 2021, were as follows:
Fixed rate advances, with monthly interest payments, principal due in:
 
Year
    Current
Weighted
  Average Rate  		       Principal Due    
2021
      0.19 %    $ 41,500  
2022
      1.99 %      1,500  
2023
      —       —  
2024
      1.76 %      6,000  
2025
      —       —  
            
 
 
  
            
$
 49,000  
There are no fixed rate advances, with monthly principal and interest payments outstanding as of June 30, 2021.
NOTE 5 - SUBORDINATED DEBENTURES
Subordinated debentures are made up of the following as of:
 
                                                               
         June 30, 2021            December 31, 2020    
Trust II Debentures
    $ 3,093      $ 3,093  
Trust III Debentures
      2,062        2,062  
DCB Trust I Debentures
      5,155        5,155  
Other debentures
      9,500        9,500  
    
 
 
     
 
 
  
     $ 19,810      $ 19,810  
    
 
 
     
 
 
  
The Company has three trusts, Guaranty (TX) Capital Trust II (“Trust II”), Guaranty (TX) Capital Trust III (“Trust III”), and DCB Financial Trust I (“DCB Trust I”) (“Trust II”, “Trust III” and together with “DCB Trust I,” the “Trusts”). Upon formation, the Trusts issued pass-through securities (“TruPS”) with a liquidation value of $1,000 per share to third parties in private placements. Concurrently with the issuance of the TruPS, the Trusts issued common securities to the Company. The Trusts invested the proceeds of the sales of securities to the Company (“Debentures”). The Debentures mature approximately 30 years after the formation date, which may be shortened if certain conditions are met (including the Company having received prior approval of the Federal Reserve and any other required regulatory approvals).
 
 
(Continued)
27. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
     Trust II      Trust III      DCB Trust I  
Formation date
      October 30, 2002        July 25, 2006        March 29, 2007  
Capital trust pass-through securities
                           
Number of shares
      3,000        2,000        5,000  
Original liquidation value
    $ 3,000      $ 2,000      $ 5,000  
Common securities liquidation value
      93        62        155  
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 June 30, 2021 and December 31, 2020. Additionally, the terms provide that trust preferred securities would no longer qualify for Tier 1 capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the junior subordinated debentures.
With certain exceptions, the amount of the principal and any accrued and unpaid interest on the Debentures are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company. Interest on the Debentures is payable quarterly. The interest is deferrable on a cumulative basis for up to five consecutive years following a suspension of dividend payments on all other capital stock. No principal payments are due until maturity for each of the Debentures.
 
     Trust II Debentures      Trust III Debentures      DCB Trust I
Debentures		  
Original amount
    $ 3,093      $ 2,062      $ 5,155  
Maturity date
      October 30, 2032        October 1, 2036        June 15, 2037  
Interest due
      Quarterly        Quarterly        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.
 
 
(Continued)
28. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Other Debentures
In May 2020, the Company issued $10,000 in debentures to directors and other related parties. The debentures were issued at a par value of $500 each with fixed annual rates between 1.00% and 4.00% and maturity dates between November 1, 2020 and November 1, 2024. $500 matured in November of 2020 and $9,500 remain as of June 30, 2021. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holder on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued interest.
The scheduled principal payments and weighted average rates of other debentures are as follows:
 
Year
    Current
Weighted
    Average Rate    		     Principal Due  
2022
      2.45 %    $ 2,000  
2023
      2.85 %      3,500  
2024
      3.74 %      4,000  
            
 
 
  
             $                         9,500  
            
 
 
  
NOTE 6 – EQUITY AWARDS
The Company’s 2015 Equity Incentive Plan (the “Plan”) was adopted by the Company and approved by its shareholders in April 2015. The maximum number of shares of common stock that may be issued pursuant to stock-based awards under the Plan equals 1,100,000 shares, all of which may be subject to incentive stock option treatment. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods ranging from 5 to 10 years and have 10-year contractual terms. Restricted stock awards vest under the period of restriction specified within their respective award agreements as determined by the Company. Forfeitures are recognized as they occur, subject to a 90-day grace period for vested options.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer group averages. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on U.S. Treasury yield curve in effect at the time of the grant.
 
 
(Continued)
29. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
A summary of stock option activity in the Plan during the six months ended June 30, 2021 and 2020 follows:
 
Six Months Ended June 30, 2021
    Number of
Shares		     Weighted-
Average
Exercise
Price		      Weighted-
Average
Remaining
Contractual
Life in
Years		      Aggregate
Intrinsic
Value		  
Outstanding at beginning of year
      506,200     $ 26.81        5.82      $ 1,805  
Effect of 10% stock dividend
      50,770                            
Granted
      24,500       33.37        9.61        22  
Exercised
      (28,590 )      22.28        3.38        337  
Forfeited
      (19,020 )      26.01        7.09        153  
    
 
 
                            
Balance, June 30, 2021
      533,860     $ 24.84        5.58      $ 4,930  
    
 
 
                            
                                    
Exercisable at end of period
          312,206     $ 23.58        4.49      $ 3,274  
    
 
 
                            
 
Six Months Ended June 30, 2020
    Number of
Shares		     Weighted-
Average
Exercise
Price		      Weighted-
Average
Remaining
Contractual
Life in
Years		      Aggregate
Intrinsic
Value		  
Outstanding at beginning of year
      508,000     $ 26.68        6.24      $ 3,159  
Granted
      35,000       27.64        9.72        41  
Exercised
      (3,000 )      24.00        2.29        6  
Forfeited
      (28,200 )      31.93        8.16        —  
    
 
 
                            
Balance, June 30, 2020
      511,800     $ 26.47        5.90      $ 607  
    
 
 
                            
                                    
Exercisable at end of period
          284,620     $ 25.28        4.88      $ 438  
    
 
 
                            
A summary of nonvested stock option activity in the Plan during the six months ended June 30, 2021 and 2020 follows:
 
Six Months Ended June 30, 2021
                Number of        
Shares		    
    Weighted-Average    

Grant
Date Fair Value		  
Outstanding at beginning of year
              214,680     $ 4.46  
Effect of 10% stock dividend
              23,218          
Granted
                                    24,500       5.67  
Vested
              (31,724 )      (6.13 ) 
Forfeited
              (9,020 )      (8.06 ) 
            
 
 
          
Balance, June 30, 2021
              221,654     $ 5.01  
            
 
 
          
 
Six Months Ended June 30, 2020
                Number of        
Shares		    
    Weighted-Average    

Grant
Date Fair Value		  
Outstanding at beginning of year
                                    251,120     $ 4.97  
Granted
              35,000       4.13  
Vested
              (35,740 )      (6.43 ) 
Forfeited
              (23,200 )      (3.13 ) 
            
 
 
          
Balance, June 30, 2020
              227,180     $ 5.55  
            
 
 
          
 
 
(Continued)
30. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Information related to stock options in the Plan is as follows for the six months ended:
 
       June 30, 2021         June 30, 2020    
Intrinsic value of options exercised
    $ 337     $ 6  
Cash received from options exercised
    $ 636       72  
Weighted average fair value of options granted
      5.67       4.13  
Restricted Stock Awards and Units
A summary of restricted stock activity in the Plan during the six months ended June 30, 2021 and 2020 follows:
 
                                                                                             
Six Months Ended June 30, 2021
    Number of
Shares		    
Weighted-Average

Grant
Date Fair Value		  
Outstanding at beginning of year
      35,300     $ 29.72  
Effect of 10% stock dividend
      3,530       —  
Granted
      —       —  
Vested
      (4,840 )      30.25  
Forfeited
      —       —  
    
 
 
          
Balance, June 30, 2021
      33,990     $ 26.95  
    
 
 
          
 
                                                                                             
Six Months Ended June 30, 2020
    Number of
Shares		    
Weighted-Average

Grant
Date Fair Value		  
Outstanding at beginning of year
      31,459     $ 30.29  
Granted
      —       —  
Vested
      (10,100 )      30.25  
Forfeited
      —       —  
    
 
 
          
Balance, June 30, 2020
      21,359     $ 30.31  
    
 
 
          
Restricted stock granted to employees typically vests over five years, but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date.
As of June 30, 2021, there was $1,772 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 3.17 years.
The Company granted options under the Plan during the first six months of 2021 and 2020. Expense of $329 was recorded during both the six months ended June 30, 2021 and 2020, which represents the fair value of shares vested during those periods.
NOTE 7 - EMPLOYEE BENEFITS
KSOP
The Company maintains an Employee Stock Ownership Plan containing Section 401(k) provisions covering substantially all employees (“KSOP”). The plan provides for a matching contribution of up to 5% of a participant’s qualified compensation starting January 1, 2016. Guaranty’s total contributions accrued or paid during the six months ended June 30, 2021 and 2020 totaled $737 and $692, respectively.
Upon separation from service or other distributable event, a participant’s account under the KSOP may be distributed in kind in the form of the GNTY common shares allocated to his or her account (with the balance payable in cash), or the entire account can be liquidated and distributed in cash.
 
 
(Continued)
31. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
As of June 30, 2021, the number of shares held by the KSOP was 1,304,471. There were no unallocated shares to plan participants as of June 30, 2021, and all shares held by the KSOP were treated as outstanding.
Executive Incentive Retirement Plan
The Company established a non-qualified, non-contributory executive incentive retirement plan covering a selected group of key personnel to provide benefits equal to amounts computed under an “award criteria” at various targeted salary levels as adjusted for annual earnings performance of the Company. The plan is non-funded.
In connection with the Executive Incentive Retirement Plan, the Company has purchased life insurance policies on the respective officers. The cash surrender value of life insurance policies held by the Company totaled $36,367 and $35,510 as of June 30, 2021 and December 31, 2020, respectively.
Expense related to these plans totaled $471 and $400 for the six months ended June 30, 2021 and 2020, respectively, and $592 for the year ended December 31, 2020. This expense is included in employee compensation and benefits on the Company’s consolidated statements of earnings. The recorded liability totaled approximately $4,781 and $4,383 as of June 30, 2021 and December 31, 2020, respectively and is included in accrued interest and other liabilities on the Company’s consolidated balance sheets.
Bonus Plan
The Company has a bonus plan that rewards officers and employees based on performance of individual business units of the Company. Earnings and growth performance goals for each business unit and for the Company as a whole are established at the beginning of the calendar year and approved annually by Guaranty’s board of directors. The bonus plan 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 six months ended June 30, 2021 and 2020 totaled $2,153 and $728, respectively. This expense is included in employee compensation and benefits on the consolidated statements of earnings.
NOTE 8 – LEASES
The Company has operating leases for bank locations, ATMs, corporate offices, and certain other arrangements, which have remaining lease terms of 1 year to 14 years. Some of the Company’s operating leases include options to extend the leases for up to 10 years.
Operating leases in which we are the lessee must be recorded as right-of-use assets with corresponding lease liabilities. The right-of-use asset represents our right to utilize the underlying asset during the lease term, while the lease liability represents the present value of the obligation of the Company to make periodic lease payments over the life of the lease. The associated operating lease costs are comprised of the amortization of the right-of-use asset and the implicit interest accreted on the lease liability, which is recognized on a straight-line basis over the life of the lease. As of June 30, 2021, operating lease right-of-use assets were $15,179 and liabilities were $15,551, and as of December 31, 2020, lease assets and liabilities were $13,291 and $13,539
 
respectively, and were included within the accompanying consolidated balance sheets as components of other assets and accrued interest and other liabilities, respectively. 
Operating lease expense for operating leases accounted for under ASC 842 for the six months ended June 30, 2021 and 2020 was approximately $1,146 and $921, respectively, and is included as a component of occupancy expenses within the accompanying consolidated statements of earnings.
 
 
(Continued)
32. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The table below summarizes other information related to our operating leases as of:
 
                   June 30, 2021             December 31, 2020      
Operating leases
                         
  Operating lease right-of-use assets
                                  $ 15,179     $ 13,291  
  Operating lease liabilities
              15,551       13,539  
    
                         
Weighted average remaining lease term
                         
  Operating leases
              9 years       9 years  
Weighted average discount rate
                         
  Operating leases
              1.96 %      2.19 % 
The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2024 and thereafter. Minimum future lease payments under these non-cancelable operating leases in excess of one year as of June 30, 2021, are as follows:
 
                                                           
Year Ended December 31,
    Amount  
2021
    $ 1,107  
2022
      2,110  
2023
      2,049  
2024
      2,008  
2025
      1,868  
Thereafter
      7,440  
    
 
 
  
Total lease payments
      16,582  
Less: interest
      (1,031 ) 
    
 
 
  
Present value of lease liabilities
    $ 15,551  
    
 
 
  
NOTE 9 - INCOME TAXES
Income tax expense was as follows for:
 
     Three Months Ended
June 30,		     Six Months Ended
June 30,		  
     2021     2020     2021     2020  
Income tax expense for the period
    $   2,312     $ (190 )    $ 4,648     $ 1,255  
    
 
 
    
 
 
    
 
 
    
 
 
  
Effective tax rate
      18.14 %      -21.47 %        17.85 %        14.58 % 
The effective tax rates differ from the statutory federal tax rate of 21% for the three and six months ended June 30, 2021 and 2020, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank owned life insurance.
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes certain derivative financial instruments. Stand-alone derivative financial instruments such as interest rate swaps, are used to economically hedge interest rate risk related to the Company’s liabilities. These derivative instruments involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected on the Company’s consolidated balance sheets in other liabilities.
 
 
(Continued)
33. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The Company is exposed to credit related losses in the event of nonperformance by the counterparties to those agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to perform their respective obligations.
The Company entered into interest rate swaps to receive payments at a fixed rate in exchange for paying a floating rate on the debentures discussed in Note 5. Management 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.
The Company also entered into interest rate swaps to receive payments at a floating rate in exchange for paying a fixed rate, the objective of which is to reduce the overall cost of short-term 3-month FHLB advances that will be renewed consistent with the reset terms on the interest rate swap and that are included in the amounts in Note 4.
Interest rate swaps with notional amounts totaling $5,000 as of June 30, 2021 and December 31, 2020, were designated as cash flow hedges of the debentures and $40,000 as of June 30, 2021 and December 31, 2020 were designated as cash flow hedges of the FHLB advances.
The aggregate fair value of the swaps is recorded in accrued interest and other liabilities within the Company’s consolidated balance sheets with changes in fair value recorded in other comprehensive income.
The information pertaining to outstanding interest rate swap agreements used to hedge floating rate debentures and FHLB advances was as follows as of:
 
June 30, 2021
  
        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     4.75     $ 324  
$ 3,000       7.505 %    3 month LIBOR plus 3.35%   10/30/2012     1.33     $ 160  
$ 15,000       0.668 %    3 month LIBOR   3/18/2020     1.72     $ 105  
$ 15,000       0.790 %    3 month LIBOR   3/18/2020     3.72     $ 45  
$ 10,000       0.530 %    3 month LIBOR   3/23/2020     1.73     $ 45  
 
December 31, 2020
  
        Notional        
Amount		     Pay
    Rate    		           Receive      
Rate		       Effective
Date		       Maturity    
in Years		         Unrealized    
Losses		  
$ 2,000       5.979 %        3 month LIBOR plus 1.67%       10/1/2016     5.25     $ 408  
$ 3,000       7.505 %    3 month LIBOR plus 3.35%   10/30/2012     1.83     $ 221  
$ 15,000       0.668 %    3 month LIBOR   3/18/2020     2.22     $ 159  
$ 15,000       0.790 %    3 month LIBOR   3/18/2020     4.22     $ 288  
$ 10,000       0.530 %    3 month LIBOR   3/23/2020     2.23     $ 75  
Interest expense recorded on these swap transactions totaled $320 and $276 during the six months ended June 30, 2021 and 2020, respectively. This expense is reported as a component of interest expense on the debentures and the FHLB advances and federal funds purchased. At June 30, 2021, the Company expected none of the unrealized loss to be reclassified as a reduction of interest expense during the remainder of 2021.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in its consolidated balance sheets. These transactions are referred to as “off-balance sheet commitments.” The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit, which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
 
 
(Continued)
34. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management considers the likelihood of commitments and letters of credit to be funded, along with credit related conditions present in the loan agreements when estimating an ACL for off-balance sheet commitments. Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management has determined that credit risk is minimal and there is no recorded ACL as of June 30, 2021 and December 31, 2020.
Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below. If the commitment were funded, the Company would be entitled to seek recovery from the customer. As of June 30, 2021 and December 31, 2020, 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  
     June 30, 2021      December 31, 2020  
Commitments to extend credit
    $ 358,725      $ 324,277  
Letters of credit
      8,511        8,488  
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 June 30, 2021, the Company had letters of credit of $50,833 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.
NOTE 12 - REGULATORY MATTERS
The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
 
(Continued)
35. 
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 June 30, 2021 and December 31, 2020, that the Bank met all capital adequacy requirements to which it was subject.
The Basel III Capital Rules, among other things, have (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, (iv) expanded the scope of the deductions/adjustments as compared to existing regulations, and (v) imposed a “capital conservation buffer” of 2.5% above minimum risk-based capital requirements, below which an institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers.
As of June 30, 2021 and December 31, 2020, the Company’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Company must maintain minimum total risk-based, CET1, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since June 30, 2021 that management believes have changed the Company’s category.
The Federal Reserve’s guidelines regarding the capital treatment of trust preferred securities limits restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred securities is less than the limit of 25% of Tier 1 capital, net of goodwill, the rules permit the inclusion of $10,310 of trust preferred securities in Tier 1 capital as of June 30, 2021 and December 31, 2020. Additionally, the rules provide that trust preferred securities would no longer qualify for Tier 1 capital within five years of their maturity, but would be included as Tier 2 capital. However, the trust preferred securities would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the subordinated debentures.
 
