Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q3 2023 Earnings Call Transcript

Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q3 2023 Earnings Call Transcript October 16, 2023

Guaranty Bancshares, Inc. misses on earnings expectations. Reported EPS is $0.54 EPS, expectations were $0.55.

Operator: Good morning and welcome to Guaranty Bancshares Third Quarter 2023 Earnings Call. My name is Nona Branch, and I will be your operator for today’s call. I’d like to remind everyone this call is being recorded. After our prepared remarks, we will have a Q&A session. Our host today for today’s call will be Ty Abston, Chairman and Chief Executive Officer of the company; Cappy Payne, Senior Executive Vice President, and Chief Financial Officer of the company; Shalene Jacobson, Executive Vice President, and Chief Financial Officer of the bank. To begin our call, I will now turn it over to our CEO Ty Abston.

Ty Abston: Thank you, Nona. Good morning, everyone, and again, welcome to our third quarter earnings call. We did issue a press release this morning that , kind of, went over our quarter and a lot of detail. We do have a presentation that Cappy and Shalene are going to go through to give a little more color on the quarter and kind of our operations and then we’ll open it up to Q&A afterwards. Cappy?

Cappy Payne: All right, thank you, Ty. We’ll take a quick look at the balance sheet, then the income statement here as I talk through the details. Looking at the balance sheet, total assets ended the quarter at $3.2 billion, that remained pretty consistent from the linked quarter. We did show a small increase or an increase for the quarter in total assets of $24 million. For the year 2023, assets are down about $120 million, that’s 3.7%. That decrease mainly is reflected in our bond portfolio, it’s down $110 million since the beginning of the year. We had some short-term treasuries that we bought about $65 million that matured and about $25 million in called or matured munis during the year. So looking at loans, so it’s obviously the bigger bulk of our assets, they were $2.3 billion at the end of Q3, they did decrease for the quarter about $16 million and year-to-date they’re down about $60 million.

We address that in the earnings release, I don’t know what our thought is in that regard just in broad terms, in that we’ve tightened our credit underwriting as most banks have, and of course with higher rates, loan demand has softened some. The bulk of that $60 million year-to-date decrease I mentioned is in the construction and development bucket, just FYI. Deposits increased $55 million on the liability side that’s about 2% to $2.7 billion and it’s a — and there are $23 million decrease since beginning of year. As we’ve had for the last 12-months actually a continual shift in deposits into interest-bearing deposits our — still our DDA deposits are sitting at 34% of total deposits. Shalene will give a little more detail on the deposits here in just a minute.

Our equity capital remains strong ended the quarter at $296.8 million, that’s 9.2% of average assets and it’s a TCE, a tangible common equity ratio of 8.21%, down about 8 basis points. If you’re looking at our change of our capital, it did decrease a little bit during the quarter. We had earnings of $6.3 million and as far as capital is concerned, that was offset by — somewhat offset by an increase in our unrealized loss on our bonds, which is our AOCI of $3 million and then we did pay a $2.7 million dividend during the quarter and repurchase company stock of about $1.7 million, that’s 61,688 shares during the quarter. That means year-to-date we bought back repurchased 410,000 shares and that’s 3.4% of shares outstanding. Again looking at that dividend is again we pay a pretty consistent dividend, it annualizes out to $0.92 a share for the year, that’s up from $0.88 last year, which is a 5% increase.

And the yield at today’s price is over 3.25%. So then turning to the income statement, our Q3 net earnings were $6.3 million, that’s $0.54 per share. There really were no extraordinary items in the quarter, so this would be our core earnings. So if you compare that this quarter Q3 to the core earnings of Q2, they’re down about $1.2 million, that’s going to be driven by lower, mainly by lower net interest income of $1.4 million and lower non-interest income of about $250,000 when you compare it to the core non-interest income of Q2. So I thought I’d take a little bit of dive and look into the components of the margin, because that’s obviously the major decrease from the prior quarter, and it is a variance from what consensus projections had out there.

And looking at the averages table in the earnings release, Q3 compared to Q2, our interest-bearing deposit average balance increased $72 million. Almost all of that increase is due to an increase in time money, CDs, which obviously has a higher costing deposit cost. On that same averages balance and yields table, our non-interest bearing or our DDA checking accounts decreased $60 million. And then our money market accounts or our non-interest bearing or non-maturing interest bearing remained pretty steady. So both the DDA and the money market balance accounts were affected in part by decrease in our public fund money of $20 million for the quarter, which is typical for Q3 activity. Now, looking back at the cost of that interest-bearing deposit related to those — that time deposit activity I mentioned the yield on interest bearing accounts was 3.0% for the quarter and that’s compared to 2.41% for the linked quarter, a little more than what increased and what we had projected, but that’s obviously affected by that shift in deposits and of course higher CD rates.

