UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 2021, there were 12,086,977 outstanding shares of the registrant’s common stock, par value $1.00 per share.
PART I — FINANCIAL INFORMATION
Page
Item 1.
Financial Statements – (Unaudited)
3
Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020
Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2021 and 2020
4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020
5
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020
6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
86
Item 4.
Controls and Procedures
PART II — OTHER INFORMATION
Legal Proceedings
87
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
88
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
89
SIGNATURES
90
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
(Audited)
September 30, 2021
December 31, 2020
ASSETS
Cash and due from banks
$
34,741
47,836
Federal funds sold
346,500
218,825
Interest-bearing deposits
27,634
85,130
Total cash and cash equivalents
408,875
351,791
Securities available for sale
269,070
380,795
Securities held to maturity
173,676
—
Loans held for sale
1,903
5,542
Loans, net of allowance for credit losses of $30,621 and $33,619, respectively
1,938,268
1,831,737
Accrued interest receivable
7,673
9,834
Premises and equipment, net
53,834
55,212
Other real estate owned
40
404
Cash surrender value of life insurance
36,582
35,510
Core deposit intangible, net
2,426
2,999
Goodwill
32,160
Other assets
43,761
34,848
Total assets
2,968,268
2,740,832
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing
972,854
779,740
Interest-bearing
1,590,217
1,506,650
Total deposits
2,563,071
2,286,390
Securities sold under agreements to repurchase
11,195
15,631
Accrued interest and other liabilities
26,284
25,257
Line of credit
3,000
12,000
Federal Home Loan Bank advances
47,500
109,101
Subordinated debentures
19,810
Total liabilities
2,670,860
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, 14,097,738 and 12,951,676 shares issued, and 12,081,477 and 10,935,415 shares outstanding, respectively
14,098
12,952
Additional paid-in capital
224,458
188,032
Retained earnings
100,910
113,449
Treasury stock, 2,016,261 shares at cost
(51,419
)
Accumulated other comprehensive income
9,361
9,629
Total shareholders' equity
297,408
272,643
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
3.
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(Dollars in thousands, except per share data)
Three Months EndedSeptember 30,
Nine Months EndedSeptember 30,
2021
2020
Interest income
Loans, including fees
22,605
22,681
69,664
69,337
Securities
Taxable
1,203
1,051
3,393
3,532
Nontaxable
1,050
1,074
3,142
3,135
Federal funds sold and interest-bearing deposits
377
150
833
785
Total interest income
25,235
24,956
77,032
76,789
Interest expense
1,348
2,285
4,444
9,746
FHLB advances and federal funds purchased
107
141
308
346
182
192
558
511
Other borrowed money
28
59
184
156
Total interest expense
1,665
2,677
5,494
10,759
Net interest income
23,570
22,279
71,538
66,030
Provision for credit losses
(700
(300
(1,700
13,200
Net interest income after provision for credit losses
24,270
22,579
73,238
52,830
Noninterest income
Service charges
1,003
717
2,687
2,196
Net realized gain on sale of loans
1,759
2,114
4,401
4,811
Other income
3,687
3,832
11,450
9,604
Total noninterest income
6,449
6,663
18,538
16,611
Noninterest expense
Employee compensation and benefits
10,998
9,439
31,145
26,982
Occupancy expenses
2,738
2,597
8,258
7,624
Other expenses
5,551
4,722
14,899
13,743
Total noninterest expense
19,287
16,758
54,302
48,349
Income before income taxes
11,432
12,484
37,474
21,092
Income tax provision
2,179
2,350
6,827
3,605
Net earnings
9,253
10,134
30,647
17,487
Basic earnings per share*
0.77
0.84
2.54
1.43
Diluted earnings per share*
0.76
2.51
* Periods prior to the stock dividend issued during the first quarter of 2021 have been adjusted to give effect to the 10% stock dividend.
4.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Other comprehensive income (loss):
Unrealized gains (losses) on securities, net of tax
1,654
397
(1,268
12,094
Unrealized gains (losses) on interest rate swaps
Unrealized holding gains (losses) arising during the period
62
99
534
(730
Reclassification of realized losses on interest rate swap termination from accumulated other comprehensive income
466
528
1,000
Total other comprehensive income (loss)
2,182
496
(268
11,364
Comprehensive income
11,435
10,630
30,379
28,851
5.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
PreferredStock
CommonStock
AdditionalPaid-inCapital
RetainedEarnings
TreasuryStock
AccumulatedOtherComprehensiveIncome
TotalShareholders’Equity
For the Nine Months Ended September 30, 2021
Balance at December 31, 2020
Other comprehensive loss
10% stock dividend
1,094
34,853
(35,947
Exercise of stock options
48
1,065
1,113
Restricted stock grants
(4
Stock based compensation
512
Cash dividends:
Common - $0.60 per share
(7,239
Balance at September 30, 2021
For the Three Months Ended September 30, 2021
Balance at June 30, 2021
14,074
223,822
94,073
7,179
287,729
Other comprehensive income
20
457
477
183
Common - $0.20 per share
(2,416
6.
For the Nine Months Ended September 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
68
72
Purchase of treasury stock
(14,110
494
Common - $0.53 per share*
(6,412
Balance at September 30, 2020
12,909
187,254
105,721
(48,602
9,571
266,853
For the Three Months Ended September 30, 2020
Balance at June 30, 2020
12,908
187,073
97,788
(47,969
9,075
258,875
1
(1
(633
Dividends:
Common - $0.18 per share*
(2,201
7.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months EndedSeptember 30,
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation
3,294
3,045
Amortization
932
1,010
Deferred taxes
(181
(2,949
Premium amortization, net of discount accretion
3,291
2,948
Gain on sale of loans
(4,401
(4,811
Origination of loans held for sale
(84,944
(121,628
Proceeds from loans held for sale
92,984
119,659
Write-down of other real estate and repossessed assets
358
Net gain on sale of premises, equipment, other real estate owned and other assets
16
103
Net change in accrued interest receivable and other assets
(5,034
(2,607
Net change in accrued interest payable and other liabilities
1,799
1,897
Net cash provided by operating activities
37,221
28,206
Cash flows from investing activities
Securities available for sale:
Purchases
(125,826
(333,838
Proceeds from maturities and principal repayments
63,264
342,452
Securities held to maturity:
(7,797
938
3,024
Net originations of loans
(105,333
(248,409
Purchases of premises and equipment
(1,912
(5,148
Proceeds from BOLI death benefit
464
Proceeds from sale of premises, equipment, other real estate owned and other assets
319
509
Net cash used in investing activities
(175,883
(241,410
8.
Cash flows from financing activities
Net change in deposits
276,681
266,278
Net change in securities sold under agreements to repurchase
(4,436
9,420
Proceeds from FHLB advances
120,000
290,000
Repayment of FHLB advances
(181,601
(246,013
Proceeds from line of credit
8,000
25,000
Repayment of line of credit
(17,000
(18,000
Proceeds from issuance of debentures
10,000
Repayments of debentures
(500
Cash dividends
(7,011
(6,286
Net cash provided by financing activities
195,746
315,861
Net change in cash and cash equivalents
57,084
102,657
Cash and cash equivalents at beginning of period
90,714
Cash and cash equivalents at end of period
193,371
Supplemental disclosures of cash flow information
Interest paid
5,743
11,456
Income taxes paid
7,850
5,545
Supplemental schedule of noncash investing and financing activities
Cash dividends accrued
2,416
2,201
Held to maturity securities transferred to available for sale
152,486
Available for sale securities transferred to held to maturity
172,292
Transfer of loans to other real estate owned and repossessed assets
502
221
Stock dividend
35,947
9.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
(Continued)
10.
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.
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 September 30, 2021. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations, as well as business and consumer confidence. As a result of the spread of COVID-19 and its variants, economic uncertainties have arisen which can negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impact remains unknown at this time.
Allowance for Credit Losses:
Held to Maturity Debt Securities
The allowance for credit losses on held to maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held to maturity securities to present management's best estimate of the net amount expected to be collected. Held to maturity securities are charged-off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses. Management measures expected credit losses on held to maturity securities on a collective basis by major security type with each types sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held to maturity securities from the estimate of 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.
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 a security is uncollectible or when either of the criteria regarding intent to sell or required to sell is met. Accrued interest receivable on securities is excluded from the estimate of credit losses.
11.
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.
12.
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.
13.
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.
14.
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:
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.
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.
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.
In assessing risk associated with farmland loans, management considers the borrower’s cash flows and underlying property values to be key credit quality indicators.
Management considers delinquency status to be the primary credit quality indicator of consumer loans. Others include the debt to income ratio of the borrower, the borrower’s credit history, the availability of other credit to the borrower, the borrower’s past-due history, and, if applicable, the value of the underlying collateral to be primary credit quality indicators.
Management considers delinquency status to be the primary credit quality indicator of 1-4 family residential loans. Others include changes in the local economy, changes in property values, and changes in local unemployment rates to be key credit quality indicators of the loans in the 1-4 family residential loan segment.
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.
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
15.
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.
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 available for sale and held to maturity securities as of September 30, 2021 and securities available for sale as of December 31, 2020 and the corresponding amounts of gross unrealized gains and losses:
AmortizedCost
GrossUnrealizedGains
GrossUnrealized Losses
EstimatedFairValue
Available for sale:
U.S. government agencies
10,013
46
10,059
Corporate bonds
34,105
1,233
92
35,246
Mortgage-backed securities
157,846
2,143
847
159,142
Collateralized mortgage obligations
63,272
1,405
54
64,623
Total available for sale
265,236
4,827
993
Held to maturity:
Municipal securities
170,634
9,139
147
179,626
3,042
37
3,005
Total held to maturity
182,631
29,608
1,382
30,982
164,668
11,036
175,704
104,210
3,041
107,164
64,611
2,335
66,945
363,097
17,794
96
16.