 
(Continued)
36. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
A comparison of the Company’s and Bank’s actual capital amounts and ratios to required capital amounts and ratios are presented in the following tables as of:
 
     Actual     Minimum Required
For Capital
Adequacy Purposes		     Minimum Required
Under Basel III
(Including Buffer)		     To Be Well
Capitalized Under
Prompt Corrective
Action Provisions		  
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  
June 30, 2021
                                                                     
Total capital to risk-weighted assets:
                                                                     
Consolidated
    $     280,300        14.52 %    $     154,445        8.00 %    $ 202,709        10.50 %               n/a  
Bank
      289,779        15.01 %      154,442        8.00 %      202,705        10.50 %    $     193,052        10.00 % 
Tier 1 capital to risk-weighted assets:
                                                                     
Consolidated
      256,077        13.26 %      115,834        6.00 %      164,098        8.50 %               n/a  
Bank
      265,556        13.76 %      115,831        6.00 %      164,094        8.50 %      154,442        8.00 % 
Tier 1 capital to average assets:
(1)
                                                                     
Consolidated
      256,077        8.86 %      115,560        4.00 %      115,560        4.00 %               n/a  
Bank
      265,556        9.19 %      115,560        4.00 %      115,560        4.00 %      144,450        5.00 % 
Common equity tier 1 capital to risk-weighted assets:
                                                                     
Consolidated
      245,767        12.73 %      86,875        4.50 %      135,139        7.00 %               n/a  
Bank
      265,556        13.76 %      86,874        4.50 %      135,137        7.00 %      125,484        6.50 % 
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
 
     Actual     Minimum Required
For Capital
Adequacy Purposes		     Minimum Required
Under Basel III
(Including Buffer)		     To Be Well
Capitalized Under
Prompt Corrective
Action Provisions		  
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  
December 31, 2020
                                                                     
Total capital to risk-weighted assets:
                                                                     
Consolidated
    $   263,144        13.20 %    $     159,496        8.00 %    $     209,338        10.50 %               n/a  
Bank
      285,490        14.32 %      159,514        8.00 %      209,362        10.50 %    $     199,392        10.00 % 
Tier 1 capital to risk-weighted assets:
                                                                     
Consolidated
      238,115        11.94 %      119,622        6.00 %      169,464        8.50 %               n/a  
Bank
      260,459        13.06 %      119,635        6.00 %      169,483        8.50 %      159,514        8.00 % 
Tier 1 capital to average assets:
(1)
                                                                     
Consolidated
      238,115        9.13 %      104,293        4.00 %      104,293        4.00 %               n/a  
Bank
      260,459        9.99 %      104,293        4.00 %      104,293        4.00 %      130,366        5.00 % 
Common equity tier 1 capital to risk-weighted assets:
                                                                     
Consolidated
      227,805        11.43 %      89,716        4.50 %      139,559        7.00 %               n/a  
Bank
      260,459        13.06 %      89,726        4.50 %      139,574        7.00 %      129,605        6.50 % 
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
Dividends paid by Guaranty are mainly provided by dividends from its subsidiaries. However, certain regulatory restrictions exist regarding the ability of its bank subsidiary to transfer funds to Guaranty in the form of cash dividends, loans or advances. The amount of dividends that a subsidiary bank organized as a national banking association, such as the Bank, may declare in a calendar year is the subsidiary bank’s net profits for that year combined with its retained net profits for the preceding two years.
 
 
(Continued)
37. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
NOTE 13 - FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Marketable Securities
: The fair values for marketable securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Loans Held For Sale
: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).
Derivative Instruments
: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
Other Real Estate Owned
: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly (Level 3).
Individually Evaluated Collateral Dependent Loans
: The fair value of individually evaluated collateral dependent loans is generally based on the fair value of collateral, less costs to sell. The fair value of real estate collateral is determined using recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant (Level 3). Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business (Level 3).
 
 
(Continued)
38. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The following tables summarize quantitative disclosures about the fair value measurements for each category of financial assets (liabilities) carried at fair value:
 
                                                                                                                 
As of June 30, 2021
    Fair
Value		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		     Significant
Other
Unobservable
Inputs
(Level 3)		  
Assets (liabilities) at fair value on a recurring basis:
                                  
Available for sale securities:
                                  
Mortgage-backed securities
    $ 157,316     $ —      $ 157,316     $ —  
Collateralized mortgage obligations
      66,928       —        66,928       —  
Municipal securities
      171,813       —        171,813       —  
Corporate bonds
      40,431       —        40,431       —  
U.S. government agencies
      10,148       —        10,148       —  
Loans held for sale
      5,088       —        —       5,088  
Cash surrender value of life insurance
      36,367       —        36,367       —  
SBA servicing assets
      740       —        —       740  
Derivative instrument assets
      484       —        484       —  
Derivative instrument liabilities
      (679 )      —        (679 )      —  
                  
Assets at fair value on a nonrecurring basis:
                 
Individually evaluated collateral dependent loans
      4,134       —        —       4,134  
 
                                                                                                                 
As of December 31, 2020
    Fair
Value		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		     Significant
Other
Unobservable
Inputs
(Level 3)		  
Assets (liabilities) at fair value on a recurring basis:
                                  
Available for sale securities:
                                  
Mortgage-backed securities
    $ 107,164     $ —      $ 107,164     $ —  
Collateralized mortgage obligations
      66,945       —        66,945       —  
Municipal securities
      175,704       —        175,704       —  
Corporate bonds
      30,982       —        30,982       —  
Loans held for sale
      5,542       —        —       5,542  
Cash surrender value of life insurance
      35,510       —        35,510       —  
SBA servicing assets
      763       —        —       763  
Derivative instrument assets
      629       —        629       —  
Derivative instrument liabilities
      (1,151 )      —        (1,151 )      —  
                  
Assets at fair value on a nonrecurring basis:
                 
Individually evaluated collateral dependent loans
      8,427       —        —       8,427  
There were no transfers between Level 2 and Level 3 during the six months ended June 30, 2021 or for the year ended December 31, 2020.
 
 
(Continued)
39. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Nonfinancial Assets and Nonfinancial Liabilities
Nonfinancial assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2021 and 2020 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for credit losses and certain foreclosed assets which, subsequent to their initial recognition, 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:
 
                                                                                                                
    
  June 30, 2021  
    
  December 31, 2020  
    
  June 30, 2020  
  
Other real estate owned remeasured at initial recognition:
                         
Carrying value of other real estate owned prior to remeasurement
   
$
—
 
  
$
42
 
  
$
—
 
Charge-offs recognized in the allowance for credit losses
   
 
—
 
  
 
(9
) 
  
 
—
 
    
 
 
    
 
 
    
 
 
  
Fair value of other real estate owned remeasured at initial recognition
   
$
—
 
  
$
33
 
  
$
—
 
    
 
 
    
 
 
    
 
 
  
   
Other real estate owned remeasured subsequent to initial recognition:
         
Carrying value of other real estate owned prior to remeasurement
   
$
—
 
  
$
62
 
  
$
62
 
Write-downs included in collection and other real estate owned expense
   
 
—
 
  
 
(1
) 
  
 
(1
) 
    
 
 
    
 
 
    
 
 
  
Fair value of other real estate owned remeasured subsequent to initial recognition
   
$
—
 
  
$
61
 
  
$
61
 
    
 
 
    
 
 
    
 
 
  
The following table presents quantitative information about nonrecurring Level 3 fair value measurements as of:
 
June 30, 2021
        Fair Value          Valuation
Technique(s)		    Unobservable
Input(s)		    Range
(Weighted
Average)		  
Other real estate owned
    $ 227      Appraisal
value of
collateral		    Selling costs
or other
normal
adjustments		      10%-20% (16%)  
 
December 31, 2020
        Fair Value          Valuation
Technique(s)		    Unobservable
Input(s)		    Range
(Weighted
Average)		  
Other real estate owned
    $ 404      Appraisal
value of
collateral		    Selling costs
or other
normal
adjustments		      10%-20% (16%)  
 
 
(Continued)
40. 
Table of Contents
GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The following table presents information on individually evaluated collateral dependent loans as of June 30, 2021:
 
     Fair Value Measurements Using         
     Level 1      Level 2      Level 3      Total Fair Value  
Commercial and industrial
    $ —      $ —      $ 81      $ 81  
Real estate:
                  
Construction and development
      —        —        399        399  
Commercial real estate
      —        —        3,654        3,654  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $             —      $             —      $             4,134      $         4,134  
    
 
 
     
 
 
     
 
 
     
 
 
  
The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of June 30, 2021 and December 31, 2020, are as follows:
 
     Fair value measurements as of
June 30, 2021 using:		  
     Carrying
Amount		      Level 1
Inputs		      Level 2
Inputs		      Level 3
Inputs		      Total
Fair Value		  
Financial assets:
                                    
Cash, due from banks, federal funds sold and interest-bearing deposits
    $     447,218      $     447,218      $     —      $     —      $     447,218  
Loans, net
      1,856,277        —        —            1,866,176        1,866,176  
Accrued interest receivable
      8,801        —        8,801        —        8,801  
Nonmarketable equity securities
      14,011        —        14,011        —        14,011  
Financial liabilities:
                                    
Deposits
    $     2,533,026      $     2,184,394      $     349,698      $     —      $     2,534,092  
Securities sold under repurchase agreements
      15,336        —        15,336        —        15,336  
Accrued interest payable
      565        —        565        —        565  
Federal Home Loan Bank advances
      49,000        —        49,173        —        49,173  
Subordinated debentures
      19,810        —        18,745        —        18,745  
 
     Fair value measurements as of
December 31, 2020 using:		  
     Carrying
Amount		      Level 1
Inputs		      Level 2
Inputs		      Level 3
Inputs		      Total
Fair Value		  
Financial assets:
                                    
Cash, due from banks, federal funds sold and interest-bearing deposits
    $     351,792      $     351,792      $     —      $     —      $     351,792  
Loans, net
      1,831,737        —        —            1,846,868        1,846,868  
Accrued interest receivable
      9,834        —        9,834        —        9,834  
Nonmarketable equity securities
      14,095        —        14,095        —        14,095  
Financial liabilities:
                                    
Deposits
    $     2,286,390      $     1,907,587      $     380,570      $     —      $     2,288,157  
Securities sold under repurchase agreements
      15,631        —        15,631        —        15,631  
Accrued interest payable
      804        —        804        —        804  
Federal Home Loan Bank advances
      109,101        —        109,381        —        109,381  
Subordinated debentures
      19,810        —        17,406        —        17,406  
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values (Level 1).
 
 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
Loans, net
The fair value of fixed-rate loans and variable-rate loans that reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality (Level 3).
Cash Surrender Value of Life Insurance
The carrying amounts of bank-owned life insurance approximate their fair value (Level 2).
Nonmarketable Equity Securities
It is not practical to determine the fair value of Independent Bankers Financial Corporation, Federal Home Loan Bank, Federal Reserve Bank and other stock due to restrictions placed on its transferability.
Deposits and Securities Sold Under Repurchase Agreements
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 1). The fair values of deposit liabilities with defined maturities are estimated by discounting future cash flows using interest rates currently offered for deposits of similar remaining maturities (Level 2).
Other Borrowings
The fair value of borrowings, consisting of lines of credit, Federal Home Loan Bank advances and Subordinated debentures is estimated by discounting future cash flows using currently available rates for similar financing (Level 2).
Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate their fair values (Level 2).
Off-balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
NOTE 14 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the maximum potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and would then share in the net earnings of the Company. Dilutive share equivalents include stock-based awards issued to employees.
Stock options granted by the Company are treated as potential shares in computing earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money awards which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
 
 
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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
 
 
The computations of basic and diluted earnings per share for the Company were as follows for the:
 
    Three Months Ended
June 30,		     Six Months Ended
June 30,		  
    2021     2020     2021     2020  
Numerator:
                                
Net earnings (basic)
   $ 10,432     $ 1,075     $ 21,394     $ 7,353  
   
 
 
    
 
 
    
 
 
    
 
 
  
Net earnings (diluted)
   $ 10,432     $ 1,075     $ 21,394     $ 7,353  
   
 
 
    
 
 
    
 
 
    
 
 
  
    
                                
Denominator:
                                
Weighted-average shares outstanding
(basic)*
         12,056,550           12,128,516           12,047,643           12,352,074  
Effect of dilutive securities:
                                
Common stock equivalent shares from stock
options
     195,037       —       168,311       —  
   
 
 
    
 
 
    
 
 
    
 
 
  
Weighted-average shares outstanding (diluted)*
     12,251,587       12,128,516       12,215,954       12,352,074  
   
 
 
    
 
 
    
 
 
    
 
 
  
    
                                
Net earnings per share
                                
Basic
   $ 0.87     $ 0.09     $ 1.78     $ 0.59  
   
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
   $ 0.85     $ 0.09     $ 1.75     $ 0.59  
   
 
 
    
 
 
    
 
 
    
 
 
  
* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
 
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Report”) and any subsequent Quarterly Reports on Form 10-Q, the risk factors appearing in Item 1A of Part II of this Report, and the other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2020. 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 31 banking locations in the East Texas, Dallas/Fort Worth, Central Texas and Greater Houston regions of the state. Our principal executive office is located at 16475 Dallas Parkway, Suite 600, Addison, Texas, 75001 and our telephone number is (888) 572-9881. Our website address is
gnty.com
. Information contained on our website does not constitute a part of this Report and is not incorporated by reference into this filing or any other report.
As a bank holding company that operates through one segment, we generate most of our revenue from interest on loans and investments, customer service and loan fees, fees related to the sale of mortgage loans, and trust and wealth management services. We incur interest expense on deposits and other borrowed funds, as well as noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities.
Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the State of Texas.
Impact of COVID-19 and Quarterly Highlights
In March 2020, the outbreak of the novel coronavirus disease 2019 (“COVID-19”) was recognized as a pandemic by the World Health Organization. Global health concerns relating to COVID-19 and variants of the virus, have had, and will likely continue to have, a severe impact on the macroeconomic environment, leading to lower interest rates, depressed equity market valuations, heightened financial market volatility and significant disruption in banking and other financial activity in the areas we serve. Since March 2020, governmental responses to the pandemic included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary or permanent closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, material decreases in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. Despite the wide availability of vaccines in early 2021, these risks and uncertainties remain as the extent to which the American public is willing to receive the vaccines remains unknown, and more contagious strains of the virus mutate both in the US and abroad.
 
