UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

OR

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

For the transition period fromto.

Commission File Number: 001-38087

GUARANTY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Texas	75-1656431
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification no.)
201 South Jefferson Avenue
Mount Pleasant, Texas	75455
(Address of principal executive offices)	(Zip code)

(903) 572 - 9881

(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, 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 and post 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. (Check one):

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☐
(Do not check if a smaller reporting company)
	Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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

As of August 10, 2018, there were 11,960,772 outstanding shares of the registrant’s common stock, par value $1.00 per share.

GUARANTY BANCSHARES, INC.

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements – (Unaudited)	4
	Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	4
	Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2018 and 2017	6
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017	7
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and 2017	8
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	77
Item 4.	Controls and Procedures	77
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	78
SIGNATURES		80

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)
	(Unaudited)		(Audited)
	June 30, 2018		December 31, 2017
ASSETS
Cash and due from banks	$	37,944	$	40,482
Federal funds sold	56,850		26,175
Interest-bearing deposits	4,186		24,771
Total cash and cash equivalents	98,980		91,428
Securities available for sale	243,490		232,372
Securities held to maturity	167,239		174,684
Loans held for sale	1,731		1,896
Loans, net	1,580,441		1,347,779
Accrued interest receivable	8,667		8,174
Premises and equipment, net	53,396		43,818
Other real estate owned	1,926		2,244
Cash surrender value of life insurance	25,590		19,117
Deferred tax asset	2,902		2,543
Core deposit intangible, net	5,133		2,724
Goodwill	32,019		18,742
Other assets	23,126		17,103
Total assets	$	2,244,640	$	1,962,624
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing	$	464,236	$	410,009
Interest-bearing	1,384,189		1,266,311
Total deposits	1,848,425		1,676,320
Securities sold under agreements to repurchase	12,588		12,879
Accrued interest and other liabilities	9,515		7,117
Federal Home Loan Bank advances	120,644		45,153
Subordinated debentures	13,810		13,810
Total liabilities	2,004,982		1,755,279

See accompanying notes to consolidated financial statements.

4.

GUARANTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)
	(Unaudited)			(Audited)
	June 30, 2018			December 31, 2017
Shareholders' equity
Preferred stock, $5.00 par value, 15,000,000 shares authorized, no shares issued	—			—
Common stock, $1.00 par value, 50,000,000 shares authorized, 12,823,114 and 11,921,298 shares issued, and 11,960,772 and 11,058,956 shares outstanding, respectively	12,823			11,921
Additional paid-in capital	184,548			155,601
Retained earnings	72,293			66,037
Treasury stock, 862,342 shares at cost	(20,087		)	(20,087		)
Accumulated other comprehensive loss	(9,919		)	(6,127		)
Total shareholders' equity	239,658			207,345
Total liabilities and shareholders' equity	$	2,244,640		$	1,962,624

See accompanying notes to consolidated financial statements.

5.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Interest income
Loans, including fees	$	18,242		$	15,214	$	34,498		$	29,629
Securities
Taxable	1,598			1,401		3,187			2,712
Nontaxable	932			920		1,846			1,842
Federal funds sold and interest-bearing deposits	254			257		533			745
Total interest income	21,026			17,792		40,064			34,928
Interest expense
Deposits	4,004			2,627		7,278			5,031
FHLB advances and federal funds purchased	374			58		588			137
Subordinated debentures	176			188		343			395
Other borrowed money	13			120		24			325
Total interest expense	4,567			2,993		8,233			5,888
Net interest income	16,459			14,799		31,831			29,040
Provision for loan losses	650			800		1,250			1,450
Net interest income after provision for loan losses	15,809			13,999		30,581			27,590
Noninterest income
Service charges	852			938		1,740			1,815
Net realized (loss) gain on securities transactions	(51		)	25		(51		)	25
Net realized gain on sale of loans	678			472		1,234			901
Other income	2,437			2,081		4,658			4,057
Total noninterest income	3,916			3,516		7,581			6,798
Noninterest expense
Employee compensation and benefits	7,789			6,440		15,567			13,427
Occupancy expenses	2,006			1,866		3,859			3,614
Other expenses	4,274			3,600		7,777			6,910
Total noninterest expense	14,069			11,906		27,203			23,951
Income before income taxes	5,656			5,609		10,959			10,437
Income tax provision	1,022			1,633		1,966			2,945
Net earnings	$	4,634		$	3,976	$	8,993		$	7,492
Basic earnings per share	$	0.41		$	0.40	$	0.80		$	0.80
Diluted earnings per share	$	0.41		$	0.39	$	0.80		$	0.79