There is no allowance for credit losses recorded for our available for sale or held to maturity debt securities as of September 30, 2021 or December 31, 2020.
Information pertaining to securities with gross unrealized losses as of September 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
GrossUnrealizedLosses
(92
7,678
(803
68,150
(44
3,276
(847
71,426
(54
18,203
(949
94,031
(993
97,307
(147
4,381
(37
3,006
(184
7,387
(8
2,493
(87
25,775
106
(95
28,268
(96
28,374
There were 26 investments in an unrealized loss position, and 22 available for sale debt securities in an unrealized loss position with no recorded allowance for credit losses at September 30, 2021. The available for sale securities in a loss position were composed of corporate bonds, collateralized mortgage obligations and mortgage-backed securities. Management evaluates available for sale debt securities in an unrealized loss position to determine whether the impairment is due to credit-related factors or noncredit-related factors. With respect to 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 September 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
17.
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.
Management assesses held to maturity securities sharing similar risk characteristics on a collective basis for expected credit losses under CECL. As of September 30, 2021, our held to maturity securities consisted of municipal bonds and mortgage-backed securities issued by the U.S. Government and its agencies. With regard to the mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. For municipal securities, management reviewed key risk indicators, including ratings by credit agencies when available, and determined that there is no current expectation of credit loss. Accordingly, no allowance for credit losses has been recorded for these securities.
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 September 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.
Securities with fair values of approximately $279,726 and $314,962 at September 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 nine months ended September 30, 2021 or 2020.
From time to time, we have reclassified certain securities from available for sale to held to maturity. Such transfers are made at fair value at the date of transfer. The unrealized holding gains at the date of transfer are retained in other comprehensive income and in the carrying value of the held to maturity securities and are amortized over the remaining life of the security. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income in the accompanying balance sheet totaled $9,684 at September 30, 2021. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.
The contractual maturities at September 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
Held to Maturity
Due within one year
4,802
4,868
Due after one year through five years
14,645
15,430
48,612
50,466
Due after five years through ten years
29,473
29,875
50,369
53,350
Due after ten years
66,851
70,942
Total securities
NOTE 3 - LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the Company’s loan portfolio by type of loan as of:
18.
Commercial and industrial
308,647
356,291
Real estate:
Construction and development
309,746
270,407
Commercial real estate
633,353
594,216
Farmland
135,413
78,508
1-4 family residential
403,403
389,096
Multi-family residential
40,810
21,701
Consumer
52,992
51,044
Agricultural
14,199
15,734
Warehouse lending(1)
71,823
89,480
Overdrafts
495
342
Total loans(2)
1,970,881
1,866,819
Net of:
Deferred loan fees, net
(1,992
(1,463
Allowance for credit losses
(30,621
(33,619
Total net loans(2)
(1) Warehouse lending is presented as a component of commercial and industrial loans on remaining tables.
(2) Excludes accrued interest receivable on loans of $5.8 million and $7.0 million as of September 30, 2021 and December 31, 2020, respectively, which is presented separately on the consolidated balance sheets.
19.
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 nine months ended September 30, 2021, for the year ended December 31, 2020 and for the nine months ended September 30, 2020:
Commercialand industrial
Constructionand development
Commercialreal estate
1-4 familyresidential
Multi-familyresidential
Allowance for credit losses:
Beginning balance
4,033
4,735
15,780
1,220
6,313
363
929
239
7
33,619
(774
(670
365
(559
213
(61
(73
127
Loans charged-off
(816
(113
(173
(1,402
Recoveries
15
11
32
104
Ending balance
3,480
3,962
14,305
1,585
5,754
576
787
166
30,621
For the Year Ended December 31, 2020
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
73
(9
4,548
1,398
2,034
6,698
624
1,915
373
(33
187
(68
(155
(18
(234
(543
101
2
51
212
1,366
6,613
694
1,778
(34
407
(43
(59
(136
(128
(384
93
30
191
4,018
4,929
15,695
1,290
6,185
325
975
331
9
33,757
20.
During the year ended December 31, 2020, a total allowance for credit losses provision of $13,200 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. We recorded no provision in the first quarter of 2021, a $1,000 reverse provision in the second quarter and a $700 reverse provision in the third quarter. These provision reversals capture the improvements that have occurred to macroeconomic factors evaluated at the onset of the pandemic as part of the aforementioned COVID-specific qualitative factors, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model, offset by growth in our overall loan portfolio. Although management is cautiously optimistic about improving vaccination and hospitalization rates and economic trends, it is very likely that the economic effects of the pandemic will continue into 2022.
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 judgment 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.
21.
The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of September 30, 2021:
2019
2018
2017
Prior
Revolving Loans Amortized Cost
Pass
199,537
40,901
20,982
9,595
4,333
17,616
86,768
379,732
Special mention
21
117
Substandard
278
60
196
43
582
Nonaccrual
25
14
39
Total commercial and industrial loans
41,275
21,042
9,816
4,397
17,635
380,470
Charge-offs
(167
(67
(19
(47
Current period net
(32
(285
153,740
78,121
29,164
7,149
16,405
14,347
8,313
307,239
710
955
609
612
230
Total construction and development loans
78,831
30,003
7,152
17,360
100,853
98,665
80,197
64,919
44,565
176,005
14,699
579,903
398
2,439
4,591
1,629
9,057
7,040
10,124
13,110
13,732
44,006
33
387
Total commercial real estate loans
101,251
105,765
77,555
62,299
191,587
(17
(56
(472
(271
(461
(805
72,382
12,776
8,683
8,541
5,345
21,626
5,777
135,130
118
109
137
Total farmland loans
21,881
5,805
22.
101,523
72,986
48,075
38,577
29,077
97,575
13,368
401,181
57
383
254
1,344
2,165
Total 1-4 family residential loans
48,259
38,960
29,331
98,976
13,113
4,312
4,392
15,448
545
2,194
131
40,135
675
Total multi-family residential loans
Consumer and overdrafts:
21,949
14,015
5,654
5,400
820
656
4,838
53,332
22
70
145
Total consumer loans and overdrafts
21,957
14,041
5,685
5,470
829
667
53,487
(180
(38
(2
(286
19
77
(135
(31
(24
(209
2,611
2,081
1,052
1,082
275
592
6,366
14,059
31
13
Total agricultural loans
2,101
1,057
1,122
337
605
Total loans:
665,708
323,857
198,199
150,711
101,365
330,611
140,260
1,910,711
807
5,587
1,714
10,954
7,318
674
10,354
13,867
13,868
46,081
105
436
560
299
1,699
Total loans
666,114
332,087
199,318
164,064
121,118
347,892
140,288
(222
(493
Total current period net (charge-offs) recoveries
(480
(251
(1,298
23.
The following table summarizes the credit exposure in the Company’s loan portfolio, by year of origination, as of December 31, 2020:
2016
278,687
30,563
12,860
4,366
6,131
16,294
90,074
438,975
124
119
222
4,040
1,324
5,829
307
540
50
940
27
278,811
30,989
13,635
8,456
7,512
445,771
(25
44
118,590
76,926
26,212
24,524
7,742
10,507
3,266
267,767
356
990
1,346
680
1,294
118,946
77,535
26,217
25,514
8,422
91,819
80,753
89,542
72,311
86,946
123,463
5,890
550,724
2,716
3,542
849
5,724
449
13,280
2,010
4,913
4,445
8,240
19,608
1,140
151
4,158
4,769
386
10,604
84,609
95,245
82,231
101,884
132,538
17,444
12,668
10,327
6,620
9,904
15,402
5,864
78,229
35
129
115
15,681
24.
87,578
62,937
52,087
37,224
43,858
93,486
10,091
387,261
168
326
163
1,134
1,667
52,413
37,268
44,021
94,788
(57
(66
5,889
4,498
3,617
1,371
1,737
4,391
198
24,740
11,176
9,369
1,701
735
513
2,825
51,059
83
24
36
24,780
11,295
9,509
1,728
736
51,386
(243
(63
(3
(6
(389
49
(194
(35
(301
3,489
1,718
1,893
607
273
189
7,408
15,577
41
80
1,725
1,936
643
628,236
281,239
205,907
148,724
157,326
264,245
125,616
1,811,293
2,918
3,773
5,922
7,048
652
20,809
923
2,565
4,963
5,192
8,369
22,012
1,176
654
4,222
4,992
1,637
12,705
628,756
286,256
212,899
163,831
174,558
274,903
(12
(65
55
(331
25.
There were no loans classified in the “doubtful” or “loss” risk rating categories as of September 30, 2021 and December 31, 2020.
The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of September 30, 2021:
Real Estate
Non-RE
Allowance for Credit Losses Allocation
207
4,540
603
5,268
850
The following table presents the amortized cost basis of individually evaluated collateral-dependent loans by class of loans, and their impact on the ACL, as of December 31, 2020:
208
9,989
2,048
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:
30 to 59 DaysPast Due
60 to 89 DaysPast Due
90 Daysand GreaterPast Due
TotalPast Due
Current
TotalLoans
RecordedInvestment >90 Days andAccruing
874
38
912
379,558
Construction anddevelopment
309,516
Commercial realestate
777
258
1,232
632,121
149
195
372
135,041
1,407
465
569
2,441
400,962
206
47
286
52,706
14,139
2,864
1,479
1,190
5,533
1,965,348
26.
385
432
445,339
256
270,151
10,105
11,199
583,017
120
78,388
2,097
556
2,780
386,316
97
604
50,440
15,593
4,382
754
10,396
15,532
1,851,287
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:
Nonaccrual TDRs
84
Performing TDRs
9,522
9,626
9,606
9,716
Specific reserves on TDRs
There was one loan modified as a TDR during the nine months ended September 30, 2021. No TDRs have subsequently defaulted during 2021, and the TDRs described above did not increase the allowance for credit losses and did not result in any charge-offs during the nine months ended September 30, 2021.