 
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The financial performance of the Company generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Company offers and whose success it relies on to drive growth, are highly dependent upon the business environment in the primary markets in which we operate and in the United States as a whole. Unfavorable market conditions and uncertainty due to the COVID-19 pandemic may result in a deterioration in the credit quality of borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values of the collateral securing loans and an overall material adverse effect on the quality of the loan portfolio.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program (“PPP”), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. PPP loans were intended to provide eligible businesses with funding for payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. PPP loans are forgivable to the extent that the borrower can demonstrate that the funds were used for such costs. Any amounts not forgiven will bear interest at 1% and be repayable over a term of 24 to 60 months from origination. PPP has been subject to amendments to increase the size of the program, extend the period in which loans could be made, extend the period for which costs could be forgiven and to provide additional flexibility to borrowers. In December 2020, several portions of the CARES Act were extended as part of the Consolidated Appropriations Act, including additional stimulus payments to consumers and a second round of PPP loans for small businesses. It is expected that there may be further changes to PPP, either through legislation or changes to forms and applications required under PPP.
Significant uncertainties as to future economic conditions exist, and we have taken measured actions during the pandemic, to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and reserves supported by a strong capital position. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from government stimulus and relief programs; however, the extent to which the COVID-19 pandemic will continue to impact our operations and financial results, as well as timing of economic recovery, remains uncertain.
Quarterly highlights of the Company include:
 
 
●
  
Solid Net Earnings and Core Earnings
. Net earnings have remained consistent for the past four quarters. Net core earnings
†
, which exclude provisions for credit losses and income tax, net PPP income, and interest on PPP-related borrowings, have also remained solid over the last five quarters, illustrating a consistent core earnings stream. Net core earnings
†
were $9.8 million for the second quarter, compared to $9.4 million for the first quarter of 2021, and $10.5 million during the second quarter of 2020.
 
 
●
  
Steady Net Interest Margin and Firm Loan Yields
. The fully tax-equivalent (“FTE”) net interest margin, net of PPP effects, was 3.38% for the second quarter of 2021, compared to 3.48% in the preceding quarter and 3.75% in the second quarter of 2020. The decrease in the current quarter is primarily due to higher liquidity levels, which had a lower average yield during the quarter of only six basis points. Net interest income decreased $1.0 million, or 4.1%, from $24.5 million in the first quarter of 2021 to $23.5 million in the second quarter of 2021. However, excluding the effects of PPP, net interest income increased $752,000, or 3.6%, from $21.0 million in the first quarter of 2021 to $21.7 million in the second quarter. Average loan yield, excluding PPP effects, increased three basis points, from 4.79% in the first quarter to 4.82% in the second quarter of 2021. Interest expense decreased $215,000, or 10.6%, from $2.0 million in the first quarter of 2021 to $1.8 million in second quarter of 2021. The Bank continues to decrease cost of funds as higher rate CDs mature and to reduce interest rates on non-maturing deposits as market conditions allow. In addition, 63.8% of the loan portfolio, or $1.16 billion, has interest rate floors and 57.5% of those loans are currently at their floors. The weighted average interest rate of loans currently at their floor is 4.37%.
 
 
●
  
Strong Credit Quality.
Non-performing assets as a percentage of total assets were 0.13% at June 30, 2021 and March 31, 2021, compared to 0.56% at June 30, 2020. Net charge-offs to average loans (annualized) were 0.05% for the quarter ended June 30, 2021, compared to 0.18% for the quarter ended March 31, 2021, and (0.02%) for the quarter ended June 30, 2020. The decrease in non-performing assets and the increase in charge-offs during the second quarter of 2021 compared to the same period of 2020 resulted primarily from the resolution of three problem loans, made to two borrowers, with outstanding combined book balances of $8.7 million at December 31, 2020, that were acquired during the Westbound acquisition and which were fully reserved prior to the onset of COVID-19.
 
 
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●
  
Paycheck Protection Program. The Bank continued participation in the PPP2 program through its end date in the second quarter of 2021. During the first half of 2021, we originated total PPP2 loans of $100.8 million to 1,349 borrowers, which resulted in recognition of $3.3 million of net origination fees and related amortization for PPP2 loans during the first half of 2021. The Bank also recognized $1.8 million in PPP1 deferred origination fees during the first half of 2021 through both amortization and forgiveness of the related PPP1 loans. As of June 30, 2021, there are outstanding PPP1 balances of $26.6 million to 325 borrowers, a reduction of 87.3% from the $209.6 million to 1,944 borrowers that was originated under the PPP1 program. Net deferred origination fees remaining as of June 30, 2021 are $355,000 and $2.2 million from PPP1 and PPP2, respectively.
†
Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in subsequent sections of this MD&A.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates, and the potential sensitivity of our consolidated financial statements to those judgments and assumptions, is critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate.
Loans and Allowance for Credit Losses (ACL)
Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for credit losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Fees associated with the origination of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.
The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. A loan may continue to accrue interest, even if it is more than 90 days past due, if the loan is both well collateralized and it is in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured in accordance with the terms of the loan agreement.
The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Recoveries will not exceed the aggregate of loan amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We use the weighted-average remaining maturity method (WARM method) as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate. This average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a pool or segment of our loan portfolio at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss factors. In early 2020, to address the uncertainties resulting from COVID-19, an additional qualitative factor was added to specifically address COVID-related economic factors and potential credit losses, in addition to our standard qualitative factors.
 
 
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The allowance for credit losses is measured on a collective (pool or segment) basis when similar risk characteristics exist. Our loan portfolio segments include both regulatory call report codes and internally identified risk ratings for our commercial loan segments and delinquency status for our consumer loan segments. We also have separate segments for our warehouse lines of credit, for our internally originated SBA loans, for our SBA loans acquired from Westbound Bank, and for loans originated under the PPP program.
In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our portfolio is impacted by delinquency status and debt service coverage generated by our borrowers’ businesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be “seasoned” and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for credit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. Delinquency statistics are updated at least monthly.
Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial and industrial, construction, and commercial real estate loans. Internal risk ratings are a key factor that impacts management’s estimates of loss factors used in determining the amount of the allowance for credit losses. Internal risk ratings are updated on a continuous basis.
Loans with unique risk characteristics are evaluated on an individual basis. Loans evaluated individually are excluded from the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
For off-balance sheet credit exposures, we estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
From time to time, we modify our loan agreement with a borrower. A modified loan is considered a troubled debt restructuring (TDR) when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by us that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. We review each troubled debt restructured loan and determine on a case by case basis if the loan can be grouped with its like segment for allowance consideration or whether it should be individually evaluated for a specific allowance for credit loss allocation. If individually evaluated, an allowance for credit loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral. Most modifications made as a direct result of COVID-19 are not TDRs pursuant to the CARES Act and the April 7, 2020 Interagency guidance and GAAP.
We have certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.
 
 
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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 an allowance for credit losses based on whether they are classified as held to maturity or available for sale. For held to maturity securities, management measures expected credit losses on a collective basis by major security type and credit rating. The estimate of expected credit losses considers historical credit loss information that is then adjusted for current conditions and reasonable and supportable forecasts. For available for sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically relate to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
 
 
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Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.
Emerging Growth Company
The Jumpstart our Business Startups Act of 2012 (“JOBS Act”) permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have “opted out” of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.
 
 
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Discussion and Analysis of Results of Operations for the Six Months Ended June 30, 2021 and 2020
Results of Operations
The following discussion and analysis compares our results of operations for the six months ended June 30, 2021 with the six months ended June 30, 2020. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.
Net earnings were $21.4 million for the six months ended June 30, 2021, as compared to $7.4 million for the six months ended June 30, 2020. The following table presents key earnings data for the periods indicated:
 
     For the Six Months Ended June 30,  
(dollars in thousands, except per share data)
    2021     2020  
Net earnings
    $                   21,394     $                   7,353  
Net earnings per common share*
     
-basic
      1.78       0.59  
-diluted
      1.75       0.59  
Net interest margin
(1)
      3.60 %      3.79 % 
Net interest rate spread
(2)
      3.42 %      3.47 % 
Return on average assets
      1.51 %      0.59 % 
Return on average equity
      15.31 %      5.70 % 
Average equity to average total assets
      9.86 %      10.41 % 
Cash dividend payout ratio*
      22.47 %      58.46 % 
* Adjusted to give effect to the 10% stock dividend issued during the first quarter of 2021.
(1)
Net interest margin is equal to net interest income divided by average interest-earning assets.
(2)
Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
Large provisions for credit losses in the prior period, resulting from effects of COVID-19 and participation in the PPP program, have created temporary extraordinary results in the calculation of net earnings and related performance ratios. With the credit outlook still uncertain as a result of COVID-19 and other economic factors, the following table illustrates net earnings and net core earnings per share,
 
 
(Continued)
50. 
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which are pre-tax, pre-provision and pre-extraordinary PPP income, as well as net core performance ratios for the six months ended June 30, 2021 and 2020.
 
         For the Six Months Ended June 30,      
(dollars in thousands, except per share data)
    2021     2020  
Net earnings
    $ 21,394     $ 7,353  
Adjustments:
     
Provision for credit losses
      (1,000 )      13,500  
Income tax provision
      4,648       1,255  
PPP interest income, including fees
      (5,859 )      (2,540 ) 
Net interest expense on PPP-related borrowings
      —       31  
  
 
 
    
 
 
  
Net core earnings
†
    $ 19,183     $ 19,599  
  
 
 
    
 
 
  
    
Total average assets
    $ 2,857,707     $ 2,491,614  
Adjustments:
     
PPP loans average balance
      (146,103 )      (81,592 ) 
Excess fed funds sold due to PPP-related borrowings
      —       (42,033 ) 
  
 
 
    
 
 
  
Total average assets, adjusted
†
    $ 2,711,604     $ 2,367,989  
  
 
 
    
 
 
  
Total average equity
      281,730       259,275  
  
 
 
    
 
 
  
    
PERFORMANCE RATIOS
     
Net earnings to average assets (annualized)
      1.51 %      0.59 % 
Net earnings to average equity (annualized)
      15.31       5.70  
Net core earnings to average assets, as adjusted (annualized)
†
      1.43       1.66  
Net core earnings to average equity (annualized)
†
      13.73       15.20  
    
PER COMMON SHARE DATA
     
Weighted-average common shares outstanding, basic*
      12,047,643       12,352,074  
  
 
 
    
 
 
  
Earnings per common share, basic*
    $ 1.78     $ 0.59  
  
 
 
    
 
 
  
Net core earnings per common share, basic*
†
      1.59       1.59  
  
 
 
    
 
 
  
 
* Adjusted to give effect to the 10% stock dividend issued during the first quarter of 2021.
† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in “
—Non-GAAP Financial Measures
”.
 
 
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51. 
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Net Interest Income
Our operating results depend primarily on our net interest income. Fluctuations in market interest rates impact the yield and rates paid on interest-earning assets and interest-bearing liabilities, respectively. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact our net interest income. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.
Net interest income, before the reverse provision for credit losses, was $48.0 million compared to $43.8 million for the six months ended June 30, 2020, an increase of $4.2 million, or 9.6%. The increase in net interest income before the provision (or reverse provision) for credit losses resulted from a $4.3 million, or 52.6%, decrease in interest expense. Although there was a $106.1 million, or 5.9%, increase in average loans outstanding for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, that increase was offset by a 24 basis point decrease in the average yield on total loans driven by lower rates on PPP loans and new and variable rate loans, partially offset by recognition of PPP origination fees, which are described in more detail in a table below.
The increase in average loans outstanding was primarily due to loans originated through the PPP and modest organic growth of approximately $48.1 million, or 2.82%, from the same quarter in the prior year. The $4.3 million decrease in interest expense for the six months ended June 30, 2021 was primarily related to a decrease in the cost of interest-bearing deposits of 63 basis points, despite a $114.0 million, or 7.7%, increase in average interest-bearing deposits over the same period in 2020. The average deposit balance increase appears to be the result of government stimulus payments, PPP-related deposits and general changes in consumer spending habits.
For the six months ended June 30, 2021, net interest margin on a taxable equivalent basis and net interest spread were 3.64% and 3.42%, respectively, compared to 3.78% and 3.47% for the same period in 2020, which reflects a decrease in both loan yield due to the continued repricing of variable rate loans to lower interest rates during the period, a decrease in the cost of interest-bearing deposits as discussed above, and higher interest-bearing deposits at other banks (primarily federal funds), which earned an average yield of 10 basis points compared to 58 basis points in the prior period.
Average Balance Sheet Amounts, Interest Earned and Yield Analysis
The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for all major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rates earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the six months ended June 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.
 
 
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For the Six Months Ended June 30,
  
   
2021
    
2020
  
(dollars in thousands)
  
Average

Outstanding

Balance
    
Interest

Earned/

Interest

Paid
    
Average

Yield/

Rate
    
Average

Outstanding

Balance
    
Interest

Earned/

Interest

Paid
    
Average

Yield/

Rate
  
ASSETS
            
Interest-earning assets:
            
Total loans
(1)
  
$
1,899,864
 
  
$
47,059
 
  
 
4.99
% 
  
$
1,793,742
 
  
$
46,656
 
  
 
5.23
% 
Securities available for sale
  
 
399,255
 
  
 
4,282
 
  
 
2.16
 
  
 
300,053
 
  
 
3,586
 
  
 
2.40
 
Securities held to maturity
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
72,266
 
  
 
956
 
  
 
2.66
 
Nonmarketable equity securities
  
 
10,043
 
  
 
265
 
  
 
5.32
 
  
 
10,545
 
  
 
222
 
  
 
4.23
 
Interest-bearing deposits in other banks
  
 
380,455
 
  
 
191
 
  
 
0.10
 
  
 
142,341
 
  
 
413
 
  
 
0.58
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-earning assets
  
 
2,689,617
 
  
 
51,797
 
  
 
3.88
 
  
 
2,318,947
 
  
 
51,833
 
  
 
4.49
 
   
 
 
    
 
 
      
 
 
    
 
 
  
Allowance for credit losses
  
 
(32,951
) 
      
 
(24,250
) 
    
Noninterest-earning assets
  
 
201,041
 
      
 
196,917
 
    
 
 
 
        
 
 
      
Total assets
  
$
2,857,707
 
      
$
2,491,614
 
    
 
 
 
        
 
 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
            
Interest-bearing liabilities:
            
Interest-bearing deposits
  
$
1,591,784
 
  
$
3,096
 
  
 
0.39
% 
  
$
1,477,806
 
  
$
7,461
 
  
 
1.02
% 
Advances from FHLB and fed funds purchased
  
 
50,075
 
  
 
201
 
  
 
0.81
 
  
 
78,957
 
  
 
205
 
  
 
0.52
 
Line of credit
  
 
8,470
 
  
 
149
 
  
 
3.55
 
  
 
5,599
 
  
 
75
 
  
 
2.69
 
Subordinated debentures
  
 
19,810
 
  
 
376
 
  
 
3.83
 
  
 
14,214
 
  
 
319
 
  
 
4.51
 
Securities sold under agreements to repurchase
  
 
18,013
 
  
 
7
 
  
 
0.08
 
  
 
15,466
 
  
 
22
 
  
 
0.29
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-bearing liabilities
  
 
1,688,152
 
  
 
3,829
 
  
 
0.46
 
  
 
1,592,042
 
  
 
8,082
 
  
 
1.02
 
   
 
 
    
 
 
      
 
 
    
 
 
  
Noninterest-bearing liabilities:
            
Noninterest-bearing deposits
  
 
862,619
 
      
 
618,176
 
    
Accrued interest and other liabilities
  
 
25,206
 
      
 
22,121
 
    
 
 
 
        
 
 
      
Total noninterest-bearing liabilities
  
 
887,825
 
      
 
640,297
 
    
Shareholders’ equity
  
 
281,730
 
      
 
259,275
 
    
 
 
 
        
 
 
      
Total liabilities and shareholders’ equity
  
$
    2,857,707
 
      
$
    2,491,614
 
    
 
 
 
        
 
 
      
Net interest rate spread
(2)
      
 
3.42
% 
      
 
3.47
% 
           
Net interest income
    
$
    47,968
 
      
$
    43,751
 
  
   
 
 
        
 
 
    
Net interest margin
(3)
      
 
3.60
% 
      
 
3.79
% 
Net interest margin, fully taxable equivalent
(4)
      
 
3.64
% 
      
 
3.78
% 
(1) Includes average outstanding balances of loans held for sale of $3.7 million and $4.5 million for the six months ended June 30, 2021 and 2020, respectively.
(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(4) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.
 