But again, most all of that increase came in that time deposit category. If you look at our total cost of deposits, including the DDA balances for the quarter it was 1.98%, which is up 45 basis points from the linked quarter when it was 1.53%. On a one note you’ll see on the earnings release when you look at the detail the increase in these costing liabilities is being somewhat offset by rising rates in our loan book and other assets too, but looking at other earning assets, but looking at the loan yield, it increased 21 basis points from linked quarter and 85 basis points year-over-year. We have a relatively short average life in our loan portfolio, so we expect to see that quarterly increase and that category speed up in the coming quarters as interest rates continue to stay higher for longer and we have the opportunity to reprice those loans in the coming quarters.

So all that equates to our net interest margin being decreased about 17 basis points from last quarter, it was 3.19% and in Q3 this quarter it is 3.02%. I mentioned briefly our non-interest income, our core non-interest income decreased about $250,000 from linked quarters, core non-interest income, that’s about 5%. That’s almost all of that is due to lower volume related to the gain on sale of loans, both in the secondary market and SBA activity. Expenses are detailed on the earnings release for you, they’re very flat for the quarter, and that made our efficiency ratio increase or all those components made our efficiency ratio increased to 72.5% for the quarter. So I’ll turn it over to Shalene and she has a few comments about the loan portfolio and capital and liquidity.

Shalene Jacobson: Yes, thank you, Cappy. As Cappy mentioned, loans are down about $15.7 million this quarter, primarily in our construction and development portfolio as those projects that have been on our books for a while are moving to permanent financing or they’re paying off. Overall, lending has slowed down as we’ve tightened underwriting standards and borrower demand is lower as a result of higher interest rates. However, we did originate about $76 million in new loans during the quarter, with an average rate of 8.49%. So new loan yields are strong. Our non-performing assets continue to remain at historically low levels at 0.09% of total assets for the quarter, compared to 0.11% in the prior quarter and charge-offs also remain low at $619,000, and we had a net charge-off to average loans ratio of 0.11%.

Commercial real estate and office related loans continue to be a hot topic, but we manage our concentrations in those areas very well. We’ve got a diverse portfolio and we really don’t have any significant concerns in those areas right now. CRE represents about 38.9% of our total loan portfolio and of that 38.9%, 4.7% is office-related CRE; but the average loan balance on that office CRE is $523,000. So it’s primarily mom-and-pop office type buildings instead of the larger commercial office developments. We did have an increase in substandard loans during the quarter of $21.4 million. However, total substandard loans still represent only 1.3% of the total loan portfolio. The increase results primarily from two loans; one, had a balance of or has a balance of $14.5 million and the other with a balance of $6.9 million.

Both of those loans are currently performing. They both have low LTVs and at this time we expect minimal to no losses as we work through those two credits. Overall, the quality of the portfolio really does remain strong. We do expect some potential challenges in the coming months, but we continue to believe that our borrowers and our overall credit metrics will continue to benefit from the good tailwinds that we have here in Texas, compared to some other geographic areas. Our quarter end ACL coverage is 1.34% of total loans. We did not have a provision for credit losses during the third quarter. Our qualitative factor adjustments that we’ve made in previous quarters within our CECL model are still relevant today and the decrease in our loan portfolio has allowed us to not need additional provisions this quarter.

On to deposits, as Cappy mentioned, deposits grew every month during the quarter and we ended the quarter with an increase of $55.5 million. With respect to overall deposit risk, Guaranty has a very granular and historically stable core deposit base. At quarter end, we had more than 87,000 deposit accounts with an average account balance of only $30,482. And our uninsured deposits are also relatively low, excluding public funds and Guaranty-owned accounts. Uninsured deposits were 25% of total deposits at quarter end. Our loan-to-deposit ratio continues to improve as deposit balances increase and loan balances decrease. Our ratio was 87.2% in the third quarter, compared to 89.7% in the second quarter and 90.6% in the same quarter in 2022. Although down slightly from prior quarters, as Cappy mentioned, non-interest bearing deposits still represent 34% of total deposits.