See accompanying notes to consolidated financial statements.

6.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net earnings	$	4,634		$	3,976		$	8,993		$	7,492
Other comprehensive income:
Unrealized (losses) gains on securities
Unrealized holding (losses) gains arising during the period	(649		)	1,457			(4,512		)	2,686
Amortization of net unrealized gains on held to maturity securities	4			17			22			35
Reclassification adjustment for net losses (gains) included in net earnings	51			(25		)	51			(25		)
Tax effect	127			(501		)	937			(931		)
Unrealized (losses) gains on securities, net of tax	(467		)	948			(3,502		)	1,765
Unrealized holding gains (losses) arising during the period on interest rate swaps	60			(41		)	196			(6		)
Total other comprehensive (loss) income	(407		)	907			(3,306		)	1,759
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	—			—			(486		)	—
Comprehensive income	$	4,227		$	4,883		$	5,201		$	9,251

See accompanying notes to consolidated financial statements.

7.

GUARANTY BANCSHARES, INC.

CONSOLIDATED STATMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except share amounts)

	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Less: KSOP-Owned Shares			Total Shareholders’ Equity
For the Six Months Ended June 30, 2017
Balance at December 31, 2016	$	—	$	9,616	$	101,736	$	57,160		$	(20,111	)	$	(6,487	)	$	(31,661	)	$	110,253
Net earnings	—		—		—		7,492			—			—			—			7,492
Other comprehensive income	—		—		—		—			—			1,759			—			1,759
Terminated KSOP put option	—		—		—		—			—			—			34,300			34,300
Exercise of stock options	—		5		55		—			24			—			—			84
Sale of common stock	—		2,300		53,455		—			—			—			—			55,755
Stock based compensation	—		—		123		—			—			—			—			123
Net change in fair value of KSOP shares	—		—		—		—			—			—			(2,639		)	(2,639		)
Dividends:
Common - $0.26 per share	—		—		—		(2,576		)	—			—			—			(2,576		)
Balance at June 30, 2017	$	—	$	11,921	$	155,369	$	62,076		$	(20,087	)	$	(4,728	)	$	—		$	204,551
For the Six Months Ended June 30, 2018
December 31, 2017	$	—	$	11,921	$	155,601	$	66,037		$	(20,087	)	$	(6,127	)	$	—		$	207,345
Net earnings	—		—		—		8,993			—			—			—			8,993
Other comprehensive loss	—		—		—		—			—			(3,306		)	—			(3,306		)
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	—		—		—		486			—			(486		)	—			—
Exercise of stock options	—		2		44		—			—			—			—			46
Issuance of common stock	—		900		28,668		—			—			—			—			29,568
Stock based compensation	—		—		235		—			—			—			—			235
Dividends:
Common - $0.28 per share	—		—		—		(3,223		)	—			—			—			(3,223		)
Balance at June 30, 2018	$	—	$	12,823	$	184,548	$	72,293		$	(20,087	)	$	(9,919	)	$	—		$	239,658

See accompanying notes to consolidated financial statements.

8.

GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	For the Six Months Ended June 30,
	2018			2017
Cash flows from operating activities
Net earnings	$	8,993		$	7,492
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation	1,588			1,599
Amortization	532			524
Deferred taxes	976			(160		)
Premium amortization, net of discount accretion	2,151			2,357
Net realized gain on securities transactions	51			(25		)
Gain on sale of loans	(1,234		)	(901		)
Provision for loan losses	1,250			1,450
Origination of loans held for sale	(36,753		)	(29,330		)
Proceeds from loans held for sale	38,152			30,359
Write-down of other real estate and repossessed assets	—			1
Net loss on sale of premises, equipment, other real estate owned and other assets	103			84
Stock based compensation	235			123
Net change in accrued interest receivable and other assets	(4,465		)	2,761
Net change in accrued interest payable and other liabilities	1,029			1,909
Net cash provided by operating activities	12,608			18,243
Cash flows from investing activities
Securities available for sale:
Purchases	(23,927		)	(113,208		)
Proceeds from sales	9,457			13,839
Proceeds from maturities and principal repayments	13,087			11,675
Securities held to maturity:
Proceeds from sales	—			923
Proceeds from maturities and principal repayments	6,333			4,950
Cash paid in connection with acquisitions	(6,423		)	—
Cash received from acquired banks	24,927			—
Net purchases of premises and equipment	(2,543		)	(1,313		)
Net proceeds from sale of premises, equipment, other real estate owned and other assets	1,488			394
Net increase in loans	(79,662		)	(52,584		)
Net cash used in investing activities	(57,263		)	(135,324		)
Cash flows from financing activities
Net change in deposits	(9,316		)	69,582
Net change in securities sold under agreements to repurchase	(291		)	3,294
Proceeds from FHLB advances	220,000			—
Repayment of FHLB advances	(155,009		)	(30,009		)
Proceeds from other debt	—			2,000
Repayment of other debt	—			(20,286		)
Repayments of debentures	—			(5,000		)

See accompanying notes to consolidated financial statements.

9.

GUARANTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	For the Six Months Ended June 30,
	2018			2017
Exercise of stock options	46			84
Sale of common stock	—			55,755
Cash dividends	(3,223		)	(2,576		)
Net cash provided by financing activities	52,207			72,844
Net change in cash and cash equivalents	7,552			(44,237		)
Cash and cash equivalents at beginning of period	91,428			127,543
Cash and cash equivalents at end of period	$	98,980		$	83,306
Supplemental disclosures of cash flow information
Interest paid	$	7,835		$	5,973
Income taxes paid	2,508			2,840
Supplemental schedule of noncash investing and financing activities
Transfer loans to other real estate owned and repossessed assets	437			467
Common stock issued in acquisitions	29,568			—
Transfer of KSOP shares	—			34,300
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	486			—
Net change in fair value of KSOP shares	—			2,639

See accompanying notes to consolidated financial statements.

10.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Presentation: The consolidated financial statements in this Quarterly Report on Form 10-Q (this “Report”) include the accounts of Guaranty, the Bank, and their respective other direct and indirect subsidiaries and any other entities in which Guaranty has a controlling interest. The Bank has six wholly-owned non-bank subsidiaries, Guaranty Company, Inc., G B COM, INC., 2800 South Texas Avenue LLC, Pin Oak Realty Holdings, Inc., Pin Oak 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, 2017, included in Guaranty’s Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

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

KSOP Repurchase Right: In accordance with applicable provisions of the Internal Revenue Code, the terms of Guaranty’s employee stock ownership plan with 401(k) provisions (“KSOP”), provided that, for so long as Guaranty was a privately-held company without a public market for its common stock, KSOP participants would have the right, for a specified period of time, to require Guaranty to repurchase shares of its common stock that are distributed to them by the KSOP. This repurchase obligation terminated upon the consummation of Guaranty’s initial public offering and listing of its common stock on the NASDAQ Global Select Market in May 2017. However, because Guaranty was privately-held without a public market for its common stock as of and for the quarter ended March 31, 2017, the shares of common stock held by the KSOP are reflected in the Company’s consolidated statement of changes in shareholders' equity for the six months ended June 30, 2017 in a column called “KSOP-owned shares”. As a result of the initial public offering, the consolidated statement of changes in shareholders' equity for the six months ended June 30, 2017 includes an adjustment for the inclusion of such KSOP-owned shares in total shareholders' equity as "terminated KSOP