 
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To illustrate core net interest margin, fully taxable equivalent, and remove the extraordinary impacts resulting from the PPP program, the table below excludes PPP loans and their associated fees and costs for the six months ended June 30, 2021:
 
     For the Six Months Ended June 30, 2021  
(dollars in thousands)    Average
    Outstanding    
Balance		     Interest
      Earned/      
Interest
Paid		     Average
    Yield/ Rate    		  
Total interest-earning assets
    $ 2,689,617     $ 51,797       3.88 % 
      
Total loans
      1,899,864       47,059       4.99  
Adjustments:
       
PPP loans average balance and net fees
(1)
      (146,103 )      (5,260 )      7.26  
  
 
 
    
 
 
    
 
 
  
Total loans, net of PPP effects
    $ 1,753,761     $ 41,799       4.81 % 
      
  
 
 
    
 
 
    
 
 
  
Total interest-earning assets, net of PPP effects
†
    $ 2,543,514     $ 46,537       3.69 % 
      
Net interest income, fully taxable equivalent (“FTE”)
      $ 48,488    
Net interest margin, FTE
          3.64 % 
Net interest income, net of PPP effects
†
        43,228    
Net interest margin, FTE, net of PPP effects
†
          3.43 % 
 
†
Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in “—Non-GAAP Financial Measures”
(1)
Interest earned consists of interest income of $720,000 and net origination fees recognized in earnings of $4.5 million for the six months ended June 30, 2021.
The following table presents the change in interest income and interest expense for the periods indicated for all major components of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
 
     For the Six Months Ended
June 30, 2021 vs. 2020		  
     Increase (Decrease)        
     Due to Change in     Total Increase  
(in thousands)
        Volume         Rate     (Decrease)  
Interest-earning assets:
       
Total loans
    $ 2,775     $ (2,372 )    $ 403  
Securities available for sale
      1,190       (494 )      696  
Securities held to maturity
      (961 )      5       (956 ) 
Nonmarketable equity securities
      (11 )      54       43  
Interest-earning deposits in other banks
      691       (913 )      (222 ) 
  
 
 
    
 
 
    
 
 
  
Total increase (decrease) in interest income
    $ 3,684     $ (3,720 )    $ (36 ) 
  
 
 
    
 
 
    
 
 
  
      
Interest-bearing liabilities:
       
Interest-bearing deposits
    $ 581     $ (4,946 )    $ (4,365 ) 
Advances from FHLB and fed funds purchased
      (75 )      71       (4 ) 
Line of credit
      39       35       74  
Subordinated debentures
      126       (69 )      57  
Securities sold under agreements to repurchase
      4       (19 )      (15 ) 
  
 
 
    
 
 
    
 
 
  
Total increase (decrease) in interest expense
      675       (4,928 )      (4,253 ) 
  
 
 
    
 
 
    
 
 
  
Increase in net interest income
    $         3,009     $         1,208     $         4,217  
  
 
 
    
 
 
    
 
 
  
Provision for Credit Losses
The provision for credit losses is a charge to income in order to bring our allowance for credit losses to a level deemed appropriate by management based on factors such as historical loss experience, trends in classified and past due loans, volume and growth in the loan portfolio, current economic conditions in our markets and value of the underlying collateral. Loans are charged off against the allowance for credit losses when determined appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.
 
 
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A reverse provision of $1.0 million was recorded in the second quarter of 2021 in order to begin to capture improvements that have occurred to macro-economic factors evaluated at the onset of the pandemic as part of the aforementioned COVID-specific qualitative factors, or Q-factors, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model. For the year ended December 31, 2020, a total allowance for credit losses provision of $13.2 million was recorded primarily to account for the estimated impact of COVID-19 on credit quality and resulted largely from changes to individual loan risk ratings, as well as COVID-specific qualitative factors primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were impacted by the effects of COVID-19.
These COVID-specific qualitative factors, established during 2020, were reduced during the first half of 2021 from 55 basis points across the loan portfolio to 27.5 basis points across the portfolio in order to conservatively capture the improvements that have occurred to macro-economic factors evaluated at the onset of the pandemic. Although management is cautiously optimistic about improving economic trends, it is likely that the economic effects of the pandemic could continue beyond 2021, and emerging COVID-19 variants may result in adverse economic impacts.
Noninterest Income
Our primary sources of recurring noninterest income are service charges on deposit accounts, merchant and debit card fees, fiduciary income, gains on the sale of both mortgage and SBA loans, and income from bank-owned life insurance. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
The following table presents components of noninterest income for the six months ended June 30, 2021 and 2020 and the period-over-period variations in the categories of noninterest income:
 
         For The Six Months Ended    
June 30,		          Increase    
(Decrease)		  
(in thousands)
    2021      2020      2021 vs. 2020  
Noninterest income:
         
Service charges
    $ 1,684      $ 1,479      $ 205  
Gain on sale of loans
      2,642        2,697        (55 ) 
Fiduciary and custodial income
      1,119        988        131  
Bank-owned life insurance income
      418        425        (7 ) 
Merchant and debit card fees
      3,428        2,465        963  
Loan processing fee income
      317        280        37  
Warehouse lending fees
      452        407        45  
Mortgage fee income
      334        302        32  
Other noninterest income
      1,695        905        790  
  
 
 
     
 
 
     
 
 
  
Total noninterest income
    $ 12,089      $ 9,948      $ 2,141  
  
 
 
     
 
 
     
 
 
  
Total noninterest income increased $2.1 million, or 21.5%, for the six months ended June 30, 2021 compared to the same period in 2020. Material changes in the components of noninterest income are discussed below.
Service Charges on Deposit Accounts.
We earn fees from our customers for deposit related services, and these fees typically constitute a significant and generally predictable component of our non-interest income. Beginning in March 2020, as a result of COVID-19, we waived certain service charges in sensitivity to our customers through June 30, 2020. Service fee income was $1.7 million for the six months ended June 30, 2021 compared to $1.5 million for the same period in 2020, an increase of $205,000, or 13.9%, resulting largely from the virus-related fee waivers.
Gain on Sale of Loans
. We originate long-term fixed-rate mortgage loans and Small Business Administration (SBA) loans for resale into the secondary market. We sold 279 mortgage loans for $63.4 million during the six months ended June 30, 2021 compared to 287 mortgage loans for $67.0 million for the six months ended June 30, 2020. Gain on sale of loans was $2.6 million for the six months ended June 30, 2021, a decrease of $55,000, or 2.0%, compared to $2.7 million for the same period in 2020. $2.5 million and $165,000 of the gain in the current year was attributable to the sales of mortgage loans and SBA 7(a) loans, respectively, while the gain during the six month period of the prior year consisted of $2.3 million in mortgage loan sales and $419,000 in SBA 7(a) loan sales.
Fiduciary and Custodial Income.
We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $1.1 million and $988,000 for the six months ended June 30, 2021 and 2020, respectively, an increase of $131,000, or 13.3%. The revenue increase resulted primarily from 16 new accounts that opened during the first six months of 2021, which have generated additional income. Furthermore, revenue for our services fluctuates by month with the market value for all publicly-traded assets, which are 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.
 
 
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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 $3.4 million for the six months ended June 30, 2021, compared to $2.5 million for the same period in 2020, an increase of $963,000, or 39.1%. The increase was primarily due to a change in contract terms, an annual earnings credit received from our debit card vendor and growth in the number of DDAs and debit card usage volume during 2021. The total number of DDAs increased by 2,897 accounts, from 49,058 as of June 30, 2020 to 51,955 as of June 30, 2021.
Other.
This category includes a variety of other income producing activities, including mortgage loan origination fees, wire transfer fees, loan administration fees, and other fee income. Other noninterest income increased $790,000, or 87.3%, for the six months ended June 30, 2021, compared to the same period in 2020 due primarily to a gain of $277,000 on bank-owned life insurance proceeds resulting from the death of a former bank officer, as well as the write-off of repossessed assets of $356,000 in the prior year that was not present in the current year.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, professional and regulatory fees, including FDIC assessments, data processing expenses, and advertising and promotion expenses.
For the six months ended June 30, 2021, noninterest expense totaled $35.0 million, an increase of $3.4 million, or 10.8%, compared to $31.6 million for the six months ended June 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest expense:
 
         For The Six Months Ended    
June 30,		          Increase    
(Decrease)		  
(in thousands)
    2021      2020      2021 vs. 2020  
Employee compensation and benefits
    $ 20,147      $ 17,543      $ 2,604  
Non-staff expenses:
         
Occupancy expenses
      5,520        5,027        493  
Legal and professional fees
      1,351        1,108        243  
Software and technology
      2,169        1,884        285  
Amortization
      679        671        8  
Director and committee fees
      422        384        38  
Advertising and promotions
      793        841        (48 ) 
ATM and debit card expense
      1,156        897        259  
Telecommunication expense
      414        389        25  
FDIC insurance assessment fees
      337        317        20  
Other noninterest expense
      2,027        2,530        (503 ) 
  
 
 
     
 
 
     
 
 
  
Total noninterest expense
    $ 35,015      $ 31,591      $ 3,424  
  
 
 
     
 
 
     
 
 
  
Material changes in the components of noninterest expense are discussed below.
Employee Compensation and Benefits
. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $20.1 million for the six months ended June 30, 2021, an increase of $2.6 million, or 14.8%, compared to $17.5 million for the same period in 2020. Employee compensation and benefits expense increased $768,000 due to standard annual salary increases and employee growth from 460 to 480 full-time equivalent employees, but increased primarily due to an increase in bonus accrual expense of approximately $1.4 million. The bonus accrual in the prior year was halted due to the unknown impacts of COVID-19 during that time and was resumed during the period in 2021.
 
 
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Occupancy Expenses.
Occupancy expenses are mainly comprised of depreciation expense on fixed assets, and lease expense related to ASC 842 accounting. Occupancy expenses increased $493,000, or 9.8%, for the six months ended June 30, 2021 compared to the same period of the prior year. Depreciation expense and ASC 842 lease expense increased $216,000 and $224,000, respectively, compared to the prior year period.
Legal and Professional Fees.
Legal and professional fees, which include audit, loan review and regulatory assessments, were $1.4 million and $1.1 million for the six months ended June 30, 2021 and 2020, respectively, an increase of $243,000, or 21.9%. The increase was primarily the result of professional recruiting fees paid during the six months ended June 30, 2021 that were not paid during the same period of 2020.
Software and Technology.
Software and technology expenses increased $285,000, or 15.1%, from $1.9 million for the six months ended June 30, 2020 to $2.2 million for the six months ended June 30, 2021. The increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities and improve connectivity to support remote working and other technology capabilities.
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 $1.2 million for the six months ended June 30, 2021, an increase of $259,000, or 28.9%, compared to $897,000 for the same period in 2020 as a result of increased ATM and debit card usage by our customers.
Other
. This category includes operating and administrative expenses, such as stock option expense, expenses and losses related to repossession of assets, small hardware and software purchases, expense of the value of stock appreciation rights, losses incurred on problem assets, losses on sale of other real estate owned and other assets, other real estate owned expense and write-downs, business development expenses (i.e., travel and entertainment, charitable contributions and club memberships), insurance and security expenses. Other noninterest expense decreased $503,000, or 19.9%, from $2.5 million for the six months ended June 30, 2020 to $2.0 million for the six months ended June 30, 2021. The decrease was primarily due to fewer charitable contributions of $211,000, a $128,000 decrease in loan and filing expenses and a $92,000 reduction in loan processing fees.
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 six months ended June 30, 2021 and 2020, income tax expense totaled $4.6 million and $1.3 million, respectively. The increase in income tax expense was primarily due to an increase in net earnings before taxes of $17.4 million. Our effective tax rates for the six months ended 2021 and 2020 were 17.85% and 14.58%, respectively.
Discussion and Analysis of Results of Operations for the Three Months Ended June 30, 2021 and 2020
Results of Operations
The following discussion and analysis of our results of operations compares our results of operations for the three months ended June 30, 2021 with the three months ended June 30, 2020. The results of operations for the three months ended June 30, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.
Net earnings were $10.4 million for the three months ended June 30, 2021, as compared to $1.1 million for the three months ended June 30, 2020. Basic earnings per share were $0.87 for the three months ended June 30, 2021 compared to $0.09 during the same period in 2020.
 
 
(Continued)
57. 
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The following table presents key earnings data for the periods indicated:
 
     For the Three Months Ended June 30,  
(dollars in thousands, except per share data)
                  2021                                  2020                
Net earnings
    $ 10,432         $ 1,075     
Net earnings per common share*
      
-basic
      0.87           0.09     
-diluted
      0.85           0.09     
Net interest margin
(1)
      3.40%        3.75%  
Net interest rate spread
(2)
      3.24%        3.48%  
Return on average assets
      1.42%        0.16%  
Return on average equity
      14.64%        1.67%  
Average equity to average total assets
      9.72%        9.72%  
Cash dividend payout ratio*
      22.99%        190.00%  
* Adjusted to give effect to the 10% stock dividend issued during the first quarter of 2021.
(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.
With the credit outlook still uncertain as a result of COVID-19 and other economic factors, the following table illustrates net earnings and net core earnings results, which are pre-tax, pre-provision and pre-extraordinary PPP income, as well as performance ratios for the three months ended June 30, 2021 and 2020:
 
     For the Three Months Ended
June 30,		  
             2021                     2020          
Net earnings
    $ 10,432     $ 1,075  
Adjustments:
     
Provision for credit losses
      (1,000 )      12,100  
Income tax provision
      2,312       (190 ) 
PPP loans, including fees
      (1,954 )      (2,540 ) 
Net interest expense on PPP-related borrowings
      —       31  
  
 
 
    
 
 
  
Net core earnings
†
    $ 9,790     $ 10,476  
  
 
 
    
 
 
  
    
Total average assets
    $ 2,938,944     $ 2,657,609  
Adjustments:
     
PPP loans average balance
      (155,417 )      (163,184 ) 
Excess fed funds sold due to PPP-related borrowings
      —       (84,066 ) 
  
 
 
    
 
 
  
Total average assets, adjusted
†
    $ 2,783,527     $ 2,410,359  
  
 
 
    
 
 
  
Total average equity
    $ 285,803     $ 258,225  
  
 
 
    
 
 
  
    
PERFORMANCE RATIOS
     
Net earnings to average assets (annualized)
      1.42 %      0.16 % 
Net earnings to average equity (annualized)
      14.64       1.67  
Net core earnings to average assets, as adjusted (annualized)
†
      1.41       1.75  
Net core earnings to average equity (annualized)
†
      13.74       16.32  
    
PER COMMON SHARE DATA
     
Weighted-average common shares outstanding, basic*
      12,056,550       12,128,516  
  
 
 
    
 
 
  
Earnings per common share, basic*
    $ 0.87     $ 0.09  
  
 
 
    
 
 
  
Net core earnings per common share, basic
†
*
      0.81       0.86  
  
 
 
    
 
 
  
* Adjusted to give effect to the 10% stock dividend issued during the first quarter of 2021.
† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in the schedules accompanying this release.
Net Interest Income
Net interest income, before the provision for credit losses, in the second quarter of 2021 and 2020 was $23.5 million and $23.2 million, respectively, an increase of $295,000, or 1.3%, resulting primarily from a decrease in deposit-related interest expense of $1.5 million, or 50.9%, compared to the same quarter of the prior year. The decrease in deposit-related interest expense was offset by a $1.3 million, or 5.2%, decrease in loan-related interest income, primarily due to our PPP loans, which earned only 1.00% interest, and low interest earned on high balances of fed funds held at other banks.
 