We expect that ratio to continue to move down towards our historical pre-pandemic average, which was more in the mid to high-20s. And as far as the deposit betas, they were high again in third quarter, but we don’t anticipate any more large increases in deposit rates for the remainder of this year. Some deposits will continue to reprice as CDs mature and renew into higher yielding or higher rate CDs and some of the customers will continue to move from non-interest bearing to interest bearing accounts. However, we really do expect deposit betas to be much lower in the fourth quarter. Liquidity is good. We ended the quarter with a liquidity ratio of 14%, and we used some of our cash flows for matured securities and loans to pay down federal home loan bank advances by about $20 million during the quarter and we also purchased some small amounts of mortgage-backed securities at higher yields during the quarter as well.

We have contingent liquidity of about $1.5 billion available through either federal home loan bank advances, federal reserve bank programs, and other correspondent fed funds lines and lines of credit. Our total net unrealized losses on investment securities remains reasonable at $65.3 million, of which $24.7 million is related to our AFS securities and included within our AOCI on the balance sheet. Capital is also strong. As Cappy mentioned, we use some of our excess capital in the third quarter to repurchase shares of Guaranty stock and add intrinsic value to our shareholders. We repurchased 61,688 shares, an average price of $27.38. And then finally, with respect to the declines I just mentioned in the fair value of investment securities, even if we had to liquidate the entire portfolio, which we certainly don’t expect to do or anticipate doing, our total equity to average assets ratio will remain pretty good at 8.2%, right now it’s 9.2%.

That concludes our prepared remarks. So I will turn it back over to Nona for Q&A.

Operator: Thank you, Shalene. It is time for our Q&A session. Our first question today will be from Tim Mitchell with Raymond James.

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Q&A Session

Tim Mitchell: Hey everyone, good morning. Thanks for taking my questions today. I appreciate the color there on NIM this quarter. Obviously it’s getting pretty close to that 3% level you’ve been talking about staying above through the cycle. So I guess kind of given how things developed this quarter, could you talk about where you think NIM goes from here?

Cappy Payne: I’ll take that, Tim. Our modeling has projected out that we’ll stay right at 3%, I think what will affect that more than anything is the mix of the deposits. As I said, basically all the increase came in the time deposits last quarter. We’ve got modeling that says that we can pretty well keep it near the 3%. We’re confident that the pace of increase in rates is really going to slow down in Q4 from what we did in Q2 and Q3 for that matter. So we can control the deposit rate somewhat. What we don’t control so much is the mix. So we’ll see how that lays out. But our modeling has us right at near the 3%, whether we go below it just a little bit maybe, but certainly not much.

Tim Mitchell: Awesome, thank you. And I guess next on the loan growth front, loans were down a little bit this quarter, which was kind of consistent with what you’ve been talking about previously, being comfortable with, you know, kind of letting the balance sheet shrink a little bit? I guess does that remain true moving forward for the rest of the year? And then how do you think about loan growth going into 2024, if rates say elevated for longer?

y Abston: Hey, Tim, this Ty. I think low growth in ‘24 is going to be muted. I would say it would be low-single-digit at best, just with higher rates. I think economic activity is going to be slower as we would all expect. So that’s, kind of, how we’re starting to kind of put together our modeling for ‘24 and budget for ‘24, but that’s kind of how we’re going to look at next year.

Tim Mitchell: Awesome. And then just lastly for me, buyback took a step back this quarter from second quarter levels. I was just curious if you could discuss the rationale behind the more muted activity? And then how you think about repurchase activity moving forward?

Ty Abston: I mean, like we’ve said in the past, it’s a capital allocation priority for us when it hits our metrics on valuation. And we did not buy as much stock back this last quarter just, because the price was, you know, stronger than and it had been previous quarter during the year, but as we see opportunities to buy back stock at lower valuations we certainly will.

Tim Mitchell: Perfect. Awesome. Well thank you guys for taking my questions. I’ll hop back now.

Ty Abston: Thank you, Tim.

Cappy Payne: Thanks, Tim.

Operator: Our next question today is from Graham Dick with Piper Sandler.

Graham Dick: Hey everybody, good morning.

Ty Abston: Good morning, Graham.

Cappy Payne: Good morning, Graham.

Graham Dick: So I just — I kind of wanted to circle back to the NIM just quickly and just get some more color on a couple of things. So the loan yields, they’re up 25 — 26 — 24 over 20 basis points of the last three quarters. And it sounds like you guys think that is a sustainable rate going forward. I just wanted to get confirmation of that? I mean, if you get $75 million of the originations, you’ve got a certainly a lot of renewals and repricing is going on in the quarter, such as a ton of churn. Do you think that that 20 plus basis point improvements, kind of, sustainable over the next couple of quarters? And if so, I mean, does that mean that, you know, the NIM is, like you said, pretty close to a bottom, I guess, here?