(Continued)

11.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

put option." For all periods following Guaranty’s initial public offering and continued listing of the Company’s common stock on the NASDAQ Global Select Market, the KSOP-owned shares are included in, and not be deducted from, shareholders’ equity.

Recent Accounting Pronouncements:

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

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. In addition, the amendments in this ASU provide a detailed framework to assist entities in evaluating whether a set of assets and activities constitutes a business, as well as clarify the definition of the term output so the term is consistent with how outputs are described in Topic 606. The Company adopted ASU 2017-01 is effective for first quarter of 2018. The adoption of this ASU was not significant and we do not expect the adoption of this guidance to be material to our consolidated financial statements.

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

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The adoption of this ASU was not significant and we do not expect the adoption of this guidance to be material to our consolidated financial statements.

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

(Continued)

12.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit loss" ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has assembled a transition team to assess the adoption of this ASU, and has developed a project plan regarding implementation.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key informationabout leasing arrangements. The amendments in this ASU are effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption of this ASU is permitted for all entities. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on the Company’s condensed consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio prospectively as of June 30, 2018 using an exit price notion. See Note 13 – Fair Value for further information regarding the valuation of these loans.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 606), followed by various amendments to the standard, including clarification of principal versus agent considerations, narrow scope improvements and other technical corrections, all of which are codified in ASU 606. The amendments in these updates amend existing guidance related to revenue from contracts with customers. The amendments supersede and replace nearly all existing revenue recognition guidance, including industry-specific guidance, establish a new control-based revenue recognition model, change the basis for deciding when revenue is recognized over a time or point in time, provide new and more detailed guidance on specific topics and expand and improve disclosures about revenue. In addition, these amendments specify the accounting for some costs to obtain or fulfill a contract with a customer. The Company has applied ASU 2014-09, which was effective on January 1, 2018, using the modified retrospective approach to all existing contracts with customers covered under the scope of the standard. The adoption of this ASU was not significant to the Company and had no material effect on how the Company recognizes revenue nor did it result in a cumulative effect adjustment or any presentation changes to the consolidated financial statements.

The majority of the Company's revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, loan processing fees and investment securities, as well as revenue related to mortgage banking activities, and BOLI, as these activities are subject to other accounting guidance. Descriptions of revenue-generating activities that are within the scope of ASC 606, and are presented in the accompanying Consolidated Statements of Income as components of noninterest income, are as follows:

(Continued)

13.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

• Deposit services. Service charges on deposit accounts include fees for banking services provided, overdrafts and non-sufficient funds. Revenue is generally recognized in accordance with published deposit account agreements for retail accounts or contractual agreements for commercial accounts.

• Merchant and debit card fees. Merchant and debit card fees includes interchange income that is generated by our customers’ usage and volume of activity. Interchange rates are not controlled by the Company, which effectively acts as processor that collects and remits payments associated with customer debit card transactions. Merchant service revenue is derived from third party vendors that process credit card transactions on behalf of our merchant customers. Merchant services revenue is primarily comprised of residual fee income based on the referred merchant’s processing volumes and/or margin.

• Fiduciary income. Trust income includes fees and commissions from investment management, administrative and advisory services primarily for individuals, and to a lesser extent, partnerships and corporations. Revenue is recognized on an accrual basis at the time the services are performed and when we have a right to invoice and are based on either the market value of the assets managed or the services provided.