 
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58. 
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Loan yield decreased from 5.15% for the second quarter of 2020 to 4.79% for the second quarter of 2021, a change of 36 basis points, while the cost of interest-bearing deposits decreased from 0.83% to 0.37% during the same period, a change of 46 basis points. The decrease in loan yield was primarily due to the dilutive effect of the 1.00% interest rate on PPP loans originated during the second quarter of 2020, partially offset by the yield added from net PPP loan origination fees. The decrease in loan yield is also attributable to reductions in interest rates by the Federal Reserve in the first quarter of 2020.
For the three months ended June 30, 2021, net interest margin on a taxable equivalent basis and net interest spread were 3.44% and 3.24%, respectively, compared to 3.78% and 3.48% for the same period in 2020, which reflects the changes in interest income discussed above relative to the changes 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 June 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.
 
 
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59. 
Table of Contents
    For the Three Months Ended June 30,  
    2021     2020  
(dollars in thousands)
   Average
Outstanding
Balance		     Interest
Earned/
Interest
Paid		     Average
Yield/ Rate		     Average
Outstanding
Balance		     Interest
Earned/
Interest
Paid		     Average
Yield/ Rate		  
ASSETS
            
Interest-earning assets:
            
Total loans
(1)
   $     1,912,722     $     22,864       4.79 %    $     1,885,959     $     24,139       5.15 % 
Securities available for sale
     420,202       2,191       2.09       379,803       2,273       2.41  
Nonmarketable equity securities
     10,056       164       6.54       11,869       108       3.66  
Interest-bearing deposits in other banks
     426,074       65       0.06       209,005       61       0.12  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-earning assets
     2,769,054       25,284       3.66       2,486,636       26,581       4.30  
   
 
 
    
 
 
      
 
 
    
 
 
  
Allowance for loan losses
     (32,664 )          (27,720 )     
Noninterest-earning assets
     202,554           198,693      
 
 
 
        
 
 
      
Total assets
   $ 2,938,944         $ 2,657,609      
 
 
 
        
 
 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
            
Interest-bearing liabilities:
            
Interest-bearing deposits
   $ 1,623,351     $ 1,493       0.37 %    $ 1,480,106     $ 3,040       0.83 % 
Advances from FHLB and fed funds purchased
     49,063       102       0.83       134,677       123       0.37  
Line of credit
     2,374       21       3.55       7,791       47       2.43  
Subordinated debentures
     19,810       188       3.81       17,618       176       4.02  
Securities sold under agreements to repurchase
     14,887       3       0.08       18,106       13       0.29  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-bearing liabilities
     1,709,485       1,807       0.42       1,658,298       3,399       0.82  
   
 
 
    
 
 
      
 
 
    
 
 
  
Noninterest-bearing liabilities:
            
Noninterest-bearing deposits
     916,631           718,378      
Accrued interest and other liabilities
     27,025           22,708      
 
 
 
        
 
 
      
Total noninterest-bearing liabilities
     943,656           741,086      
Shareholders’ equity
     285,803           258,225      
 
 
 
        
 
 
      
Total liabilities and shareholders’ equity
   $ 2,938,944         $ 2,657,609      
 
 
 
        
 
 
      
Net interest rate spread
(2)
         3.24 %          3.48 % 
Net interest income
     $ 23,477         $ 23,182    
   
 
 
        
 
 
    
Net interest margin
(3)
         3.40 %          3.75 % 
Net interest margin, fully taxable equivalent
(4)
         3.44 %          3.78 % 
(1) Includes average outstanding balances of loans held for sale of $3.2 million and $6.5 million for the three months ended June 30, 2021 and 2020, respectively.
(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(4) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.
 
 
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60. 
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To illustrate core net interest margin and remove the extraordinary impacts resulting from the PPP program, the table below excludes PPP loans and their associated fees and costs for the three months ended June 30, 2021:
 
     For the Three Months Ended June 30, 2021  
(dollars in thousands)
    Average
    Outstanding    
Balance		     Interest
Earned/
Interest
Paid		     Average
      Yield/ Rate      		  
Total interest-earning assets
    $         2,769,054     $             25,284       3.66 % 
      
Total loans
      1,912,722       22,864       4.79  
Adjustments:
       
PPP loans average balance and net fees
(1)
      (155,417 )      (1,747 )      4.51  
  
 
 
    
 
 
    
 
 
  
Total loans, net of PPP effects
    $ 1,757,305     $ 21,117       4.82 % 
    
       
  
 
 
    
 
 
    
 
 
  
Total interest-earning assets, net of PPP effects
†
    $ 2,613,637     $ 23,537       3.61 % 
      
      
Net interest income, fully taxable equivalent (“FTE”)
      $ 23,746    
Net interest margin, FTE
          3.44 % 
Net interest income, net of PPP effects†
        21,999    
Net interest margin, FTE, net of PPP effects†
          3.38 % 
† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in the schedules accompanying this release.
(1) Interest earned consists of interest income of $385,000 and net origination fees recognized in earnings of $1.4 million for the three months ended June 30, 2021.
The following table presents the change in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
 
     For the Three Months Ended
June 30, 2021 vs. 2020
     Increase (Decrease)
Due to Change in		   Total Increase
(in thousands)
    Volume   Rate   (Decrease)
Interest-earning assets:
             
Total loans
      $                 345     $           (1,620 )     $           (1,275 )
Securities available for sale
        243       (325 )       (82 )
Nonmarketable equity securities
        (17 )       73       56
Interest-earning deposits in other banks
        65       (61 )       4
    
 
 
 
    
 
 
 
    
 
 
 
Total increase (decrease) in interest income
      $ 636     $ (1,933 )     $ (1,297 )
    
 
 
 
    
 
 
 
    
 
 
 
            
Interest-bearing liabilities:
             
Interest-bearing deposits
      $ 297     $ (1,844 )     $ (1,547 )
Advances from FHLB and fed funds purchased
        (79 )       58       (21 )
Line of credit
        (33 )       7       (26 )
Subordinated debentures
        22       (10 )       12
Securities sold under agreements to repurchase
        (2 )       (8 )       (10 )
    
 
 
 
    
 
 
 
    
 
 
 
Total increase (decrease) in interest expense
        205       (1,797 )       (1,592 )
    
 
 
 
    
 
 
 
    
 
 
 
Increase (decrease) in net interest income
      $ 431     $ (136 )     $ 295
    
 
 
 
    
 
 
 
    
 
 
 
Provision for Credit Losses
There was a reverse provision for credit losses of $1.0 million for the three months ended June 30, 2021, compared to a provision expense of $12.1 million for the three months ended June 30, 2020. During the second quarter of 2020, a COVID-specific qualitative factor was added to the CECL model, primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were impacted by the effects of COVID-19. The COVID-19 qualitative factor was reduced during the current year quarter by 14 basis points to reflect the continued improvement of those macro-economic factors used to establish the initial COVID-specific qualitative factor at the onset of the pandemic.
 
 
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61. 
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Noninterest Income
The following table presents components of noninterest income for the three months ended June 30, 2021 and 2020 and the period-over-period variations in the categories of noninterest income:
 
     For The Three Months Ended
June 30,		   Increase
(Decrease)
(in thousands)
    2021   2020   2021 vs. 2020
Noninterest income:
             
Service charges
      $ 855     $ 571     $ 284
Gain on sale of loans
        1,244         1,508         (264 )
Fiduciary and custodial income
        570       474       96
Bank-owned life insurance income
        206       207       (1 )
Merchant and debit card fees
        1,922       1,334       588
Loan processing fee income
        164       130       34
Warehouse lending fees
        211       243       (32 )
Mortgage fee income
        157       204       (47 )
Other noninterest income
        641       316       325
    
 
 
 
    
 
 
 
    
 
 
 
Total noninterest income
      $           5,970     $           4,987     $             983
    
 
 
 
    
 
 
 
    
 
 
 
Total noninterest income increased $983,000, or 19.7%, for the three months ended June 30, 2021 compared to the same period in 2020. Material changes in the components of noninterest income are discussed below.
Service Charges on Deposit Accounts.
Service fee income was $855,000 for the three months ended June 30, 2021 compared to $571,000 for the same period in 2020, an increase of $284,000, or 49.7%. The increase was primarily due to service charge waivers during the prior year quarter because of COVID-19, as well as increases in customer spending activity during the current year quarter.
Gain on Sale of Loans.
We sold 125 mortgage loans for $28.3 million for the three months ended June 30, 2021 compared to 181 mortgage loans for $42.5 million for the three months ended June 30, 2020. Gain on sale of loans was $1.2 million for the three months ended June 30, 2021, a decrease of $264,000, or 17.5%, compared to $1.5 million for the same period in 2020. The total gain on loans sold during the quarter ended June 30, 2021 consisted of $1.0 million in mortgage loans and $165,000 in SBA 7(a) loans sold during the quarter ended June 30, 2021.
Fiduciary and Custodial Income.
We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $570,000 and $474,000 for the three months ended June 30, 2021 and 2020, respectively, an increase of $96,000, or 20.3%. The revenue increase resulted primarily from eight new accounts that opened during the quarter, which have generated additional income.
Merchant and Debit Card Fees.
We earn interchange income related to the activity of our customers’ merchant and debit card usage. Debit card interchange income was $1.9 million for the three months ended June 30, 2021 compared to $1.3 million for the same period in 2020, an increase of $588,000, or 44.1%. The increase was primarily due to a change in contract terms, receipt of an annual statement credit from our debit card vendor, as well as growth in the number of DDAs and debit card usage volume during 2021.
Other.
This category includes a variety of other income producing activities, including mortgage loan origination fees, wire transfer fees, loan administration fees, and other fee income. Other noninterest income increased $325,000, or 102.8%, for the three months ended June 30, 2021, compared to the same period in 2020 due primarily to a $256,000 write-off of repossessed assets during the prior year quarter.
 
 
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Noninterest Expense
For the three months ended June 30, 2021, noninterest expense totaled $17.7 million, an increase of $2.5 million, or 16.6%, compared to $15.2 million for the three months ended June 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest expense:
 
     For The Three Months Ended
June 30,		   Increase
(Decrease)
(in thousands)
    2021   2020   2021 vs. 2020
Employee compensation and benefits
      $ 10,204     $ 8,077     $ 2,127
Non-staff expenses:
             
Occupancy expenses
        2,833       2,550       283
Legal and professional fees
        747         589         158
Software and technology
        1,055       945       110
Amortization
        336       338       (2 )
Director and committee fees
        167       165       2
Advertising and promotions
        338       408       (70 )
ATM and debit card expense
        616       479       137
Telecommunication expense
        180       209       (29 )
FDIC insurance assessment fees
        168       122       46
Other noninterest expense
        1,059       1,302       (243 )
    
 
 
 
    
 
 
 
    
 
 
 
Total noninterest expense
      $           17,703     $           15,184     $           2,519
    
 
 
 
    
 
 
 
    
 
 
 
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 $10.2 million for the three months ended June 30, 2021, an increase of $2.1 million, or 26.3%, compared to $8.1 million for the same period in 2020. The increase resulted from an increase in salary expense due to annual salary adjustments and resumption of bonus accruals that were halted during the prior year quarter due to COVID-19 uncertainties.
Occupancy Expenses.
Occupancy expenses increased $283,000, or 11.1% during the second quarter of 2021 compared to the same period of the prior year primarily due to new leases entered into during the quarter.
Legal and Professional Fees.
Legal and professional fees, which include audit, loan review and regulatory assessments, were $747,000 for the three months ended June 30, 2021, an increase of $158,000, or 26.8%, compared to $589,000 for the same period in 2020. The increase was primarily the result of professional recruiting fees paid during the three months ended June 30, 2021 that were not paid during the same period of the prior year due to COVID-19 hiring restrictions put in place at the time.
Software and Technology Fees.
Software and technology fees consist of fees paid to third parties for support of software and technology products. Software support fee expense was $1.1 million for the three months ended June 30, 2021, compared to $945,000 for the same period in 2020, an increase of $110,000, or 11.6%. The increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities and improve connectivity to support remote working and other technology capabilities.
ATM and Debit Card Expense.
ATM and debit card expenses were $616,000 for the three months ended June 30, 2021, an increase of $137,000, or 28.5%, compared to $479,000 for the same period in 2020 as a result of increased ATM and debit card usage by our customers.
Other
. Other noninterest expense decreased $243,000, or 18.7%, from $1.3 million for the three months ended June 30, 2020 to $1.1 million for the three months ended June 30, 2021. The decrease was primarily due to fewer charitable contributions of $156,000 and an $89,000 reduction in loan processing fees.
 
 
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63. 
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Income Tax Expense
For the three months ended June 30, 2021, income tax expense totaled $2.3 million, in contrast to a tax benefit of $190,000 received in the same period of 2020. The effective tax rates for the three months ended June 30, 2021 and 2020 were 18.14% and 21.47%, respectively. The effective tax rates differ from the statutory federal tax rate of 21% for the three months ended June 30, 2021 and 2020, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank-owned life insurance.
 
 
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64. 
Table of Contents
Discussion and Analysis of Financial Condition as of June 30, 2021
Assets
Our total assets increased $192.1 million, or 7.0%, from $2.74 billion as of December 31, 2020 to $2.93 billion as of June 30, 2021. Our asset growth was primarily due to increases in cash and cash equivalents of $95.4 million, securities available for sale of $65.8 million and in total gross loans of $23.3 million. The increase in cash and cash equivalents is due to a $166.3 million increase in federal funds sold, partially offset by decreases in interest-bearing cash deposits and due from balances of $60.6 million and $10.2 million, respectively. The increase in loans resulted largely from our participation in the PPP2 loan program, and the increase in cash and cash equivalents resulted largely from increases in deposit balances that resulted from government stimulus payments, PPP2 loan proceeds and general changes in consumer spending and saving habits.
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 June 30, 2021, total loans held for investment were $1.89 billion, an increase of $23.3 million, or 1.3%, from the December 31, 2020 balance of $1.87 billion. In addition to these amounts, $5.1 million and $5.5 million in loans were classified as held for sale as of June 30, 2021 and December 31, 2020, respectively.
The increase in gross loans during the period included outstanding PPP loan balances of $127.4 million, to 1,674 borrowers, as of June 30, 2021. Excluding the outstanding balance of PPP loans, gross loans increased 2.1%, or $35.8 million, from December 31, 2020, primarily the result of period-end increases in commercial real estate and multi-family residential portfolios.
Total loans, excluding those held for sale, as a percentage of deposits, were 74.6% and 81.6% as of June 30, 2021 and December 31, 2020, respectively. Total loans, excluding those held for sale, as a percentage of total assets, were 64.4% and 68.1% as of June 30, 2021 and December 31, 2020, respectively.
The following table summarizes our loan portfolio by type of loan and dollar change and percentage change from December 31, 2020 to June 30, 2021:
 
(in thousands)
    As of
    June 30, 2021    		      As of
 December 31, 2020 		      Increase
   (Decrease)   		          Percent     
Change		  
Commercial and industrial
    $ 424,624      $ 445,771      $ (21,147 )      (4.74 %) 
Real estate:
           
Construction and development
      264,002        270,407        (6,405 )      (2.37 %) 
Commercial real estate
      608,464        594,216        14,248       2.40 % 
Farmland
      94,525        78,508        16,017       20.40 % 
1-4 family residential
      389,616        389,096        520       0.13 % 
Multi-family residential
      42,086        21,701        20,385       93.94 % 
Consumer and overdrafts
      52,239        51,386        853       1.66 % 
Agricultural
      14,608        15,734        (1,126 )      (7.16 %) 
  
 
 
     
 
 
     
 
 
    
 
 
  
Total loans held for investment
    $ 1,890,164      $ 1,866,819      $ 23,345       1.25 % 
  
 
 
     
 
 
     
 
 
    
 
 
  
          
Total loans held for sale
    $ 5,088      $ 5,542      $ (454 )      (8.19 %) 
  
 
 
     
 
 
     
 
 
    
 
 
  
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.
 