The following table presents the loan, by class, modified as a TDR during the nine months ended September 30, 2021:
Nine Months Ended September 30, 2021
NumberofContracts
Pre-ModificationOutstandingRecordedInvestment
Post-ModificationOutstandingRecordedInvestment
Troubled Debt Restructurings:
17
The following table presents loans, by class, modified as TDRs during the year ended December 31, 2020:
Year Ended December 31, 2020
1,289
1,081
85
1,017
670
2,435
1,836
27.
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.
NOTE 4 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER DEBT
At September 30, 2021 and December 31, 2020, securities sold under agreements to repurchase totaled $11,195 and $15,631, respectively.
The Company has an unsecured $25,000 revolving line of credit, which had a $3,000 outstanding balance at September 30, 2021, bears interest at the greater of (i) the prime rate, which was 3.25% at September 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 September 30, 2021, were as follows:
Fixed rate advances, with monthly interest payments, principal due in:
Year
CurrentWeightedAverage Rate
Principal Due
0.13
%
40,000
2022
1.99
1,500
2023
2024
1.76
6,000
2025
There are no fixed rate advances, with monthly principal and interest payments outstanding as of September 30, 2021.
NOTE 5 - SUBORDINATED DEBENTURES
Subordinated debentures were made up of the following as of:
Trust II Debentures
3,093
Trust III Debentures
2,062
DCB Trust I Debentures
5,155
Other debentures
9,500
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).
28.
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
2,000
5,000
Original liquidation value
Common securities liquidation value
155
The securities held by the Trusts qualify as Tier 1 capital for the Company under Federal Reserve Board guidelines. The Federal Reserve’s guidelines restrict core capital elements (including trust preferred securities and qualifying perpetual preferred stock) to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Because the Company’s aggregate amount of trust preferred securities is less than the limit of 25% of Tier 1 capital, net of goodwill, the full amount is includable in Tier 1 capital at September 30, 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.
DCB Trust IDebentures
Original amount
Maturity date
October 30, 2032
October 1, 2036
June 15, 2037
Interest due
Quarterly
In accordance with ASC 810, "Consolidation," the junior subordinated debentures issued by the Company to the subsidiary trusts are shown as liabilities in the consolidated balance sheets and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of earnings.
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.
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.
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.
29.
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 September 30, 2021. At the Company’s option, and with 30 days advanced notice to the holder, the entire principal amount and all accrued interest may be paid to the holder on or before the due date of any debenture. The redemption price is equal to 100% of the face amount of the debenture redeemed, plus all accrued interest.
The scheduled principal payments and weighted average rates of other debentures are as follows:
2.45
2.85
3,500
3.74
4,000
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.
A summary of stock option activity in the Plan during the nine months ended September 30, 2021 and 2020 follows:
Number ofShares
Weighted-AverageExercisePrice
Weighted-AverageRemainingContractualLife inYears
AggregateIntrinsicValue
Outstanding at beginning of year
506,200
26.81
5.82
1,805
Effect of 10% stock dividend
50,770
Granted
45,500
33.49
9.59
Exercised
(48,630
22.89
3.82
630
Forfeited
(19,020
26.01
6.84
Balance, September 30, 2021
534,820
25.22
5.53
5,684
Exercisable at end of period
307,786
23.78
4.33
3,715
30.
Nine Months Ended September 30, 2020
508,000
26.68
6.24
3,159
39,000
27.43
9.51
(3,000
24.00
2.04
(37,600
29.68
8.12
Balance, September 30, 2020
506,400
26.53
5.62
304
302,220
25.55
4.77
244
A summary of nonvested stock option activity in the Plan during the nine months ended September 30, 2021 and 2020 follows:
Weighted-AverageGrantDate Fair Value
214,680
4.46
23,218
Vested
(47,344
(5.72
(9,020
(8.06
227,034
5.11
251,120
4.97
3.86
(53,340
(6.07
(32,600
(2.20
204,180
5.54
Information related to stock options in the Plan is as follows for the nine months ended:
September 30, 2020
Intrinsic value of options exercised
Cash received from options exercised
Weighted average fair value of options granted
31.
Restricted Stock Awards and Units
A summary of restricted stock activity in the Plan during the nine months ended September 30, 2021 and 2020 follows:
Weighted-Average GrantDate Fair Value
35,300
29.72
3,530
33.09
(7,850
27.26
34,480
27.41
Weighted-AverageGrant Date Fair Value
31,459
30.29
(13,380
30.30
18,079
30.28
Restricted stock granted to employees typically vests over five years, but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date.
As of September 30, 2021, there was $1,831 of total unrecognized compensation expense related to unvested stock options granted under the Plan. The expense is expected to be recognized over a weighted-average period of 3.16 years.
The Company granted options and restricted stock under the Plan during the first nine months of 2021 and 2020. Expense of $512 and $494 was recorded during the nine months ended September 30, 2021 and 2020, respectively, 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 nine months ended September 30, 2021 and 2020 totaled $1,146 and $1,031, 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.
As of September 30, 2021, the number of shares held by the KSOP was 1,287,897. There were no unallocated shares to plan participants as of September 30, 2021, and all shares held by the KSOP were treated as outstanding.
32.
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 $36,582 and $35,510 as of September 30, 2021 and December 31, 2020, respectively. A gain of $277,000 on proceeds from these life insurance policies resulting from the death of a former bank officer was recorded for the nine months ended September 30, 2021. No such gains were recorded during the nine months ended September 31, 2020.
Expense related to these plans totaled $588 and $500 for the nine months ended September 30, 2021 and 2020, respectively, and $592 for the year ended December 31, 2020. This expense is included in employee compensation and benefits on the Company’s consolidated statements of earnings. The recorded liability totaled approximately $4,861 and $4,383 as of September 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 nine months ended September 30, 2021 and 2020 totaled $3,529 and $1,610, respectively. This expense is included in employee compensation and benefits on the consolidated statements of earnings.
NOTE 8 – LEASES
The Company has operating leases for bank locations, ATMs, corporate offices, and certain other arrangements, which have remaining lease terms of 1 year to 14 years. Some of the Company’s operating leases include options to extend the leases for up to 10 years.
Operating leases in which we are the lessee must be recorded as right-of-use assets with corresponding lease liabilities. The right-of-use asset represents our right to utilize the underlying asset during the lease term, while the lease liability represents the present value of the obligation of the Company to make periodic lease payments over the life of the lease. The associated operating lease costs are comprised of the amortization of the right-of-use asset and the implicit interest accreted on the lease liability, which is recognized on a straight-line basis over the life of the lease. As of September 30, 2021, operating lease right-of-use assets were $14,810 and liabilities were $15,243, and as of December 31, 2020, lease assets and liabilities were $13,291 and $13,539, respectively, and were included within the accompanying consolidated balance sheets as components of other assets and accrued interest and other liabilities, respectively.
Operating lease expense for operating leases accounted for under ASC 842 for the nine months ended September 30, 2021 and 2020 was approximately $1,715 and $1,416, respectively, and is included as a component of occupancy expenses within the accompanying consolidated statements of earnings.
33.
The table below summarizes other information related to our operating leases as of:
Operating leases
Operating lease right-of-use assets
14,810
13,291
Operating lease liabilities
15,243
13,539
Weighted average remaining lease term
9 years
Weighted average discount rate
1.95
2.19
The Company leases some of its banking facilities under non-cancelable operating leases expiring in various years through 2025 and thereafter. Minimum future lease payments under these non-cancelable operating leases as of September 30, 2021, are as follows:
Year Ended December 31,
Amount
554
2,152
2,090
2,035
1,868
Thereafter
7,441
Total lease payments
16,140
Less: interest
(897
Present value of lease liabilities
NOTE 9 - INCOME TAXES
Income tax expense was as follows for:
Income tax expense for the period
Effective tax rate
19.06
18.82
18.22
17.09
The effective tax rates differ from the statutory federal tax rate of 21% for the three and nine months ended September 30, 2021 and 2020, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank owned life insurance.
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.
34.
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 believed that entering into the interest rate swaps exposed the Company to variability in their fair value due to changes in the level of interest rates. It was the Company’s objective to hedge the change in fair value of floating rate debentures at coverage levels that were appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in the liability to other liabilities of the Company. During the quarter ended September 30, 2021, Guaranty terminated these interest rate swaps with notional amounts totaling $5,000 as of December 31, 2020, as the risk exposure declined to acceptable levels. The swaps were cancelled at an expense of $466, which is included in non-interest expense in the Consolidated Statement of Earnings.
The Company also entered into interest rate swaps to receive payments at a floating rate in exchange for paying a fixed rate, the objective of which is to reduce the overall cost of short-term 3-month FHLB advances that will be renewed consistent with the reset terms on the interest rate swap and that are included in the amounts in Note 4. Interest rate swaps with notional amounts totaling $40,000 as of September 30, 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:
NotionalAmount
PayRate
ReceiveRate
EffectiveDate
Maturityin Years
UnrealizedLosses
15,000
0.668
3 month LIBOR
3/18/2020
1.47
0.790
3.47
0.530
3/23/2020
1.48
5.979
3 month LIBOR plus 1.67%
10/1/2016
5.25
408
7.505
3 month LIBOR plus 3.35%
10/30/2012
1.83
2.22
159
4.22
288
2.23
75
Interest expense recorded on these swap transactions totaled $483 and $509 during the nine months ended September 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 September 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
35.
in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management 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 September 30, 2021 and December 31, 2020.
Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below. If the commitment were funded, the Company would be entitled to seek recovery from the customer. As of September 30, 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
Commitments to extend credit
392,332
324,277
Letters of credit
9,922
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 September 30, 2021, the Company had letters of credit of $35,833 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.
NOTE 12 - REGULATORY MATTERS
The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and
36.
classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015, with certain transition provisions that were fully phased in on January 1, 2019. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and or Tier 1 capital to adjusted quarterly average assets (as defined). Management believes, as of September 30, 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 September 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 September 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 September 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.
37.
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 RequiredFor CapitalAdequacy Purposes
Minimum RequiredUnder Basel III(Including Buffer)
To Be WellCapitalized UnderPrompt CorrectiveAction Provisions
Ratio
Total capital to risk-weighted assets:
Consolidated
289,390
14.13%
163,886
8.00%
215,100
10.50%
n/a
Bank
301,528
14.71%
164,015
215,270
205,019
10.00%
Tier 1 capital to risk-weighted assets:
263,721
12.87%
122,914
6.00%
174,129
8.50%
275,839
13.45%
123,011
174,266
Tier 1 capital to average assets:(1)
9.06%
116,422
4.00%
9.48%
116,418
145,523
5.00%
Common equity tier 1 capital to risk-weighted assets:
253,411
12.37%
92,186
4.50%
143,400
7.00%
92,259
143,513
133,262
6.50%
(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Consolidated Company and the Bank, respectively, to maintain a Tier 1 capital ratio (to average assets) above the required minimum.
263,144
13.20%
159,496
209,338
285,490
14.32%
159,514
209,362
199,392
238,115
11.94%
119,622
169,464
260,459
13.06%
119,635
169,483
9.13%
104,293
9.99%
130,366
227,805
11.43%
89,716
139,559
89,726
139,574
129,605
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.
38.
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).
39.
The following tables summarize quantitative disclosures about the fair value measurements for each category of financial assets (liabilities) carried at fair value:
As of September 30, 2021
Fair Value
QuotedPrices inActiveMarkets forIdenticalAssets(Level 1)
SignificantOtherObservableInputs(Level 2)
SignificantOtherUnobservableInputs(Level 3)
Assets (liabilities) at fair value on a recurring basis:
Available for sale securities:
SBA servicing assets
808
Derivative instrument liabilities
(151
Assets at fair value on a nonrecurring basis:
Individually evaluated collateral dependent loans
4,418
As of December 31, 2020
763
Derivative instrument assets
629
(1,151
8,427
There were no transfers between Level 2 and Level 3 during the nine months ended September 30, 2021 or for the year ended December 31, 2020.
Nonfinancial Assets and Nonfinancial Liabilities
Nonfinancial assets measured at fair value on a nonrecurring basis during the nine months ended September 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,
40.
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:
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
Fair value of other real estate owned remeasured at initial recognition
Other real estate owned remeasured subsequent to initial recognition:
Write-downs included in collection and other real estate owned expense
Fair value of other real estate owned remeasured subsequent to initial recognition
61
The following table presents quantitative information about nonrecurring Level 3 fair value measurements as of:
ValuationTechnique(s)
Unobservable Input(s)
Range(WeightedAverage)
Appraisal value of collateral
Selling costs or other normal adjustments
10%-20% (16%)
The following table presents information on individually evaluated collateral dependent loans as of September 30, 2021:
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total Fair Value
79
402
3,937
41.
The carrying amounts and estimated fair values of financial instruments not previously discussed in this note, as of September 30, 2021 and December 31, 2020, are as follows:
Fair value measurements as ofSeptember 30, 2021 using:
CarryingAmount
Level 1Inputs
Level 2Inputs
Level 3Inputs
TotalFair Value
Financial assets:
Cash, due from banks, federal funds sold and interest-bearing deposits
Marketable securities held to maturity
Loans, net
1,949,191
Nonmarketable equity securities
14,061
Financial liabilities:
2,221,716
342,153
2,563,869
Securities sold under repurchase agreements
Accrued interest payable
555
47,653
17,813
Fair value measurements as ofDecember 31, 2020 using:
351,792
1,846,868
14,095
1,907,587
380,570
2,288,157
804
109,381
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).
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).
42.
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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The computations of basic and diluted earnings per share for the Company were as follows for the:
Numerator:
Net earnings (basic)
Net earnings (diluted)
Denominator:
Weighted-average shares outstanding (basic)*
12,067,769
12,113,266
12,054,426
12,271,889
Effect of dilutive securities:
Common stock equivalent shares from stock options
143,620
155,058
Weighted-average shares outstanding (diluted)*
12,211,389
12,209,484
Net earnings per share
Basic
Diluted
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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 32 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
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American public is willing to receive the vaccines remains unknown, and more contagious strains of the virus mutate both in the US and abroad.
The financial performance of the Company generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Company offers and whose success it relies on to drive growth, are highly dependent upon the business environment in the primary markets in which we operate and in the United States as a whole. Unfavorable market conditions and uncertainty due to the COVID-19 pandemic may result in a deterioration in the credit quality of borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values of the collateral securing loans and an overall material adverse effect on the quality of the loan portfolio.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program ("PPP"), a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. PPP loans were intended to provide eligible businesses with funding for payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. PPP loans are forgivable to the extent that the borrower can demonstrate that the funds were used for such costs. Any amounts not forgiven will bear interest at 1% and be repayable over a term of 24 to 60 months from origination. PPP has been subject to amendments to increase the size of the program, extend the period in which loans could be made, extend the period for which costs could be forgiven and to provide additional flexibility to borrowers. In December 2020, several portions of the CARES Act were extended as part of the Consolidated Appropriations Act, including additional stimulus payments to consumers and a second round of PPP loans for small businesses.
Significant uncertainties as to future economic conditions exist, and we have taken measured actions during the pandemic, to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and reserves supported by a strong capital position. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from government stimulus and relief programs; however, the extent to which the COVID-19 pandemic will continue to impact our operations and financial results, as well as timing of economic recovery, remains uncertain.
Quarterly highlights of the Company include:
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† 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.
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
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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 were not TDRs pursuant to the CARES Act and the April 7, 2020 Interagency guidance and GAAP.
We have certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.
Real estate loans are also subject to underwriting standards and processes similar to commercial and industrial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate collateral. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real
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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.
From time to time, we have reclassified certain securities from available for sale to held to maturity. Such transfers are made at fair value at the date of transfer. The unrealized holding gains at the date of transfer are retained in other comprehensive income and in the carrying value of the held to maturity securities and are amortized over the remaining life of the security. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income on our balance sheet totaled $9.7 million at September 30, 2021. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.
Management evaluates securities for 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.
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
49.
companies. However, we have “opted out” of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.
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Discussion and Analysis of Results of Operations for the Nine Months Ended September 30, 2021 and 2020
Results of Operations
The following discussion and analysis compares our results of operations for the nine months ended September 30, 2021 with the nine months ended September 30, 2020. The results of operations for the nine months ended September 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 $30.6 million for the nine months ended September 30, 2021, as compared to $17.5 million for the nine months ended September 30, 2020. The following table presents key earnings data for the periods indicated:
For the Nine Months Ended September 30,
(dollars in thousands, except per share data)
Net earnings per common share*
-basic
-diluted
Net interest margin(1)
3.52
3.72
Net interest rate spread(2)
3.35
3.41
Return on average assets
1.42
0.92
Return on average equity
14.32
8.94
Average equity to average total assets
9.90
10.28
Cash dividend payout ratio*
23.62
36.94
(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. The following table illustrates net earnings and net core earnings per share, which are pre-tax, pre-provision and pre-extraordinary PPP income, as well as net core performance ratios for the nine months ended September 30, 2021 and 2020.
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Adjustments:
PPP interest income, including fees
(6,864
(3,616
Net interest expense on PPP-related borrowings
34
Net core earnings†
28,910
30,710
Total average assets
2,889,882
2,541,214
PPP loans average balance
(133,309
(124,541
Excess fed funds sold due to PPP-related borrowings
(30,657
Total average assets, adjusted†
2,756,573
2,386,016
Total average equity
286,228
261,205
PERFORMANCE RATIOS
Net earnings to average assets (annualized)
Net earnings to average equity (annualized)
Net core earnings to average assets, as adjusted (annualized)†
1.40
1.72
Net core earnings to average equity (annualized)†
13.50
15.70
PER COMMON SHARE DATA
Weighted-average common shares outstanding, basic*
Earnings per common share, basic*
Net core earnings per common share, basic*†
2.40
2.50
† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in "—Non-GAAP Financial Measures".
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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 $71.5 million compared to $66.0 million for the nine months ended September 30, 2020, an increase of $5.5 million, or 8.3%. The increase in net interest income before the provision (or reverse provision) for credit losses resulted primarily from a $5.3 million, or 48.9%, decrease in interest expense. Although there was a $55.8 million, or 3.0%, increase in average loans outstanding for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, that increase was offset by a 12 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 organic growth from the same quarter in the prior year. Excluding PPP loans, the average loans outstanding for the nine months ending September 30, 2021 increased $47.0 million, or 2.7%, from the same period in the prior year. The $5.3 million decrease in interest expense for the nine months ended September 30, 2021 was primarily related to a decrease in the cost of interest-bearing deposits of 52 basis points, despite a $126.4 million, or 8.6%, increase in average interest-bearing deposits over the same period in 2020. The average deposit balance increase is the result of continued reductions in interest rates for interest-bearing deposits as markets have allowed and general changes in consumer spending habits.