• Other noninterest income. Other noninterest income includes among other things, mortgage loan origination fees, wire transfer fees, stop payment fees, loan administration fees and mortgage warehouse lending fees. The majority of these fees in other noninterest income are not subject to the requirements of ASC 606. Fees that are within the scope of ASC 606 are generally received at the time the performance obligations are met.

NOTE 2 - ACQUISITIONS

On close of business June 1, 2018, the Company acquired 100% of the outstanding shares of capital stock of Westbound Bank, a Texas banking association (“Westbound”), in exchange for a combination of cash and shares of the Company’s common stock amounting to total consideration of $35,991. Under the terms of the acquisition, the Company issued 899,816 shares of the Company’s common stock in exchange for 2,311,952 shares of Westbound, representing 100% of the outstanding shares of common and preferred stock of Westbound. With the acquisition, the Company has expanded its market into the Houston metropolitan region. Results of operations of the acquired company were included in the Company’s results beginning June 2, 2018. Acquisition-related costs of $737 are included in other operating expenses in the Company’s consolidated statement of earnings for the six months ended June 30, 2018. The fair value of the common shares issued as part of the consideration paid for Westbound was determined based upon the closing price of the Company’s common shares on the acquisition date.

Goodwill of $13,277 arising from the acquisition of Westbound consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. None of the goodwill is expected to be deductible for income tax purposes. The following table summarizes the consideration paid for Westbound and the fair value of the assets acquired and liabilities assumed recognized at the acquisition date:

Consideration:

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

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

(Continued)

14.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

	Westbound
Cash and due from banks	$	24,927
Investment securities available for sale	15,264
Loans, net of discount	154,687
Accrued interest receivable	651
Premises and equipment	8,625
Nonmarketable equity securities	—
Core deposit intangible	2,700
Other assets	9,346
Total assets acquired	216,200
Non-interest bearing deposits	40,595
Interest bearing deposits	140,826
Federal Home Loan Bank advances	10,500
Accrued interest and other liabilities	1,565
Total liabilities assumed	193,486
Net assets acquired	22,714
Total consideration paid	35,991
Goodwill	$	13,277

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

NOTE 3 - MARKETABLE SECURITIES

The following tables summarize the amortized cost and fair value of securities available for sale and securities held to maturity as of June 30, 2018 and December 31, 2017 and the corresponding amounts of gross unrealized gains and losses:

(Continued)

15.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

June 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	18,784	$	—	$	643	$	18,141
Municipal securities	18,211		48		305		17,954
Mortgage-backed securities	95,062		—		3,820		91,242
Collateralized mortgage obligations	119,371		—		3,218		116,153
Total available for sale	$	251,428	$	48	$	7,986	$	243,490
Held to maturity:
Municipal securities	$	143,295	$	1,041	$	1,481	$	142,855
Mortgage-backed securities	18,880		88		472		18,496
Collateralized mortgage obligations	5,064		61		35		5,090
Total held to maturity	$	167,239	$	1,190	$	1,988	$	166,441

December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Corporate bonds	$	18,823	$	64	$	50	$	18,837
Municipal securities	7,746		—		200		7,546
Mortgage-backed securities	92,471		—		1,793		90,678
Collateralized mortgage obligations	116,809		5		1,503		115,311
Total available for sale	$	235,849	$	69	$	3,546	$	232,372
Held to maturity:
Municipal securities	$	146,496	$	2,244	$	218	$	148,522
Mortgage-backed securities	22,026		199		230		21,995
Collateralized mortgage obligations	6,162		111		—		6,273
Total held to maturity	$	174,684	$	2,554	$	448	$	176,790

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company did not record any OTTI losses on any of its securities during the six months ended June 30, 2018 or for the year ended December 31, 2017.