 
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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.
Nonperforming assets as a percentage of total loans were 0.20% at June 30, 2021, compared to 0.70% at December 31, 2020. The Bank’s nonperforming assets consist primarily of nonaccrual loans. During 2020, nonperforming assets included three Small Business Administration (SBA) 7(a), partially guaranteed (75%) loans that were acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of December 31, 2020. During the first quarter of 2021, one of these loans was resolved when the underlying collateral, a hotel, was sold to a third party. The other two loans, both to the same borrower and secured by the same hotel, were resolved through a bankruptcy judgement that allows the borrower to adequately service their debt coverage. These loans were internally identified as problem assets prior to COVID-19 and were properly reserved.
The following table presents information regarding nonperforming assets and loans as of:
 
(dollars in thousands)
          June 30, 2021             December 31, 2020    
Nonaccrual loans
    $ 3,593     $ 12,705  
Accruing loans 90 or more days past due
      —       —  
  
 
 
    
 
 
  
Total nonperforming loans
      3,593       12,705  
Other real estate owned:
     
Residential real estate
      227       404  
  
 
 
    
 
 
  
Total other real estate owned
      227       404  
Repossessed assets owned
      9       6  
  
 
 
    
 
 
  
Total other assets owned
      236       410  
  
 
 
    
 
 
  
Total nonperforming assets
    $ 3,829     $ 13,115  
  
 
 
    
 
 
  
TDR loans - nonaccrual
    $ 86     $ 90  
TDR loans - accruing
    $ 9,535     $ 9,626  
Ratio of nonperforming loans to total loans
(1)(2)
      0.19 %      0.68 % 
Ratio of nonperforming assets to total loans
(1)(2)
      0.20 %      0.70 % 
Ratio of nonperforming assets to total assets
      0.13 %      0.48 % 
(1) Excludes loans held for sale of $5.1 million and $5.5 million as of June 30, 2021 and December 31, 2020, respectively.
(2) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.
The following table presents nonaccrual loans by category as of:
 
(in thousands)
          June 30, 2021             December 31, 2020    
Commercial and industrial
    $ 86     $ 27  
Real estate:
     
Construction and development
      230       —  
Commercial real estate
      722       10,604  
Farmland
      109       115  
1-4 family residential
      2,177          1,667  
Consumer and overdrafts
      246       212     
Agricultural
      23       80  
  
 
 
    
 
 
  
Total
    $ 3,593     $ 12,705  
  
 
 
    
 
 
  
 
 
(Continued)
66. 
Table of Contents
Potential Problem Loans
From a credit risk standpoint, we classify loans in one of five risk ratings: pass, special mention, substandard, doubtful or loss. Within the pass rating, we classify loans into one of the following five subcategories based on perceived credit risk, including repayment capacity and collateral security: superior, excellent, good, acceptable and acceptable/watch. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific ACL allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated special mention show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated as doubtful have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.
Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.
Loans that were modified for reasons related to the COVID-19 pandemic that avoided TDR status are not currently required to pay, or are paying with interest only, but they are nevertheless considered performing so long as they are compliant with the terms of their modifications. They will be evaluated for classification, but the existence of a loan modification in accordance with the CARES Act does not necessarily result in an adverse classification.
The following table summarizes the internal ratings of our performing, classified and nonaccrual (as well as substandard) loans, by category, as of:
 
    June 30, 2021  
(in thousands)
   Pass     Special
Mention		     Substandard       Doubtful       Loss     Nonaccrual      Total  
Commercial and industrial
   $ 423,725     $ 162     $ 651     $             —     $             —     $ 86      $ 424,624  
Real estate:
          
Construction and development
     261,400       1,760       612       —       —       230        264,002  
Commercial real estate
     544,135       11,787       51,820       —       —       722        608,464  
Farmland
     94,265       30       121       —       —       109        94,525  
1-4 family residential
     387,412       27       —       —       —       2,177        389,616  
Multi-family residential
     41,405       —       681       —       —       —        42,086  
Consumer and overdrafts
     51,983       10       —       —       —       246        52,239  
Agricultural
     14,457       27       101       —       —       23        14,608  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Total
   $     1,818,782     $     13,803     $     53,986     $ —     $ —     $       3,593      $       1,890,164  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
 
(Continued)
67. 
Table of Contents
The following table summarizes the internal ratings of our performing, classified and nonaccrual (as well as substandard) loans, by category, as of:
 
    December 31, 2020  
(in thousands)
   Pass     Special
Mention		     Substandard     Doubtful     Loss      Nonaccrual     Total  
Commercial and industrial
   $ 438,975     $ 5,829     $ 940     $ —     $ —      $ 27     $ 445,771  
Real estate:
          
Construction and development
     267,767       1,346       1,294       —       —        —       270,407  
Commercial real estate
     550,724       13,280       19,608       —       —        10,604       594,216  
Farmland
     78,229       35       129       —       —        115       78,508  
1-4 family residential
     387,261       168       —       —       —        1,667       389,096  
Multi-family residential
     21,701       —       —       —       —        —       21,701  
Consumer and overdrafts
     51,059       115       —       —       —        212       51,386  
Agricultural
     15,577       36       41       —       —        80       15,734  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Total
   $     1,811,293     $     20,809     $     22,012     $         —     $         —      $       12,705     $     1,866,819  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Allowance for Credit Losses
We maintain an allowance for credit losses (“ACL”) that represents management’s best estimate of the appropriate level of losses and risks inherent in our applicable financial assets under the current expected credit loss model. The amount of the allowance for credit losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. The determination of the amount of allowance involves a high degree of judgement and subjectivity. Refer to Note 1 of the notes to the financial statements for discussion regarding our ACL methodologies for loans held for investment and available for sale securities.
For available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings through provision for credit loss expense. As of June 30, 2021, the Company determined that all available for sale securities that experienced a decline in fair value below the amortized costs basis were due to noncredit-related factors, therefore no related ACL was recorded and there was no related provision expense recognized during the six months ended June 30, 2021.
In determining the ACL for loans held for investment, we primarily estimate losses on segments of loans with similar risk characteristics and where the potential loss can be identified and reasonably determined. For loans that do not share similar risk characteristics with our existing segments, they are evaluated individually for an ACL. Our portfolio is segmented by regulatory call report codes, with additional segments for warehouse mortgage loans, SBA loans acquired from Westbound Bank, SBA loans originated by us and SBA PPP loans. The segments are further disaggregated by internally assigned risk rating classifications. The balance of the ACL is determined using the current expected credit loss model, which considers historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and reasonable and supportable forecasts of the impact of future economic conditions on loan loss rates. Please see “
Critical Accounting Policies - Allowance for Credit Losses
.”
In connection with the review of our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
 
 
●
  
for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial 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;
 
 
(Continued)
68. 
Table of Contents
●
  
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 June 30, 2021, the allowance for credit losses totaled $31.5 million, or 1.67%, of total loans, excluding those held for sale, and totaled 1.79%, excluding PPP loans and loans held for sale. As of December 31, 2020, the allowance for loan losses totaled $33.6 million, or 1.80%, of total loans, excluding those held for sale, and totaled 1.95%, excluding PPP loans and loans held for sale. The decrease in the ACL of $2.1 million, or 6.2%, is due to COVID-specific qualitative factors established during 2020 that were reduced during the first half of 2021 from 55 basis points across the loan portfolio to 27.5 basis points in order to conservatively capture some of the improvements that have occurred to macro-economic factors evaluated at the onset of the pandemic. Although management is cautiously optimistic about improving economic trends, it is likely that the economic effects of the pandemic could continue beyond 2021.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:
 
     As of and for the Six Months
Ended June 30,		     As of and
for the Year
Ended
December 31,		  
(dollars in thousands)
    2021     2020     2020  
Average loans outstanding
(1)
    $ 1,899,864     $ 1,793,742     $ 1,872,914  
  
 
 
    
 
 
    
 
 
  
Gross loans outstanding at end of period
(2)
      1,890,164       1,957,440       1,866,819  
  
 
 
    
 
 
    
 
 
  
Allowance for credit losses at beginning of the period
      33,619       16,202       16,202  
Impact of adopting ASC 326
      —       4,548       4,548  
Provision for credit losses
      (1,000 )      13,500       13,200  
Charge offs:
       
Commercial and industrial
      238       43       68  
Real estate:
       
Commercial real estate
      760       —       —  
1-4 family residential
      —       59       68  
Consumer
      76       80       155  
Agriculture
      —       18       18  
Overdrafts
      84       83       234  
  
 
 
    
 
 
    
 
 
  
Total charge-offs
      1,158       283       543  
Recoveries:
       
Commercial and industrial
      11       86       101  
Real estate:
       
Construction and development
      1       —       —  
Commercial real estate
      11       —       1  
1-4 family residential
      —       2       2  
Consumer
      28       17       37  
Agriculture
      —       20       20  
Overdrafts
      36       27       51  
  
 
 
    
 
 
    
 
 
  
Total recoveries
      87       152       212  
Net charge-offs (recoveries)
      1,071       131       331  
  
 
 
    
 
 
    
 
 
  
Allowance for credit losses at end of period
    $             31,548     $             34,119     $             33,619  
  
 
 
    
 
 
    
 
 
  
Ratio of allowance to end of period loans
(2)
      1.67 %      1.74 %      1.80 % 
Ratio of net charge-offs (recoveries) to average loans
(1)
      0.06 %      0.01 %      0.02 % 
(1) Includes average outstanding balances of loans held for sale of $3.7 million, $4.5 million and $6.0 million for the six months ended June 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
(2) Excludes loans held for sale of $5.1 million, $7.2 million and $5.5 million for the six months ended June 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
 
 
(Continued)
69. 
Table of Contents
The ratio of allowance for credit losses to non-performing loans increased from 264.6% at December 31, 2020 to 878.0% at June 30, 2021. Non-performing loans decreased to $3.6 million at June 30, 2021, compared to $12.7 million at December 31, 2020 due to the resolution of three Small Business Administration (“SBA”) 7(a) partially guaranteed (75%) problem loans that were acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of December 31, 2020.
Although we believe that we have established our allowance for credit losses in accordance with GAAP and that the allowance for credit losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for credit losses will be subject to ongoing evaluations of the risks in our loan portfolio. If our primary market areas experience economic declines, if asset quality deteriorates or if we are successful in growing the size of our loan portfolio, our allowance could become inadequate and material additional provisions for credit losses could be required.
The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.
 
     As of June 30, 2021     As of December 31, 2020  
(in thousands)
    Amount      Percent to
Total Loans		     Amount      Percent to
Total Loans		  
Commercial and industrial
    $ 3,477        11.02 %    $ 4,033        12.00 % 
Real estate:
           
Construction and development
      3,822        12.11 %      4,735        14.08 % 
Commercial real estate
      15,198        48.17 %      15,780        46.94 % 
Farmland
      1,239        3.93 %      1,220        3.63 % 
1-4 family residential
      6,151        19.50 %      6,313        18.78 % 
Multi-family residential
      618        1.96 %      363        1.08 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total real estate
      27,028        85.67 %      28,411        84.51 % 
Consumer and overdrafts
      853        2.71 %      936        2.78 % 
Agricultural
      190        0.60 %      239        0.71 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total allowance for credit losses
    $             31,548                      100.00 %    $             33,619                      100.00 % 
  
 
 
     
 
 
    
 
 
     
 
 
  
Securities
We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of June 30, 2021, the carrying amount of our investment securities totaled $446.6 million, an increase of $65.8 million, or 17.3%, compared to $380.8 million as of December 31, 2020. Investment securities represented 15.2% and 13.9% of total assets as of June 30, 2021 and December 31, 2020, respectively.
Our investment portfolio consists of securities classified as available for sale. During the first quarter of 2020, we transferred all of our investment securities classified as held-to-maturity to available-for-sale in order to provide maximum flexibility to address liquidity and capital needs that have resulted from COVID-19. We believe these transfers are allowable under existing GAAP due to the isolated, non-recurring and usual events resulting from the pandemic.
The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. As of June 30, 2021, the Company determined that all available for sale securities that experienced a decline in fair value below their amortized cost basis were impacted by noncredit-related factors; therefore the Company carried no ACL with respect to our securities portfolio at June 30, 2021.
 
 
(Continued)
70. 
Table of Contents
The following tables summarize the amortized cost and estimated fair value of our investment securities:
 
     As of June 30, 2021  
(in thousands)
    Amortized Cost      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		      Fair Value  
U.S. Government agencies
    $ 10,014      $ 134      $ —      $ 10,148  
Corporate bonds
      39,153        1,356        78        40,431  
Municipal securities
      162,219        9,634        40        171,813  
Mortgage-backed securities
      155,970        2,140        794        157,316  
Collateralized mortgage obligations
      65,282        1,660        14        66,928  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $         432,638      $       14,924      $         926      $     446,636  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
     As of December 31, 2020  
(in thousands)
    Amortized Cost      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		      Fair Value  
Corporate bonds
    $ 29,608      $ 1,382      $ 8      $ 30,982  
Municipal securities
      164,668        11,036        —        175,704  
Mortgage-backed securities
      104,210        3,041        87        107,164  
Collateralized mortgage obligations
      64,611        2,335        1        66,945  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $         363,097      $       17,794      $           96      $     380,795  
  
 
 
     
 
 
     
 
 
     
 
 
  
We do not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, structured investment vehicles or second lien elements in our investment portfolio. As of June 30, 2021 and December 31, 2020, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages, non-U.S. agency mortgage-backed securities or corporate collateralized mortgage obligations.
The following tables set forth the fair value of available for sale securities and 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 June 30, 2021  
          Within One Year           After One Year but
Within Five Years		     After Five Years but
Within Ten Years		     After Ten Years     Total  
(dollars in thousands)
   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Total     Yield  
U.S. government agencies
   $ —       —     $ —       —     $ 10,148       1.35%     $ —       —     $ 10,148       1.35%  
Corporate bonds
     —       —       20,719       3.09%       19,712       4.04%       —       —       40,431       3.55%  
Municipal securities
     2,850       3.19%       36,506       3.30%       52,449       3.37%       80,008       3.21%       171,813       3.28%  
Mortgage-backed securities
     123       3.42%       83,153       1.67%       48,741       1.74%       25,299       1.93%       157,316       1.73%  
Collateralized mortgage obligations
     4,832       1.25%       43,285       2.78%       —       —       18,811       1.04%       66,928       2.18%  
 
 
 
      
 
 
      
 
 
      
 
 
      
 
 
    
Total
   $       7,805       1.99%     $   183,663       2.42%     $   131,050       2.60%     $   124,118       2.62%     $   446,636       2.52%  
 
 
 
      
 
 
      
 
 
      
 
 
      
 
 
    
 
    As of December 31, 2020  
          Within One Year           After One Year but
Within Five Years		     After Five Years but
Within Ten Years		     After Ten Years     Total  
(dollars in thousands)
   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Total     Yield  
Corporate bonds
   $ —       —     $ 18,839       2.96%     $ 12,143       4.31%     $ —       —     $ 30,982       3.49%  
Municipal securities
     4,154       2.84%       35,849       3.13%       51,823       3.39%       83,878       3.23%       175,704       3.25%  
Mortgage-backed securities
     170       3.37%       74,450       2.04%       22,104       2.05%       10,440       1.81%       107,164       2.02%  
Collateralized mortgage obligations
     9,641       1.49%       57,304       2.74%       —       —       —       —       66,945       2.56%  
 
 
 
      
 
 
      
 
 
      
 
 
      
 
 
    
Total
   $     13,965       1.91%     $   186,442       2.56%     $   86,070       3.17%     $   94,318       3.07%     $   380,795       2.80%  
 
 
 
      
 
 
      
 
 
      
 
 
      
 
 
    
 
 
(Continued)
71. 
Table of Contents
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities typically cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and, consequently, the average life of this security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 7.13 years with an estimated effective duration of 4.33 years as of June 30, 2021.
As of June 30, 2021 and December 31, 2020, respectively, we did not own securities of any one issuer, other than the U.S. government and its agencies, for which aggregate adjusted cost exceeded 10.0% of the consolidated shareholders’ equity.
The average yield of our securities portfolio was 2.52% as of June 30, 2021, down from 2.80% as of December 31, 2020. The decline in average yield resulted primarily from decreases in yields on mortgage backed securities and collateralized mortgage obligations of 2.02% and 2.56% at December 31, 2020, respectively, to 1.73% and 2.18% at June 30, 2021, respectively. As of June 30, 2021, municipal securities and mortgage-backed securities comprised 38.5% and 35.2% of the portfolio, respectively. As of December 31, 2020, municipal securities and mortgage-backed securities comprised 46.1% and 28.1% 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 June 30, 2021 were $2.53 billion, an increase of $246.6 million, or 10.8%, compared to $2.29 billion as of December 31, 2020. The majority of the deposit balance increase was due to the deposit of government stimulus payments and PPP funds into demand and money market accounts at the Bank, as well as apparent changes in depositor spending habits resulting from economic and other uncertainties due to COVID-19.
The following table presents the average balances on deposits for the periods indicated:
 
(dollars in thousands)
    For the Six
 Months Ended 
June 30, 2021		      For the Year
Ended
    December 31,    
2020		      Increase
    (Decrease)    
($)		     Increase
    (Decrease)    
(%)		  
NOW and interest-bearing demand accounts
    $ 377,153      $ 293,111      $ 84,042       28.67 % 
Savings accounts
      112,936        87,092        25,844       29.67 % 
Money market accounts
      736,307        642,239        94,068       14.65 % 
Certificates and other time deposits
      365,388        445,911        (80,523 )      (18.06 %) 
  
 
 
     
 
 
     
 
 
    
 
 
  
Total interest-bearing deposits
      1,591,784        1,468,353        123,431       8.41 % 
  
 
 
     
 
 
     
 
 
    
 
 
  
Noninterest-bearing demand accounts
      862,619        696,454        166,165       23.86 % 
  
 
 
     
 
 
     
 
 
    
 
 
  
Total deposits
    $ 2,454,403      $ 2,164,807      $ 289,596       13.38 % 
  
 
 
     
 
 
     
 
 
    
 
 
  
The aggregate amount of certificates and other time deposits in denominations of $100,000 or more as of June 30, 2021 and December 31, 2020 was $241.6 million and $266.3 million, respectively.
 
 
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The scheduled maturities of certificates and other time deposits greater than $100,000 were as follows:
 
     As of June 30, 2021  
(dollars in thousands)
    Amount          Weighted Average    
Interest Rate		  
Under 3 months
    $ 60,773        0.64 % 
3 to 6 months
      55,483        0.64 % 
6 to 12 months
      92,395        0.67 % 
12 to 24 months
      22,790        1.16 % 
24 to 36 months
      6,933        1.92 % 
36 to 48 months
      1,592        1.90 % 
Over 48 months
      1,641        0.56 % 
  
 
 
     
 
 
  
Total
    $                     241,607                            0.74 % 
  
 
 
     
 
 
  
Borrowings
We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
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 June 30, 2021 and December 31, 2020, total borrowing capacity of $548.7 million and $476.5 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within three years. As of June 30, 2021, approximately $1.39 billion in real estate loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to hedge interest rate risk.
The following table presents our FHLB borrowings by maturity and weighted average rate as of June 30, 2021:
 
(dollars in thousands)
    Balance          Weighted Average    
Interest Rate		  
Less than 90 days
    $ 41,500        0.19 % 
90 days to less than one year
      —        —  
One to three years
      7,500        1.81 % 
After three to five years
      —        —  
After five years
      —        —  
  
 
 
     
 
 
  
Total
    $                       49,000                            0.43 % 
  
 
 
     
 
 
  
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 June 30, 2021 and December 31, 2020, $166.7 million and $158.8 million, respectively, were available under this arrangement. As of June 30, 2021 and December 31, 2020, approximately $223.3 million and $214.5 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of June 30, 2021 and December 31, 2020, no borrowings were outstanding under this arrangement.
Trust Preferred Securities and Other Debentures.
We have issued subordinated debentures relating to the issuance of trust preferred securities. In October 2002, we formed Guaranty (TX) Capital Trust II, which issued $3.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $93,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $3.1 million of the Company’s junior subordinated debentures, which will mature on October 30, 2032. In July 2006, we formed Guaranty (TX) Capital Trust III, which issued $2.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $62,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $2.1 million of the Company’s junior subordinated debentures, which will mature on October 1, 2036. In March 2015, we acquired DCB Trust I, which issued $5.0 million in trust preferred securities to a third party in a private placement. Concurrent with the issuance of the trust preferred securities, the trust issued common securities to the Company in the aggregate liquidation value of $155,000. The trust invested the total proceeds from the sale of the trust preferred securities and the common securities in $5.2 million of the Company’s junior subordinated debentures, which will mature on June 15, 2037.
 
 
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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%. Interest on the Trust III Debentures was payable at a fixed rate per annum equal to 7.43% until October 1, 2016 and is a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.67%. Interest on the DCB Trust I Debentures is payable at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 1.80%. The interest is deferrable on a cumulative basis for up to five consecutive years following a suspension of dividend payments on all other capital stock. No principal payments are due until maturity for each of the debentures.
On any interest payment date on or after (1) June 15, 2012 for the DCB Trust I Debentures, (2) October 30, 2012 for the Trust II Debentures and (3) October 1, 2016 for the Trust III Debentures, and before their respective maturity dates, the debentures are redeemable, in whole or in part, for cash at our option on at least 30, but not more than 60, days’ notice at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date of redemption.
On May 1, 2020, the Company issued $10.0 million in debentures to directors and other related parties. The debentures have stated maturity dates between November 1, 2020 and November 1, 2024, and bear interest at fixed annual rates between 1.00% and 4.00%. The Company pays interest semi-annually on May 1st and November 1st in arrears during the term of the debentures. $500,000 matured in November of 2020 and $9.5 million remains as of June 30, 2021. The debentures are redeemable by the Company at its option, in whole in or part, at any time on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued but unpaid interest.
Other Borrowings.
We have historically used a line of credit with a correspondent bank as a source of funding for working capital needs, the payment of dividends when there is a temporary timing difference in cash flows, and repurchases of equity securities. In March 2017, we entered into an unsecured revolving line of credit for $25.0 million, and we renewed that line of credit in March 2021. The line of credit bears interest at the prime rate (3.25% as of June 30, 2021) subject to a floor of 3.50%, with quarterly interest payments, and matures in March 2022. As of June 30, 2021, there was no outstanding balance on the line of credit.
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events, such as COVID-19. For the six months ended June 30, 2021 and the year ended December 31, 2020, liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Although access to purchased funds from correspondent banks and overnight or longer term advances from the FHLB and the Federal Reserve Bank of Dallas are available, and have been utilized on occasion to take advantage of investment opportunities, we do not generally rely on these external funding sources. As of June 30, 2021 and December 31, 2020, we maintained two federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate $60.0 million in federal funds. There were no funds under these lines of credit outstanding as of June 30, 2021 and December 31, 2020. In addition to these federal funds lines of credit, our $25.0 million revolving line of credit discussed above in “
Other Borrowings”
provides an additional source of liquidity.
 
 
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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 $2.86 billion for the six months ended June 30, 2021 and $2.57 billion for the year ended December 31, 2020.
 
         For the Six Months    
Ended
June 30, 2021		         For the Year Ended    
    December 31, 2020    		  
Sources of Funds:
     
Deposits:
     
Noninterest-bearing
      30.19 %      27.09 % 
Interest-bearing
      55.70 %      57.11 % 
Advances from FHLB
      1.75 %      2.95 % 
Line of credit
      0.30 %      0.26 % 
Subordinated debentures
      0.69 %      0.67 % 
Securities sold under agreements to repurchase
      0.63 %      0.70 % 
Accrued interest and other liabilities
      0.88 %      0.96 % 
Shareholders’ equity
      9.86 %      10.26 % 
  
 
 
    
 
 
  
Total
      100.00 %      100.00 % 
  
 
 
    
 
 
  
    
Uses of Funds:
     
Loans
      65.33 %      71.72 % 
Securities available for sale
      13.97 %      13.17 % 
Securities held to maturity
      0.00 %      1.40 % 
Nonmarketable equity securities
      0.35 %      0.42 % 
Federal funds sold
      12.36 %      4.82 % 
Interest-bearing deposits in other banks
      0.95 %      5.70 % 
Other noninterest-earning assets
      7.04 %      2.77 % 
  
 
 
    
 
 
  
Total
      100.00 %      100.00 % 
  
 
 
    
 
 
  
    
Average noninterest-bearing deposits to average deposits
      35.15 %      32.17 % 
Average loans to average deposits
      77.41 %      86.52 % 
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans, including average loans held for sale, increased $106.1 million, or 5.9%, for the six months ended June 30, 2021 compared to the same period in 2020, while our average deposits increased $358.4 million, or 17.1%, for the same time periods. We predominantly invest excess deposits in overnight deposits with our correspondent banks, federal funds sold, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth.
As of June 30, 2021, we had $358.7 million in outstanding commitments to extend credit and $8.5 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2020, we had $324.3 million in outstanding commitments to extend credit and $8.5 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
As of June 30, 2021 and December 31, 2020, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of June 30, 2021, we had cash and cash equivalents of $447.2 million, compared to $351.8 million as of December 31, 2020. The increase was primarily due to an increase in federal funds sold of $166.3 million, offset by a decrease in interest-bearing deposits held at other banks of $60.6 million.
Capital Resources
Total shareholders’ equity increased to $287.7 million as of June 30, 2021, compared to $272.6 million as of December 31, 2020, an increase of $15.1 million, or 5.5%. The increase from December 31, 2020 was primarily the result of net earnings, partially offset by a decrease in other comprehensive income and payment of dividends. The Company also issued a 10.0% stock dividend in the first quarter of 2021 that resulted in an additional 1,093,932 shares of common stock issued.
 
 
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Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to certain regulatory capital requirements at the bank holding company and bank levels. As of June 30, 2021 and December 31, 2020, we were in compliance with all applicable regulatory capital requirements at the bank and bank holding company levels, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to learn about the economic impacts of COVID-19, our regulatory capital levels may decrease depending on our level of earnings and provisions for credit losses. However, we expect to closely monitor our loan portfolio, operating expenses and overall capital levels in order to remain in compliance with all regulatory capital standards applicable to us.
The following table presents our regulatory capital ratios as of:
 
                                                           
     June 30, 2021     December 31, 2020  
(dollars in thousands)
        Amount              Ratio             Amount              Ratio      
Guaranty Bancshares, Inc. (consolidated)
           
          
Total capital (to risk weighted assets)
    $ 280,300        14.52 %    $ 263,144        13.20 % 
Tier 1 capital (to risk weighted assets)
      256,077        13.26 %      238,115        11.94 % 
Tier 1 capital (to average assets)
      256,077        8.86 %      238,115        9.13 % 
Common equity tier 1 risk-based capital
      245,767        12.73 %      227,805        11.43 % 
          
Guaranty Bank & Trust, N.A.
           
          
Total capital (to risk weighted assets)
    $     289,779        15.01 %    $     285,490        14.32 % 
Tier 1 capital (to risk weighted assets)
      265,556        13.76 %      260,459        13.06 % 
Tier 1 capital (to average assets)
      265,556        9.19 %      260,459        9.99 % 
Common equity tier 1 risk-based capital
      265,556        13.76 %      260,459        13.06 % 
Contractual Obligations
The following table summarizes contractual obligations and other commitments to make future payments as of June 30, 2021 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.
 
     As of June 30, 2021  
(in thousands)
    1 year
or less		      More than 1
year but less
than 3 years		      3 years or
more but less
than 5 years		      5 years
or more		      Total  
Time deposits
    $ 296,868        44,545      $ 7,218      $ —      $ 348,631  
Advances from FHLB
      41,500        7,500        —        —        49,000  
Subordinated debentures
      —        7,500        2,000        10,310        19,810  
Operating leases
      843        3,538        3,607        7,563        15,551  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $     339,211      $ 63,083      $ 12,825      $     17,873      $     432,992  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
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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Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of June 30, 2021 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
 
     As of June 30, 2021  
(in thousands)
    1 year
or less		      More than
1 year but
less than
3 years		      3 years or
more but
less than
5 years		      5 years
or more		      Total  
Standby and commercial letters of credit
    $ 3,623      $ 1,678      $ 375      $ 2,835      $ 8,511  
Commitments to extend credit
      194,829        80,640        981        82,275        358,725  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 198,452      $ 82,318      $ 1,356      $ 85,110      $ 367,236  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers. Management evaluated the likelihood of funding the standby and commercial letters of credit as of June 30, 2021, and determined the likelihood to be improbable. Therefore, no ACL was recorded for standby and commercial letters of credit as of June 30, 2021.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.
Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management believes the credit risk of these off balance sheet items is minimal and we recorded no ACL with respect to these loan agreements as of June 30, 2021.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
 
 
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Our exposure to interest rate risk is managed by the asset-liability committee of the Bank, in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a twelve-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 15.0% for a 100 basis point shift, 20.0% for a 200 basis point shift and 30.0% for a 300 basis point shift.
The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of:
 
     June 30, 2021     December 31, 2020  
Change in Interest Rates (Basis Points)    Percent Change
in Net Interest
Income		     Percent Change
in Fair Value
of Equity		     Percent Change
in Net Interest
Income		     Percent Change
in Fair Value
of Equity		  
+300
      7.10 %      7.76 %      4.40 %      5.04 % 
+200
      4.23 %      7.20 %      2.62 %      4.45 % 
+100
      1.55 %      3.51 %      1.42 %      3.35 % 
Base
      —       —       —       —  
-100
      (1.96 )%      7.38 %      (1.92 )%      3.96 % 
The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this Report have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or 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.
 
 
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Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Report may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Report when comparing such non-GAAP financial measures.
Tangible Book Value Per Common Share
. Tangible book value per common share is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as total shareholders’ equity, 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 June 30,     As of December 31,  
(dollars in thousands, except per share data)
    2021     2020     2020  
Tangible Common Equity
       
Total shareholders’ equity
    $ 287,729     $ 258,875     $ 272,643  
Adjustments:
       
Goodwill
      (32,160 )      (32,160 )      (32,160 ) 
Core deposit intangible, net
      (2,573 )      (3,426 )      (2,999 ) 
  
 
 
    
 
 
    
 
 
  
Total tangible common equity
    $ 252,996     $ 223,289     $ 237,484  
  
 
 
    
 
 
    
 
 
  
Common shares outstanding*
(1)
                  12,057,937                   12,115,184                   12,028,957  
Book value per common share*
    $ 23.86     $ 21.37     $ 22.67  
Tangible book value per common share*
    $ 20.98     $ 18.43     $ 19.74  
(1) Excludes the dilutive effect, if any, of 168,311, 0 and 32,781 shares of common stock issuable upon exercise of outstanding stock options as of June 30, 2021 and 2020, and December 31, 2020, respectively.
Tangible Common Equity to Tangible Assets
. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.
We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.
 