For the nine months ended September 30, 2021, net interest margin on a taxable equivalent basis and net interest spread were 3.56% and 3.35%, respectively, compared to 3.75% and 3.41% for the same period in 2020, which reflects a 53 basis point decrease in interest-earning assets, and was partially offset by a 47 basis point decrease on interest-bearing liabilities from the 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 nine months ended September 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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(dollars in thousands)
AverageOutstandingBalance
InterestEarned/InterestPaid
AverageYield/Rate
Interest-earning assets:
Total loans(1)
1,906,989
4.88
1,851,209
5.00
372,707
5,481
1.97
326,472
5,711
2.34
39,269
1,054
3.59
48,001
956
2.66
10,042
8.15
11,145
333
3.99
Interest-bearing deposits in other banks
391,096
0.08
136,684
452
0.44
Total interest-earning assets
2,720,103
3.79
2,373,511
4.32
(32,338
(27,552
Noninterest-earning assets
202,117
195,255
Interest-bearing liabilities:
1,594,219
0.37
1,467,838
0.89
Advances from FHLB and fed funds purchased
49,581
0.83
79,166
0.58
6,506
174
3.58
5,394
2.95
3.77
16,261
4.20
16,044
17,179
0.29
Total interest-bearing liabilities
1,686,160
1,585,838
0.91
Noninterest-bearing liabilities:
Noninterest-bearing deposits
892,260
670,947
25,234
23,224
Total noninterest-bearing liabilities
917,494
694,171
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest margin(3)
Net interest margin, fully taxable equivalent(4)
3.56
3.75
(1) Includes average outstanding balances of loans held for sale of $3.7 million and $6.1 million for the nine months ended September 30, 2021 and 2020, respectively.
(2) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets, annualized.
(4) Net interest margin on a taxable equivalent basis is equal to net interest income adjusted for nontaxable income divided by average interest-earning assets, annualized, using a marginal tax rate of 21%.
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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 nine months ended September 30, 2021:
AverageYield/ Rate
PPP loans average balance and net fees(1)
(6,265
6.28
Total loans, net of PPP effects
1,773,680
63,399
4.78
Total interest-earning assets, net of PPP effects†
2,586,794
70,767
3.66
Net interest income, fully taxable equivalent ("FTE")
72,336
Net interest margin, FTE
Net interest income, net of PPP effects†
66,071
Net interest margin, FTE, net of PPP effects†
† Non-GAAP financial metric. Calculations of this and reconciliations to GAAP are included in "—Non-GAAP Financial Measures"
(1) Interest earned consists of interest income of $990,000 and net origination fees recognized in earnings of $5.3 million for the nine months ended September 30, 2021.
The following table presents the change in interest income and interest expense for the periods indicated for 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 Nine Months EndedSeptember 30, 2021 vs. 2020
Increase (Decrease)
Due to Change in
Total Increase
(in thousands)
Volume
Rate
(Decrease)
2,092
(1,765
327
811
(1,041
(230
(174
272
98
312
279
Interest-earning deposits in other banks
840
(1,071
(231
Total increase (decrease) in interest income
3,536
(3,293
243
844
(6,146
(5,302
(129
91
112
(27
Total increase (decrease) in interest expense
(6,115
(5,265
Increase in net interest income
2,686
2,822
5,508
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.
A reverse provision of $1.7 million was recorded for the nine months ended September 30, 2021 in order to capture the improvements that have occurred to macroeconomic factors evaluated at the onset of the COVID-19 pandemic, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model, and were offset by growth in our overall loan portfolio.
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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 three quarters of 2021 from 55 basis points across the loan portfolio to 14.75 basis points across the portfolio in order to conservatively capture the improvements that have occurred to macroeconomic factors mentioned. Although management is cautiously optimistic about improving vaccination and hospitalization rates and economic trends, it is very likely that the economic effects of the pandemic will continue into 2022.
Noninterest Income
Our primary sources of recurring noninterest income are service charges on deposit accounts, merchant and debit card fees, fiduciary income, gains on the sale of both mortgage and SBA loans, and income from bank-owned life insurance. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
The following table presents components of noninterest income for the nine months ended September 30, 2021 and 2020 and the period-over-period variations in the categories of noninterest income:
For The Nine Months EndedSeptember 30,
Increase(Decrease)
2021 vs. 2020
Noninterest income:
491
(410
Fiduciary and custodial income
1,499
219
Bank-owned life insurance income
633
Merchant and debit card fees
5,048
4,119
Loan processing fee income
481
461
Warehouse lending fees
648
695
Mortgage fee income
479
574
Other noninterest income
2,443
1,623
1,927
Total noninterest income increased $1.9 million, or 11.6%, for the nine months ended September 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. Service fee income was $2.7 million for the nine months ended September 30, 2021 compared to $2.2 million for the same period in 2020, an increase of $491,000, or 22.4%, resulting from the expiration of COVID-related fee waivers and consumer spending activity and habits returning to more normal, pre-pandemic, levels.
Gain on Sale of Loans. We originate long-term fixed-rate mortgage loans and Small Business Administration (SBA) loans for resale into the secondary market. We sold 402 mortgage loans for $93.0 million during the nine months ended September 30, 2021 compared to 514 mortgage loans for $119.7 million for the nine months ended September 30, 2020. Gain on sale of loans was $4.4 million for the nine months ended September 30, 2021, a decrease of $410,000, or 8.5%, compared to $4.8 million for the same period in 2020. $3.7 million and $706,000 of the gain in the current year was attributable to the sales of mortgage loans and SBA 7(a) loans, respectively, while the gain during the nine month period of the prior year consisted of $4.2 million in mortgage loan sales and $629,000 in SBA 7(a) loan sales.
Fiduciary and Custodial Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $1.7 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of $219,000, or 14.6%. The revenue increase resulted primarily from 28 new accounts that opened during the first nine months of 2021, which have generated additional income. Furthermore, revenue for our services fluctuates by month with the market value for all publicly-traded assets, which are
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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.
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 $5.0 million for the nine months ended September 30, 2021, compared to $4.1 million for the same period in 2020, an increase of $929,000, or 22.6%. The increase was primarily due to a change in contract terms, an annual earnings credit received from our debit card vendor and growth in the number of DDAs and debit card usage volume during 2021. The total number of DDAs increased by 2,897 accounts, from 49,427 as of September 30, 2020 to 52,457 as of September 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 $820,000, or 50.5%, for the nine months ended September 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 nine months ended September 30, 2021, noninterest expense totaled $54.3 million, an increase of $6.0 million, or 12.3%, compared to $48.3 million for the nine months ended September 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest expense:
4,163
Non-staff expenses:
634
Legal and professional fees
1,995
1,682
313
Software and technology
3,427
2,977
450
1,009
(77
Director and committee fees
619
595
Advertising and promotions
1,288
1,142
146
ATM and debit card expense
1,802
1,406
396
Telecommunication expense
611
620
FDIC insurance assessment fees
551
Other noninterest expense
3,674
3,743
(69
5,953
Material changes in the components of noninterest expense are discussed below.
Employee Compensation and Benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $31.1 million for the nine months ended September 30, 2021, an increase of $4.2 million, or 15.4%, compared to $27.0 million for the same period in 2020. Employee compensation and benefits expense increased due to higher salaries, higher insurance expense accruals due to increased claims experience, higher payroll tax expense due to bonuses paid in July and bonus accruals. The bonus accrual in the prior year was lower during the first nine months of 2020 because of lower net income resulting from the effects of the COVID-19 pandemic.
Occupancy Expenses. Occupancy expenses are mainly comprised of depreciation expense on fixed assets, and lease expense related to ASC 842 accounting. Occupancy expenses increased $634,000, or 8.3%, for the nine months
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ended September 30, 2021 compared to the same period of the prior year. Depreciation expense and ASC 842 lease expense increased $249,000 and $299,000, respectively, compared to the prior year period.
Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were $2.0 million and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of $313,000, or 18.6%. The increase was primarily the result of professional recruiting fees paid during the nine months ended September 30, 2021 that were not paid during the same period of 2020.
Software and Technology. Software and technology expenses increased $450,000, or 15.1%, from $3.0 million for the nine months ended September 30, 2020 to $3.4 million for the nine months ended September 30, 2021. The increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities, improve cybersecurity monitoring and tools, 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 $1.8 million for the nine months ended September 30, 2021, an increase of $396,000, or 28.2%, compared to $1.4 million 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 remained consistent with the prior year and decreased only $69,000, or 1.8%, from $3.7 million for the nine months ended September 30, 2020 to $3.7 million for the nine months ended September 30, 2021.
Income Tax Expense
The amount of income tax expense we incur is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
For the nine months ended September 30, 2021 and 2020, income tax expense totaled $6.8 million and $3.6 million, respectively. The increase in income tax expense was primarily due to an increase in net earnings before taxes of $16.4 million. Our effective tax rates for the nine months ended 2021 and 2020 were 18.22% and 17.09%, respectively.
Discussion and Analysis of Results of Operations for the Three Months Ended September 30, 2021 and 2020
The following discussion and analysis of our results of operations compares our results of operations for the three months ended September 30, 2021 with the three months ended September 30, 2020. The results of operations for the three months ended September 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 $9.3 million for the three months ended September 30, 2021, as compared to $10.1 million for the three months ended September 30, 2020. Basic earnings per share were $0.77 for the three months ended September 30, 2021 compared to $0.84 during the same period in 2020.
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The following table presents key earnings data for the periods indicated:
For the Three Months Ended September 30,
3.36
3.57
3.21
3.32
1.24
1.53
12.44
15.21
9.99
10.04
25.97
21.74
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 September 30, 2021 and 2020:
PPP loans, including fees
(1,005
(1,076
9,727
11,111
2,953,181
2,639,335
(107,931
(209,506
(8,152
2,845,250
2,421,677
295,076
265,027
1.36
13.08
16.68
0.81
Net interest income, before the provision for credit losses, for the third quarter of 2021 and 2020 was $23.6 million and $22.3 million, respectively, an increase of $1.3 million, or 5.8%, resulting primarily from a decrease in deposit-related interest expense of $937,000, or 41.0%, compared to the same quarter of the prior year.
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Loan yield increased from 4.59% for the third quarter of 2020 to 4.67% for the third quarter of 2021, a change of eight basis points, while the cost of interest-bearing deposits decreased from 0.63% to 0.33% during the same period, a change of 30 basis points. The increase in loan yield was primarily due to increased origination fee income recognized during the current quarter.
For the three months ended September 30, 2021, net interest margin on a taxable equivalent basis and net interest spread were 3.40% and 3.21%, respectively, compared to 3.61% and 3.32% for the same period in 2020. The decrease in net interest margin was due to a decrease in the average yield on interest-bearing deposits in other banks, which consists primarily of fed funds sold, from 0.12% in the third quarter of 2020 to 0.10% in the current quarter, while the average balance increased 228.3%, or $286,500, from the prior year average balance. The decrease in average deposit rate was primarily due to continued reductions in interest rates for interest-bearing deposits as market conditions have allowed.
The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively.
The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended September 30, 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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1,921,005
4.67
1,964,894
4.59
320,476
1,199
378,735
2,125
116,527
10,040
268
10.59
12,332
111
412,033
0.10
125,492
0.12
2,780,081
3.60
2,481,453
4.00
(31,133
(34,083
204,233
191,965
1,599,012
0.33
1,448,117
0.63
48,609
0.87
79,580
0.70
2,641
3.76
4,989
3.51
3.64
20,310
12,171
20,568
1,682,243
0.39
1,573,564
0.68
950,574
775,341
25,288
25,403
975,862
800,744
3.40
3.61
(1) Includes average outstanding balances of loans held for sale of $3.7 million and $9.3 million for the three months ended September 30, 2021 and 2020, respectively.
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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 September 30, 2021:
3.69
1,813,074
21,600
4.73
2,672,150
24,230
23,848
22,843
3.39
(1) Interest earned consists of interest income of $270,000 and net origination fees recognized in earnings of $735,000 million for the three months ended September 30, 2021.
The following table presents the change in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
For the Three Months EndedSeptember 30, 2021 vs. 2020
(504
428
(76
(325
(601
(926
(21
178
157
(16
Total (decrease) increase in interest income
(764
1,043
238
(1,175
(937
(5
(10
152
(1,164
(1,012
(Decrease) increase in net interest income
(916
2,207
1,291
There was a reverse provision for credit losses of $700,000 for the three months ended September 30, 2021, compared to a provision expense of $300,000 for the three months ended September 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 12.75 basis points to reflect the continued improvement of those macroeconomic factors used to establish the initial COVID-specific qualitative factor at the onset of the pandemic. The reduction in the COVID-specific qualitative factor, along with risk grade improvements on specific loans, resulted in the reverse provision during the current quarter.
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The following table presents components of noninterest income for the three months ended September 30, 2021 and 2020 and the period-over-period variations in the categories of noninterest income:
For The Three Months EndedSeptember 30,
(355
599
215
1,620
164
181
(127
748
718
(214
Total noninterest income decreased $214,000, or 3.2%, for the three months ended September 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 $1.0 million for the three months ended September 30, 2021 compared to $717,000 for the same period in 2020, an increase of $286,000, or 39.9%. The increase was primarily due to the expiration of COVID-related fee waivers and increases in customer spending activity during the current year quarter.
Gain on Sale of Loans. We sold 123 mortgage loans for $29.6 million for the three months ended September 30, 2021 compared to 227 mortgage loans for $52.6 million for the three months ended September 30, 2020. Gain on sale of loans was $1.8 million for the three months ended September 30, 2021, a decrease of $355,000, or 16.8%, compared to $2.1 million for the same period in 2020. The total gain on loans sold during the quarter ended September 30, 2021 consisted of $1.2 million in mortgage loans and $541,000 in SBA 7(a) loans sold during the quarter ended September 30, 2021 compared to $1.9 million and $210,000 for mortgage and SBA loans sold, respectively, during the quarter ended September 31, 2020.
Fiduciary and Custodial Income. We have trust powers and provide fiduciary and custodial services through our trust and wealth management division. Fiduciary income was $599,000 and $511,000 for the three months ended September 30, 2021 and 2020, respectively, an increase of $88,000, or 17.2%. The revenue increase resulted primarily from 12 new accounts that opened during the quarter, which have generated additional income.
Warehouse Lending Fees. A portion of our lending involves the origination of mortgage warehouse lines of credit.The decrease in warehouse lending fees of $92,000, or 31.9%, results from a decrease in overall warehouse lending activity in current quarter compared to prior year quarter. The average quarterly balance of mortgage warehouse lines decreased from $99.1 million for the quarter ended September 30, 2020, to $57.5 million for the same quarter in 2021, a decrease of $41.6 million or 42.0%.
Mortgage Fee Income. Mortgage fee income consists of lender processing fees such as underwriting fees,administrative fees and funding fees that are collected from mortgage loans that the Bank intends to sell on the secondarymarket. The decrease of $127,000, or 46.7%, from September 30, 2020 was primarily due to a lower volume of mortgage purchases and refinances due primarily to increased mortgage loan rates in the current quarter.
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For the three months ended September 30, 2021, noninterest expense totaled $19.3 million, an increase of $2.5 million, or 15.1%, compared to $16.8 million for the three months ended September 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest expense:
1,559
644
1,258
1,093
165
253
338
(85
211
(14
301
194
646
231
214
252
1,647
1,213
434
2,529
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 $11.0 million for the three months ended September 30, 2021, an increase of $1.6 million, or 16.5%, compared to $9.4 million for the same period in 2020. The increase resulted from higher salary expense, higher insurance expense accruals due to increased claims experience, higher payroll tax expense due to larger bonuses paid in July and bonus accruals. The bonus accrual in the prior year was lower due to lower net income.
Occupancy Expenses. Occupancy expenses increased $141,000, or 5.4% during the third quarter of 2021 compared to the same period of the prior year primarily due to new leases entered into during 2021.
Legal and Professional Fees. Legal and professional fees, which include audit, loan review and regulatory assessments, were $644,000 for the three months ended September 30, 2021, an increase of $70,000, or 12.2%, compared to $574,000 for the same period in 2020. The increase was primarily the result of professional recruiting fees paid during the three months ended September 30, 2021, that were not paid during the same period of the prior year.
Software and Technology Fees. Software and technology fees consist of fees paid to third parties for support of software and technology products. Software support fee expense was $1.3 million for the three months ended September 30, 2021, compared to $1.1 million for the same period in 2020, an increase of $165,000, or 15.1%. The increase is attributable primarily to new software investments to improve online deposit account opening, further enhance treasury management capabilities, upgrade cybersecurity monitoring and tools, and improve connectivity to support remote working and other technology capabilities.
Advertising and Promotions. Advertising and promotion-related expenses increased $194,000, or 64.5%, during the three months ended September 30, 2021 compared to the same period in 2020, primarily due to the the resumption of Bank-sponsored promotional events and advertising campaigns that were halted or delayed during the prior year due to the pandemic.
ATM and Debit Card Expense. ATM and debit card expenses were $646,000 for the three months ended September 30, 2021, an increase of $137,000, or 26.9%, compared to $509,000 for the same period in 2020 as a result of increased ATM and debit card usage by our customers.
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Other. Other noninterest expense increased $434,000, or 35.8%, from $1.2 million for the three months ended September 30, 2020 to $1.6 million for the three months ended September 30, 2021. The increase was primarily due to a one-time expense of $434,000 to terminate two swap agreements associated with our trust preferred securities.
For the three months ended September 30, 2021, income tax expense totaled $2.2 million, in contrast to a tax benefit of $2.4 million received in the same period of 2020. The effective tax rates for the three months ended September 30, 2021 and 2020 were 19.06% and 18.82%, respectively. The effective tax rates differ from the statutory federal tax rate of 21% for the three months ended September 30, 2021 and 2020, largely due to tax exempt interest income earned on certain investment securities and loans and the nontaxable earnings on bank-owned life insurance.
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Discussion and Analysis of Financial Condition as of September 30, 2021
Assets
Our total assets increased $227.4 million, or 8.3%, from $2.74 billion as of December 31, 2020 to $2.97 billion as of September 30, 2021. Our asset growth was primarily due to increases in cash and cash equivalents of $57.1 million, total securities of $62.0 million and gross loans of $104.1 million. The increase in cash and cash equivalents is due to a $127.7 million increase in federal funds sold, partially offset by decreases in interest-bearing cash deposits and due from balances of $57.5 million and $13.1 million, respectively. The increase in loans resulted largely from our participation in the PPP2 loan program, as well as organic loan growth, and the increase in cash and cash equivalents resulted largely from increases in deposit balances that resulted from government stimulus payments, PPP2 loan proceeds and general changes in consumer spending and saving habits.
Loan Portfolio
Our primary source of income is derived through interest earned on loans to small- to medium-sized businesses, commercial companies, professionals and individuals located in our primary market areas. A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning asset base.
Our loan portfolio is the largest category of our earning assets. As of September 30, 2021, total loans held for investment were $1.97 billion, an increase of $104.1 million, or 5.6%, from the December 31, 2020 balance of $1.87 billion. In addition to these amounts, $1.9 million and $5.5 million in loans were classified as held for sale as of September 30, 2021 and December 31, 2020, respectively.
The increase in gross loans during the period included outstanding PPP loan balances of $75.3 million, to 773 borrowers, as of September 30, 2021. Excluding the outstanding balance of PPP loans, gross loans increased 9.8%, or $168.6 million, from December 31, 2020, primarily the result of organic growth and period-end increases in commercial real estate and multi-family residential portfolios.
Total loans, excluding those held for sale, as a percentage of deposits, were 76.9% and 81.6% as of September 30, 2021 and December 31, 2020, respectively. Total loans, excluding those held for sale, as a percentage of total assets, were 66.4% and 68.1% as of September 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 September 30, 2021:
As ofSeptember 30, 2021
As ofDecember 31, 2020
PercentChange
(65,301
(14.65
%)
39,339
14.55
39,137
6.59
56,905
72.48
14,307
3.68
19,109
88.06
Consumer and overdrafts
4.09
(1,535
(9.76
Total loans held for investment
104,062
5.57
Total loans held for sale
(3,639
(65.66
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may
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be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured.
We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
Nonperforming assets as a percentage of total loans were 0.16% at September 30, 2021, compared to 0.70% at December 31, 2020. The Bank’s nonperforming assets consist primarily of nonaccrual loans. During 2020, nonperformingassets included three SBA 7(a), partially guaranteed (75%) loans that were acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $8.7 million as of September 30, 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 bank charged off $475,000 in connection with the sale, all of which had previously been specifically reserved within the allowance for credit losses, or ACL. The other two loans, both to one borrower and collateralized by the same hotel, were resolved through a bankruptcy judgment during the first quarter of 2021 that allows the borrower to adequately service their debt coverage. The bankruptcy order resulted in a charge-off of $270,000, which had previously been fully reserved in the ACL. 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:
Nonaccrual loans
Accruing loans 90 or more days past due
Total nonperforming loans
Other real estate owned:
Residential real estate
Total other real estate owned
Repossessed assets owned
63
Total other assets owned
410
Total nonperforming assets
3,238
13,115
TDR loans - nonaccrual
TDR loans - accruing
Ratio of nonperforming loans to total loans(1)(2)
0.16
Ratio of nonperforming assets to total loans(1)(2)
Ratio of nonperforming assets to total assets
0.11
0.48
(1) Excludes loans held for sale of $1.9 million and $5.5 million as of September 30, 2021 and December 31, 2020, respectively.
(2) Restructured loans on nonaccrual are included in nonaccrual loans, which are a component of nonperforming loans.
The following table presents nonaccrual loans by category as of:
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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 have all returned to contractual payment schedules are are monitoring for risk rating classification consistent with all other loans.
The following tables summarize the internal ratings of our performing, classified and nonaccrual (as well as substandard) loans, by category, as of:
Special Mention
Doubtful
Loss
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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 judgment and subjectivity. Refer to Note 1 of the notes to the financial statements for discussion regarding our ACL methodologies for loans held for investment and available for sale securities.
For available for sale debt securities in an unrealized loss position, the Company evaluates the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings through provision for credit loss expense. As of September 30, 2021, the Company determined that all available for sale securities that experienced a decline in fair value below the amortized costs basis were due to noncredit-related factors, therefore no related ACL was recorded and there was no related provision expense recognized during the nine months ended September 30, 2021.
For held to maturity debt securities, the Company evaluates expected credit losses on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage backed securities issued by the U.S. governments, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to municipal securities, management considers 1) issuer bond ratings, 2) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, 3) internal forecasts and 4) whether or not such securities are guaranteed by the Texas Permanent School Fund or pre-refunded by the issuers. As of September 30, 2021, the Company determined there were no credit related concerns that warrant an ACL for the held to maturity portfolio.
In determining the 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:
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As of September 30, 2021, the allowance for credit losses totaled $30.6 million, or 1.55%, of total loans, excluding those held for sale, and totaled 1.62%, excluding PPP loans and loans held for sale. As of December 31, 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 $3.0 million, or 8.9%, is due to COVID-specific qualitative factors established during 2020 that were reduced during the first three quarters of 2021 from 55 basis points across the loan portfolio to 14.75 basis points in order to conservatively capture some of the improvements that have occurred to macroeconomic factors evaluated at the onset of the pandemic as part of the aforementioned COVID-specific qualitative factors, as well as risk rating upgrades for specific loans, which impact the reserve calculations within our model, offset by growth in our overall loan portfolio. Although management is cautiously optimistic about improving vaccination and hospitalization rates and economic trends, it is very likely that the economic effects of the pandemic will continue into 2022.
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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 Nine Months Ended September 30,
As of andfor the YearEndedDecember 31,
Average loans outstanding(1)
1,872,914
Gross loans outstanding at end of period(2)
1,958,634
Allowance for credit losses at beginning of the period
Charge offs:
300
816
113
136
Agriculture
18
173
128
234
Total charge-offs
1,402
384
543
Recoveries:
Total recoveries
Net charge-offs (recoveries)
1,298
193
Allowance for credit losses at end of period
Ratio of allowance to end of period loans(2)
1.55
1.80
Ratio of net charge-offs (recoveries) to average loans(1)
0.07
0.01
0.02
(1) Includes average outstanding balances of loans held for sale of $3.7 million, $6.1 million and $6.0 million for the nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
(2) Excludes loans held for sale of $1.9 million, $9.1 million and $5.5 million for the nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, respectively.
The ratio of allowance for credit losses to non-performing loans increased from 264.6% at December 31, 2020 to 976.7% at September 30, 2021. Non-performing loans decreased to $3.1 million at September 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.
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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.
Percent toTotal Loans
11.36
12.00
12.94
14.08
46.72
46.94
5.18
3.63
18.79
18.78
1.88
1.08
Total real estate
26,182
85.51
28,411
84.51
793
2.59
936
2.78
0.54
0.71
Total allowance for credit losses
100.00
We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of September 30, 2021, the carrying amount of our investment securities totaled $442.7 million, an increase of $62.0 million, or 16.3%, compared to $380.8 million as of December 31, 2020. Investment securities represented 14.9% and 13.9% of total assets as of September 30, 2021 and December 31, 2020, respectively.
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 September 30, 2021, the Company determined that all available for sale securities that experienced a decline in fair value below their amortized cost basis were impacted by noncredit-related factors and that securities held to maturity have not experienced credit deterioration; therefore the Company carried no ACL with respect to our securities portfolio at September 30, 2021.
The following tables summarize the amortized cost and estimated fair value of our investment securities:
Amortized Cost
U.S. Government agencies
160,888
884
162,147
438,912
13,966
1,177
451,701
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We do not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, structured investment vehicles or second lien elements in our investment portfolio. As of September 30, 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 the amortized cost of held to maturity 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.
Within One Year
After One Year butWithin Five Years
After Five Years butWithin Ten Years
After Ten Years
Yield
1.35%
3.21%
19,816
4.04%
3.68%
3.86%
3.23%
3.35%
3.28%
3.39%
92,073
1.56%
53,818
1.71%
16,195
1.93%
162,184
1.65%
2,310
3.09%
55,350
2.26%
6,963
1.02%
2.15%
7,210
3.61%
211,465
2.24%
134,062
2.62%
90,009
2.80%
442,746
2.49%
18,839
2.96%
12,143
4.31%
3.49%
4,154
2.84%
35,849
3.13%
51,823
83,878
3.25%
170
3.37%
74,450
2.04%
22,104
2.05%
10,440
1.81%
2.02%
9,641
1.49%
57,304
2.74%
2.56%
13,965
1.91%
186,442
86,070
3.17%
94,318
3.07%
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities typically cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and, consequently, the average life of this security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 6.45 years with an estimated effective duration of 3.71 years as of September 30, 2021.
As of September 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.
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The average yield of our securities portfolio was 2.49% as of September 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 1.65% and 2.15% at September 30, 2021, respectively. As of September 30, 2021, municipal securities and mortgage-backed securities comprised 39.8% and 35.9% 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.
We offer a variety of deposit products, which have a wide range of interest rates and terms, including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.
Total deposits as of September 30, 2021 were $2.56 billion, an increase of $276.7 million, or 12.1%, compared to $2.29 billion as of December 31, 2020. The majority of the deposit balance increase was due to the deposit of government stimulus payments and PPP funds into demand and money market accounts at the Bank, as well as apparent changes in depositor spending habits resulting from economic and other uncertainties due to COVID-19.
The following table presents the average balances on deposits for the periods indicated:
For the Year EndedDecember 31, 2020
Increase(Decrease)($)
Increase(Decrease)(%)
NOW and interest-bearing demand accounts
361,445
293,111
68,334
23.31
Savings accounts
116,604
87,092
29,512
33.89
Money market accounts
757,472
642,239
115,233
17.94
Certificates and other time deposits
358,698
445,911
(87,213
(19.56
Total interest-bearing deposits
1,468,353
125,866
8.57
Noninterest-bearing demand accounts
696,454
195,806
28.11
2,486,479
2,164,807
321,672
14.86
The aggregate amount of certificates and other time deposits in denominations of $100,000 or more as of September 30, 2021 and December 31, 2020 was $236.4 million and $266.3 million, respectively.
The scheduled maturities of certificates and other time deposits greater than $100,000 were as follows:
Weighted AverageInterest Rate
Under 3 months
69,838
0.64
3 to 6 months
72,207
6 to 12 months
60,566
0.67
12 to 24 months
23,288
1.16
24 to 36 months
6,612
1.92
36 to 48 months
734
1.90
Over 48 months
3,193
0.56
236,438
0.74
Borrowings
We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
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Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2021 and December 31, 2020, total borrowing capacity of $570.4 million and $476.5 million, respectively, was available under this arrangement. Our outstanding FHLB advances mature within three years. As of September 30, 2021, approximately $1.40 billion in real estate loans were pledged as collateral for our FHLB borrowings. We utilize these borrowings to meet liquidity needs and to hedge interest rate risk.
The following table presents our FHLB borrowings by maturity and weighted average rate as of September 30, 2021:
Balance
Less than 90 days
90 days to less than one year
One to three years
After three to five years
After five years
Federal Reserve Bank of Dallas. The Federal Reserve Bank of Dallas has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain commercial and industrial and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As of September 30, 2021 and December 31, 2020, $184.8 million and $158.8 million, respectively, were available under this arrangement. As of September 30, 2021 and December 31, 2020, approximately $240.4 million and $214.5 million, respectively, in consumer and commercial and industrial loans were pledged as collateral. As of September 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.
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
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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 September 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 September 30, 2021) subject to a floor of 3.50%, with quarterly interest payments, and matures in March 2022. As of September 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 nine months ended September 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 September 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 September 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 $2.89 billion for the nine months ended September 30, 2021 and $2.57 billion for the year ended December 31, 2020.
Sources of Funds:
Deposits:
30.88
27.09
55.17
57.11
Advances from FHLB
0.23
0.26
0.69
0.85
0.96
10.26
Uses of Funds:
64.87
71.72
12.90
13.17
0.35
0.42
12.62
4.82
5.70
Other noninterest-earning assets
6.98
2.77
Average noninterest-bearing deposits to average deposits
35.88
32.17
Average loans to average deposits
76.69
86.52
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans, including average loans held for sale, increased $55.8 million, or 3.0%, for the nine months ended September 30, 2021 compared to the same period in 2020, while our average deposits increased $347.7 million, or 16.3%, for the same time periods. We predominantly invest excess deposits in overnight deposits with our correspondent banks, federal funds sold, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth.
As of September 30, 2021, we had $392.3 million in outstanding commitments to extend credit and $9.9 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 September 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 September 30, 2021, we had cash and cash equivalents of $408.9 million, compared to $351.8 million as of December 31, 2020. The increase was primarily due to an increase in federal funds sold of $127.7 million, offset by a decrease in interest-bearing deposits held at other banks of $57.5 million.
Capital Resources
Total shareholders’ equity increased to $297.4 million as of September 30, 2021, compared to $272.6 million as of December 31, 2020, an increase of $24.8 million, or 9.1%. 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 September 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:
Guaranty Bancshares, Inc. (consolidated)
Total capital (to risk weighted assets)
14.13
13.20
Tier 1 capital (to risk weighted assets)
12.87
11.94
Tier 1 capital (to average assets)
9.06
9.13
Common equity tier 1 risk-based capital
12.37
11.43
Guaranty Bank & Trust, N.A.
14.71
13.45
13.06
9.48
Contractual Obligations
The following table summarizes contractual obligations and other commitments to make future payments as of September 30, 2021 (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations.
1 yearor less
More than 1year but lessthan 3 years
3 years ormore but lessthan 5 years
5 yearsor more
Time deposits
288,124
44,214
7,705
340,043
41,500
7,500
10,310
423
3,622
3,636
7,562
330,047
61,336
13,341
17,872
422,596
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
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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 September 30, 2021 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
More than1 year butless than3 years
3 years ormore butless than5 years
Standby and commercial letters of credit
6,962
381
2,525
205,931
85,924
10,574
89,903
212,893
85,978
10,955
92,428
402,254
Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers. Management evaluated the likelihood of funding the standby and commercial letters of credit as of September 30, 2021, and determined the likelihood to be improbable. Therefore, no ACL was recorded for standby and commercial letters of credit as of September 30, 2021.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.
Loan agreements executed in connection with construction loans and commercial lines of credit have standard conditions which must be met prior to the Company being required to provide additional funding, including conditions precedent that typically include: (i) no event of default or potential default has occurred; (ii) that no material adverse events have taken place that would materially affect the borrower or the value of the collateral, (iii) that the borrower remains in compliance with all loan obligations and covenants and has made no misrepresentations; (iv) that the collateral has not been damaged or impaired; (v) that the project remains on budget and in compliance with all laws and regulations; and (vi) that all management agreements, lease agreements and franchise agreements that affect the value of the collateral remain in force. If the conditions precedent have not been met, the Company retains the option to cease current draws and/or future funding. As a result of these conditions within our loan agreements, management believes the credit risk of these off balance sheet items is minimal and we recorded no ACL with respect to these loan agreements as of September 30, 2021.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
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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:
Change in Interest Rates (Basis Points)
Percent Changein Net InterestIncome
Percent Changein Fair Valueof Equity
+300
6.69
4.75
4.40
5.04
+200
4.02
5.14
2.62
4.45
+100
Base
-100
(2.32
)%
6.20
(1.92
3.96
The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this Report have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or 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 September 30,
As of December 31,
Tangible Common Equity
Total shareholders’ equity
(32,160
(2,426
(3,213
(2,999
Total tangible common equity
262,822
231,480
237,484
Common shares outstanding*(1)
12,081,477
12,087,063
12,028,957
Book value per common share*
24.62
22.08
22.67
Tangible book value per common share*
21.75
19.15
19.74
(1) Excludes the dilutive effect, if any, of 155,058, 0 and 32,781 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2021 and 2020, and December 31, 2020, respectively.
Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets.
We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.
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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:
Tangible Assets
Total tangible assets
2,933,682
2,705,673
Total Shareholders' Equity to Total Assets
10.02
9.95
Tangible Common Equity to Tangible Assets
8.96
8.78
The following tables reconcile, as of and for the dates set forth below, various metrics impacted by the effects of COVID-19 on reported data.
Net Core Earnings and Net Core Earnings per Common Share
Three Months EndedJune 30,
10,432
(1,000
2,312
(1,954
Net core earnings
9,790
12,056,550
Net core earnings per common share, basic*
Net Core Earnings to Average Assets, as Adjusted, and Average Equity
2,938,944
(155,417
Total average assets, adjusted
2,783,527
Net core earnings to average assets, as adjusted
1.41
285,803
Net core earnings to average equity
13.74
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Total Interest-Earning Assets, net of PPP Effects
For the Three Months EndedSeptember 30, 2021
For the Nine Months EndedSeptember 30, 2021
PPP loan average balance and net fees(1)
Total interest-earning assets, net of PPP effects
(1) Interest earned consists of interest income of $270,000 and $990,000, and net origination fees recognized in earnings of $661,000 and $5.3 million for the three and nine months ended September 30, 2021, respectively.
Net Interest Income and Net Interest Margin, Net of PPP Effects
Three Months EndedSeptember 30, 2021
Nine Months EndedSeptember 30, 2021
Three Months EndedJune 30, 2021
Three Months EndedSeptember 30, 2020
23,477
PPP-related interest income
(270
(990
(385
(527
PPP-related net origination fees
(735
(5,275
(1,362
(549
PPP-related borrowings
Net interest income, net of PPP effects
22,565
65,273
21,730
21,206
Total average interest-earning assets
2,769,054
Total average interest-earning assets, net of PPP effects
2,613,637
2,263,795
Net interest margin, net of PPP effects(2)
3.37
3.33
3.73
Interest income tax adjustments
798
269
233
23,746
22,512
Net interest income, FTE, net of PPP effects
21,999
21,439
Net interest margin, FTE(3)
3.44
Net interest margin, FTE, net of PPP effects(4)
3.38
(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%.
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Efficiency Ratio, Net of PPP Effects
17,703
PPP-related deferred costs
Total noninterest expense, net of PPP effects
54,901
17,910
16,782
5,970
Efficiency ratio(1)
64.25
60.28
60.12
57.90
Efficiency ratio, net of PPP effects(2)
66.47
65.51
64.66
60.22
(1) The efficiency ratio was calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.
(2) The efficiency ratio, net of PPP effects, was calculated by dividing total noninterest expense, net of PPP-related deferred costs, by net interest income, net of PPP effects, plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.
ACL to Total Loans, Excluding PPP
As ofJune 30, 2021
As ofSeptember 30, 2020
1,890,164
PPP loans
(75,304
(127,390
(209,609
Total loans, excluding PPP
1,895,577
1,762,774
1,749,025
31,548
Allowance for credit losses / period-end loans
1.67
Allowance for credit losses / period-end loans. excluding PPP
1.62
1.79
1.93
Loan Yield, Net of PPP Effects
Three Months Ended September 30, 2021
Three Months Ended June 30, 2021
1,912,722
22,864
4.79
PPP loans average balance and net fees
(1,747
4.51
1,757,305
21,117
Effect of removing PPP loans on loan yield
0.06
0.03
Three Months Ended September 30, 2020
1,755,388
21,605
4.90
0.31
84.
Cautionary Notice Regarding Forward-Looking Statements
This Report, our other filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of section 27A of the Securities Act and section 21E of the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for 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:
85.
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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
86.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. The Company intends to defend itself vigorously against any pending or future claims and litigation.
At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the Company’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.
87.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 13, 2020, the Company announced the adoption of a new stock repurchase program that authorized the repurchase of up to 1,000,000 shares of the Company common stock. The stock repurchase program will be effective until the earlier of March 13, 2022, or the date all shares authorized for repurchase under the program have been repurchased, unless shortened or extended by the board of directors. There were no repurchases made through the third quarter of 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
88.
Item 6. Exhibits
Exhibit
Number
Description of Exhibit
3.1
Amended and Restated Certificate of Formation of Guaranty Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed May 1, 2017 (File No. 333-217176)).
3.2
Amended and Restated Bylaws of Guaranty Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed April 6, 2017 (File No. 333-217176)).
4.1
Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on April 6, 2017, file number 333-217176).
The other instruments defining the rights of the long-term debt securities of Guaranty Bancshares, Inc. and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Guaranty Bancshares, Inc. hereby agrees to furnish copies of these instruments to the SEC upon request.
31.1*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
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
89.
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.
(Registrant)
Date: November 5, 2021
/s/ Tyson T. Abston
Tyson T. Abston
Chairman of the Board & Chief Executive Officer
/s/ Clifton A. Payne
Clifton A. Payne
Chief Financial Officer & Director
90.