(Continued)

16.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Information pertaining to securities with gross unrealized losses as of June 30, 2018 and December 31, 2017 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is detailed in the following tables:

	Less Than 12 Months					12 Months or Longer					Total
June 30, 2018	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(643	)	$	18,141	$	—		$	—	$	(643	)	$	18,141
Municipal securities	(17		)	807		(288		)	7,410		(305		)	8,217
Mortgage-backed securities	(314		)	16,151		(3,506		)	75,091		(3,820		)	91,242
Collateralized mortgage obligations	(2,504		)	91,904		(714		)	23,847		(3,218		)	115,751
Total available for sale	$	(3,478	)	$	127,003	$	(4,508	)	$	106,348	$	(7,986	)	$	233,351
Held to maturity:
Municipal securities	$	(952	)	$	68,662	$	(529	)	$	19,466	$	(1,481	)	$	88,128
Mortgage-backed securities	(158		)	6,686		(314		)	8,538		(472		)	15,224
Collateralized mortgage obligations	(35		)	2,594		—			—		(35		)	2,594
Total held to maturity	$	(1,145	)	$	77,942	$	(843	)	$	28,004	$	(1,988	)	$	105,946

	Less Than 12 Months					12 Months or Longer					Total
December 31, 2017	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Corporate bonds	$	(50	)	$	8,019	$	—		$	—	$	(50	)	$	8,019
Municipal securities	—			—		(200		)	7,546		(200		)	7,546
Mortgage-backed securities	(658		)	42,881		(1,135		)	47,797		(1,793		)	90,678
Collateralized mortgage obligations	(1,091		)	93,584		(412		)	21,258		(1,503		)	114,842
Total available for sale	$	(1,799	)	$	144,484	$	(1,747	)	$	76,601	$	(3,546	)	$	221,085
Held to maturity:
Municipal securities	$	(37	)	$	9,230	$	(181	)	$	19,961	$	(218	)	$	29,191
Mortgage-backed securities	(57		)	6,499		(173		)	9,747		(230		)	16,246
Collateralized mortgage obligations	—			—		—			—		—			—
Total held to maturity	$	(94	)	$	15,729	$	(354	)	$	29,708	$	(448	)	$	45,437

The number of investment positions in an unrealized loss position totaled 175 at June 30, 2018. The securities in a loss position were composed of tax-exempt municipal bonds, corporate bonds, collateralized mortgage obligations and mortgage backed securities.Management believes the unrealized loss on the remaining securities is a function of the movement of interest rates since the time of purchase. Based on evaluation of available evidence, including recent changes in interest rates, credit rating information and information obtained from regulatory filings, management

(Continued)

17.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment would be reduced and the resulting loss recognized in net income in the period the OTTI is identified. The Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be OTTI at June 30, 2018.

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

As of June 30, 2018, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with fair values of approximately $255,163 and $245,600 at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public fund deposits and for other purposes as required or permitted by law.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Proceeds from sales	$	9,457		$	14,762		$	9,457		$	14,762
Gross gains	—			38			—			38
Gross losses	(51		)	(13		)	(51		)	(13		)

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

There were no held to maturity securities sold during the three or six months ended June 30, 2018. Sale of securities held to maturity were as follows for:

	Three Months Ended June 30,			Six Months Ended June 30,
	2017				2017
Proceeds from sales	$	923			$	923
Amortized cost	907				907
Gross realized gains	16				16
Tax expense related to securities gains/losses	(4		)		(4		)

The contractual maturities at June 30, 2018 of available for sale and held to maturity securities at carrying value and estimated fair value are shown below. The Company invests in mortgage-backed securities and collateralized mortgage obligations that have expected maturities that differ from their contractual maturities. These differences arise because borrowers and/or issuers may have the right to call or prepay their obligation with or without call or prepayment penalties.