 
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The following table reconciles, as of the dates set forth below, total tangible common equity and total assets to tangible assets:
 
(dollars in thousands)
        As of June 30, 2021         As of December 31, 2020  
Total tangible common equity
    $ 252,996     $ 237,484  
Tangible Assets
     
Total assets
      2,932,959       2,740,832  
Adjustments:
     
Goodwill
      (32,160 )      (32,160 ) 
Core deposit intangible, net
      (2,573 )      (2,999 ) 
  
 
 
    
 
 
  
Total tangible assets
    $ 2,898,226     $ 2,705,673  
  
 
 
    
 
 
  
    
Total Shareholders’ Equity to Total Assets
      9.81 %      9.95 % 
Tangible Common Equity to Tangible Assets
      8.73 %      8.78 % 
The following tables reconcile, as of and for the dates set forth below, various metrics impacted by the effects of COVID-19 on reported data.
Net Core Earnings and Net Core Earnings per Common Share
 
    
Six Months Ended

June 30,
   
Three Months Ended

June 30,
    
Three Months
Ended

March 31,
  
(dollars in thousands, except per share data)
   
2021
    
2020
    
2021
    
2020
    
2021
  
Net earnings
    $ 21,394     $ 7,353     $ 10,432     $ 1,075     $ 10,962  
Adjustments:
           
Provision for credit losses
      (1,000 )      13,500       (1,000 )      12,100       —  
Income tax provision
      4,648       1,255       2,312       (190 )      2,336  
PPP loans, including fees
      (5,859 )      (2,540 )      (1,954 )      (2,540 )      (3,905 ) 
Net interest expense on PPP-related borrowings
      —       31       —       31       —  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net core earnings
    $ 19,183     $ 19,599     $ 9,790     $ 10,476     $ 9,393  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
          
Weighted-average common shares outstanding, basic*              12,047,643           12,352,074           12,056,550           12,128,516           12,038,638  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Earnings per common share, basic*    $ 1.78     $ 0.59     $ 0.87     $ 0.09     $ 0.91  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net core earnings per common share, basic*      1.59       1.59       0.81       0.86       0.78  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
* Adjusted to give effect to the 10% stock dividend issued during the first quarter of 2021.
Net Core Earnings to Average Assets, as Adjusted, and Average Equity
 
    
Six Months Ended

June 30,
   
Three Months Ended

June 30,
    
Three Months
Ended

March 31,
  
(dollars in thousands)
   
2021
    
2020
    
2021
    
2020
    
2021
  
Net core earnings
    $ 19,183     $ 19,599     $ 9,790     $ 10,476     $ 9,393  
Total average assets
          2,857,707           2,491,614           2,938,944           2,657,609               2,775,567  
Adjustments:
           
PPP loans average balance
      (146,103 )      (81,592 )      (155,417 )      (163,184 )      (137,251 ) 
Excess fed funds sold due to PPP-related borrowings
      —       (42,033 )      —       (84,066 )      —  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total average assets, adjusted
    $ 2,711,604     $ 2,367,989     $ 2,783,527     $ 2,410,359     $ 2,638,316  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net core earnings to average assets, as adjusted      1.43       1.66       1.41       1.75       1.44  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total average equity
    $ 281,730     $ 259,275     $ 285,803     $ 258,225     $ 277,612  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net core earnings to average equity
      13.73       15.20       13.74       16.32       13.72  
 
 
(Continued)
80. 
Table of Contents
Total Interest-Earning Assets, net of PPP Effects
 
    For the Three Months Ended
June 30, 2021		     For the Six Months Ended
June 30, 2021		  
(dollars in thousands)
   Average
Outstanding
Balance		     Interest
Earned/
Interest
Paid		     Average
Yield/Rate		     Average
Outstanding
Balance		     Interest
Earned/
Interest
Paid		     Average
Yield/Rate		  
Total interest-earning assets
   $ 2,769,054     $ 25,284       3.66 %    $ 2,689,617     $ 51,797       3.88 % 
           
Total loans
     1,912,722       22,864       4.79       1,899,864       47,059       4.99  
Adjustments:
            
PPP loan average balance and net fees
(1)
     (155,417 )      (1,747 )      4.51       (146,103 )      (5,260 )      7.26  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total loans, net of PPP effects
     1,757,305       21,117       4.82       1,753,761       41,799       4.81  
           
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-earning assets, net of PPP effects
   $     2,613,637     $         23,537       3.61 %    $     2,543,514     $         46,537       3.69 % 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
(1) Interest earned consists of interest income of $385,000 and $720,000, and net origination fees recognized in earnings of $1.4 million and $4.5 million for the three and six months ended June 30, 2021, respectively.
Net Interest Income and Net Interest Margin, Net of PPP Effects
 
(dollars in thousands)
   Three Months
Ended
  June 30, 2021  		     Six Months
Ended
  June 30, 2021  		     Three Months
Ended
  March 31, 2021  		     Three Months
Ended
  June 30, 2020  		  
Net interest income
   $ 23,477     $ 47,968     $ 24,491     $ 23,182  
Adjustments:
        
PPP-related interest income
     (385 )      (720 )      (335 )      (407 ) 
PPP-related net origination fees
     (1,362 )      (4,540 )      (3,178 )      (2,133 ) 
PPP-related borrowings
     —       —       —       31  
 
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income, net of PPP effects
   $ 21,730     $ 42,708     $ 20,978     $ 20,673  
 
 
 
    
 
 
    
 
 
    
 
 
  
       
Total average interest-earning assets
   $ 2,769,054     $ 2,689,617     $ 2,609,299     $ 2,486,636  
 
 
 
    
 
 
    
 
 
    
 
 
  
Total average interest-earning assets, net of PPP effects
     2,613,637       2,543,514       2,472,048       2,239,386  
 
 
 
    
 
 
    
 
 
    
 
 
  
       
Net interest margin
(1)
     3.40 %      3.60 %      3.81 %      3.75 % 
 
 
 
    
 
 
    
 
 
    
 
 
  
Net interest margin, net of PPP effects
(2)
     3.33       3.39       3.44       3.71  
 
 
 
    
 
 
    
 
 
    
 
 
  
       
Net interest income
   $ 23,477     $ 47,968     $ 24,491     $ 23,182  
Interest income tax adjustments
     269       520       250       212  
 
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income, fully taxable equivalent (“FTE”)
   $ 23,746     $ 48,488     $ 24,741     $ 23,394  
 
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income, FTE, net of PPP effects
     21,999       43,228       21,228       20,885  
 
 
 
    
 
 
    
 
 
    
 
 
  
       
Net interest margin, FTE
(3)
     3.44       3.64       3.85       3.78  
 
 
 
    
 
 
    
 
 
    
 
 
  
Net interest margin, FTE, net of PPP effects
(4)
     3.38       3.43       3.48       3.75  
 
 
 
    
 
 
    
 
 
    
 
 
  
(1) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(2) Net interest margin is equal to net interest income, net of PPP effects, divided by average interest-earning assets, excluding average PPP loans, annualized. Taxes are not a part of this calculation.
(3) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.
(4) Net interest margin on a taxable equivalent basis is equal to net interest income, net of PPP effects, adjusted for nontaxable income divided by average interest-earning assets, excluding average PPP loans, annualized, using a marginal tax rate of 21%.
 
 
(Continued)
81. 
Table of Contents
Efficiency Ratio, Net of PPP Effects
 
(dollars in thousands)
   Three Months
Ended
  June 30, 2021  		     Six Months
Ended
  June 30, 2021  		     Three Months
Ended
  March 31, 2021  		     Three Months
Ended
  June 30, 2020  		  
Total noninterest expense
   $ 17,703     $ 35,015     $ 17,312     $ 15,184  
Adjustments:
        
PPP-related deferred costs
     207       599       392       838  
 
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest expense, net of PPP effects
   $ 17,910     $ 35,614     $ 17,704     $ 16,022  
 
 
 
    
 
 
    
 
 
    
 
 
  
       
Net interest income
     23,477       47,968       24,491       23,182  
 
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income, net of PPP effects
     21,730       42,708       20,978       20,673  
 
 
 
    
 
 
    
 
 
    
 
 
  
       
Total noninterest income
   $ 5,970     $ 12,089     $ 6,119     $ 4,987  
       
Efficiency ratio
(1)
     60.12 %      58.30 %      56.56 %      53.90 % 
 
 
 
    
 
 
    
 
 
    
 
 
  
Efficiency ratio, net of PPP effects
(2)
     64.66       64.99       65.34       62.44  
 
 
 
    
 
 
    
 
 
    
 
 
  
(1) The efficiency ratio was calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.
(2) The efficiency ratio, net of PPP effects, was calculated by dividing total noninterest expense, net of PPP-related deferred costs, by net interest income, net of PPP effects, plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.
ACL to Total Loans, Excluding PPP
 
(dollars in thousands)
   As of
    June 30, 2021    		     As of
    December 31, 2020    		  
Total loans
  
$
1,890,164
 
  
$
1,866,819
 
Adjustments:
    
PPP loans
  
 
(127,390
) 
  
 
(139,808
) 
 
 
 
    
 
 
  
Total loans, excluding PPP
  
$
1,762,774
 
  
$
1,727,011
 
   
Allowance for credit losses
  
$
31,548
 
  
$
33,619
 
   
Allowance for credit losses / period-end loans
  
 
1.67
% 
  
 
1.80
% 
Allowance for credit losses / period-end loans. excluding PPP
     1.79       1.95  
Loan Yield, Net of PPP Effects
 
    Three Months Ended June 30, 2021     Three Months Ended March 31, 2021  
(dollars in thousands)
   Average
Outstanding
Balance		     Interest
Earned/
    Interest    
Paid		     Average
  Yield/ Rate  		     Average
Outstanding
Balance		     Interest
Earned/
    Interest    
Paid		     Average
  Yield/ Rate  		  
Total loans
   $ 1,912,722     $ 22,864       4.79 %    $ 1,886,863     $ 24,195       5.20 % 
Adjustments:
            
PPP loans average balance and net fees
     (155,417 )      (1,747 )      4.51       (137,251 )      (3,513 )      10.38  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total loans, net of PPP effects
   $       1,757,305     $ 21,117       4.82 %    $       1,749,612     $ 20,682       4.79 % 
     
 
 
        
 
 
  
Effect of removing PPP loans on loan yield
         0.03 %          -0.41 % 
 
    Three Months Ended June 30, 2021     Three Months Ended June 30, 2020  
(dollars in thousands)
   Average
Outstanding
Balance		     Interest
Earned/
    Interest    
Paid		     Average
  Yield/ Rate  		     Average
Outstanding
Balance		     Interest
Earned/
    Interest    
Paid		     Average
  Yield/ Rate  		  
Total loans
   $ 1,912,722     $ 22,864       4.79 %    $ 1,885,959     $ 24,139       5.15 % 
Adjustments:
            
PPP loans average balance and net fees
     (155,417 )      (1,747 )      4.51       (163,184 )      (2,540 )      6.26  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total loans, net of PPP effects
   $       1,757,305     $ 21,117       4.82 %    $       1,722,775     $ 21,599       5.04 % 
     
 
 
        
 
 
  
Effect of removing PPP loans on loan yield
         0.03 %          -0.11 % 
 
    Six Months Ended June 30, 2021     Six Months Ended June 30, 2020  
(dollars in thousands)
   Average
Outstanding
Balance		     Interest
Earned/
    Interest    
Paid		     Average
  Yield/ Rate  		     Average
Outstanding
Balance		     Interest
Earned/
    Interest    
Paid		     Average
  Yield/ Rate  		  
Total loans
   $ 1,912,722     $ 22,864       4.79 %    $ 1,899,864     $ 47,059       4.99 % 
Adjustments:
            
PPP loans average balance and net fees
  
 
(155,417
) 
  
 
(1,747
) 
  
 
4.51
 
  
 
(146,103
) 
  
 
(5,260
) 
  
 
7.26
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total loans, net of PPP effects
   $       1,757,305     $ 21,117       4.82 %    $       1,753,761     $ 41,799       4.81 % 
     
 
 
        
 
 
  
Effect of removing PPP loans on loan yield
         0.03 %          -0.18 % 
 
 
(Continued)
82. 
Table of Contents
Cautionary Notice Regarding Forward-Looking Statements
This Report, our other filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of section 27A of the Securities Act and section 21E of the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of the operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
 
 
●
  
the impact of COVID-19, including any variants thereof, on our business, including the impact of the actions taken by federal, state and local governmental authorities in response to COVID-19 (including, without limitation, interest rate policy, restrictions on the operation of businesses, the CARES Act and any other economic stimulus and recovery measures), and the resulting effect of all such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
 
●
  
our ability to prudently manage our growth and execute our strategy;
 
●
  
risks associated with our acquisition and de novo branching strategy;
 
●
  
business and economic conditions generally and in the financial services industry, nationally and within our primary Texas markets;
 
●
  
concentration of our business within our geographic areas of operation in Texas;
 
●
  
deterioration of our asset quality and higher loan charge-offs;
 
●
  
changes in the value of collateral securing our loans;
 
●
  
inaccuracies in the assumptions and estimate we make in establishing the allowance for credit losses reserve and other estimates;
 
●
  
changes in management personnel and our ability to attract, motivate and retain qualified personnel;
 
●
  
liquidity risks associated with our business;
 
●
  
interest rate risk associated with our business that could decrease net interest income;
 
●
  
our ability to maintain important deposit customer relationships and our reputation;
 
●
  
operational risks associated with our business;
 
●
  
volatility and direction of market interest rates;
 
●
  
change in regulatory requirements to maintain minimum capital levels;
 
●
  
increased competition in the financial services industry, particularly from regional and national institutions;
 
●
  
institution and outcome of litigation and other legal proceeding against us or to which we become subject;
 
●
  
changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;
 
●
  
further government intervention in the U.S. financial system;
 
●
  
changes in the scope and cost of FDIC insurance and other coverage;
 
●
  
natural disasters and adverse weather, acts of terrorism (including cyberattacks), an outbreak of hostilities or public health outbreaks (such as COVID-19), or other international or domestic calamities, and other matters beyond our control;
 
 
(Continued)
83. 
Table of Contents
 
●
  
risks that the financial institutions we may acquire or de novo branches we may open will not be integrated successfully, or the integrations may be more time consuming or costly than expected;
 
●
  
technology related changes are difficult to make or are more expensive than expected; and
 
●
  
the other factors that are described under the caption “Risk Factors” or referenced in this report, our Annual Report on Form 10-K for the year ended December 31, 2020, and other risks included in the Company’s filings with the SEC.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company manages market risk, which, as a financial institution is primarily interest rate volatility, through the Asset-Liability Committee of the Bank, in accordance with policies approved by its board of directors. The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Sensitivity and Market Risk” herein for a discussion of how we manage market risk.
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 June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
(Continued)
84. 
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. The Company intends to defend itself vigorously against any pending or future claims and litigation.
At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the Company’s combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect the Company’s reputation, even if resolved in the Company’s favor.
Item 1A. Risk Factors
In evaluating an investment in the Company’s common stock, investors should consider carefully, among other things, the risk factors previously disclosed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and other risks included in the Company’s filings with the SEC. The Company’s business could be harmed by any of these risks. The trading price of the Company’s common stock could decline due to any of these risks, and you may lose all or part of your investment. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
 
 
(Continued)
85. 
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 13, 2020, the Company announced the adoption of a new stock repurchase program that authorized the repurchase of up to 1,000,000 shares of the Company common stock. The stock repurchase program will be effective until the earlier of March 13, 2022, or the date all shares authorized for repurchase under the program have been repurchased, unless shortened or extended by the board of directors. There were no repurchases made through the second quarter of 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
 
 
(Continued)
86. 
Table of Contents
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   
Inline
 
XBRL Taxonomy Extension Schema Document*
   
101.CAL   
Inline
 
XBRL Taxonomy Extension Calculation Linkbase Document*
   
101.DEF   
Inline
 
XBRL Taxonomy Extension Definition Linkbase Document*
   
101.LAB   
Inline
 XBRL Taxonomy Extension Label Linkbase Document*
   
101.PRE   
Inline
 
XBRL Taxonomy Extension Presentation Linkbase Document*

104               Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*
 
*
Filed with this Quarterly Report on Form 10-Q
**
Furnished with this Quarterly Report on Form 10-Q
 
 
(Continued)
87. 
Table of Contents
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: August 6, 2021
          
/s/ Tyson T. Abston
           
Tyson T. Abston
           
Chairman of the Board & Chief Executive Officer
       
Date: August 6, 2021
          
/s/ Clifton A. Payne
           
Clifton A. Payne
           
Chief Financial Officer & Director
 
 
88.