(Continued)

18.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

	Available for Sale				Held to Maturity
June 30, 2018	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	—	$	—	$	1,175	$	1,175
Due after one year through five years	7,373		7,216		19,089		19,295
Due after five years through ten years	21,924		21,469		40,520		41,178
Due after ten years	7,698		7,410		82,511		81,207
Mortgage-backed securities	95,062		91,242		18,880		18,496
Collateralized mortgage obligations	119,371		116,153		5,064		5,090
Total Securities	$	251,428	$	243,490	$	167,239	$	166,441

(Continued)

19.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	June 30, 2018			December 31, 2017
Commercial and industrial	$	234,396		$	197,508
Real estate:
Construction and development	211,745			196,774
Commercial real estate	570,448			418,137
Farmland	68,272			59,023
1-4 family residential	392,940			374,371
Multi-family residential	39,023			36,574
Consumer	52,949			51,267
Agricultural	23,362			25,596
Overdrafts	339			294
Total loans	1,593,474			1,359,544
Net of:
Deferred loan fees	857			1,094
Allowance for loan losses	(13,890		)	(12,859		)
Total net loans	$	1,580,441		$	1,347,779

The following tables present the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method for the six months ended June 30, 2018, for the year ended December 31, 2017 and for the six months ended June 30, 2017:

For the Six Months Ended June 30, 2018	Commercial and industrial			Construction and development			Commercial real estate			Farmland		1-4 family residential			Multi-family residential		Consumer			Agricultural			Overdrafts			Total
Allowance for loan losses:
Beginning balance	$	1,581		$	1,724		$	4,585		$	523	$	3,022		$	629	$	602		$	187		$	6		$	12,859
Provision for loan losses	210			(82		)	1,004			125		(227		)	69		37			52			62			1,250
Loans charged-off	(51		)	—			(33		)	—		(13		)	—		(143		)	(1		)	(76		)	(317		)
Recoveries	2			—			—			—		50			—		26			—			20			98
Ending balance	$	1,742		$	1,642		$	5,556		$	648	$	2,832		$	698	$	522		$	238		$	12		$	13,890
Allowance ending balance:
Individually evaluated for impairment	$	209		$	—		$	49		$	78	$	9		$	—	$	—		$	—		$	—		$	345
Collectively evaluated for impairment	1,533			1,642			5,507			570		2,823			698		522			238			12			13,545
Ending balance	$	1,742		$	1,642		$	5,556		$	648	$	2,832		$	698	$	522		$	238		$	12		$	13,890
Loans:
Individually evaluated for impairment	$	1,076		$	—		$	6,530		$	222	$	1,438		$	—	$	—		$	493		$	—		$	9,759
Collectively evaluated for impairment	233,320			211,745			563,918			68,050		391,502			39,023		52,949			22,869			339			1,583,715
Ending balance	$	234,396		$	211,745		$	570,448		$	68,272	$	392,940		$	39,023	$	52,949		$	23,362		$	339		$	1,593,474

(Continued)

20.

GUARANTY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

For the year ended December 31, 2017	Commercial and industrial			Construction and development		Commercial real estate			Farmland		1-4 family residential			Multi-family residential		Consumer			Agricultural			Overdrafts			Total
Allowance for loan losses:
Beginning balance	$	1,592		$	1,161	$	3,264		$	482	$	3,960		$	281	$	585		$	153		$	6		$	11,484
Provision for loan losses	272			563		1,405			41		(418		)	348		253			276			110			2,850
Loans charged-off	(1,080		)	—		(84		)	—		(543		)	—		(344		)	(242		)	(165		)	(2,458		)
Recoveries	797			—		—			—		23			—		108			—			55			983
Ending balance	$	1,581		$	1,724	$	4,585		$	523	$	3,022		$	629	$	602		$	187		$	6		$	12,859
Allowance ending balance:
Individually evaluated for impairment	$	17		$	—	$	27		$	85	$	5		$	—	$	—		$	—		$	—		$	134
Collectively evaluated for impairment	1,564			1,724		4,558			438		3,017			629		602			187			6			12,725
Ending balance	$	1,581		$	1,724	$	4,585		$	523	$	3,022		$	629	$	602		$	187		$	6		$	12,859
Loans: