Guaranty Bancshares, Inc. (NYSE:GNTY) Q3 2023 Earnings Conference Call October 16, 2023 11:00 AM ET
Company Participants
Ty Abston – Chairman and Chief Executive Officer
Cappy Payne – Senior Executive Vice President and Chief Financial Officer
Shalene Jacobson – Executive Vice President and Chief Financial Officer
Conference Call Participants
Tim Mitchell – Raymond James
Graham Dick – Piper Sandler
Brady Gailey – KBW
Matt Olney – Stephens, Inc.
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.
Question-and-Answer Session
Operator
Thank you, Shalene. It is time for our Q&A session. Our first question today will be from Tim Mitchell with Raymond James.
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?
Ty Abston
Graham, this is Ty. So, yes, we think that is sustainable. I mean, the reality is the first-half of the year, we were raising rates weekly. And so — but we haven’t raised rates in the last few weeks and just the velocity of increase, we’ve been playing catch up on repricing the balance sheet. But as rates, we’re anticipating rates to stay level. If rates do stay level from here, and we’re not having to raise rates, then we’re repricing the asset side of the balance sheet pretty fast. And we continue to have a pretty short duration loan portfolio.
So at that rate, which we think is pretty consistent and will be consistent going forward, we will catch up on our NIM pretty quickly. We’re being conservative and not projecting that, because who knows what lays in front of us, but we do think we do have less of headwinds related to our net interest margin for sure going forward.
Graham Dick
Okay, that’s helpful. And then just specifically on the time deposit piece. Can you talk about what your appetite is for that, kind of, funding going forward and also what the cost of those new time deposits were this quarter? And maybe how you’d like to manage the loan to deposit ratio from here? Obviously, if loan growth is going to be muted, maybe you don’t need a bunch of, you know, a bunch more time deposits, I guess. I’m just wondering guys, how you guys are thinking about that? And how might play into your funding strategy over the next, you know, several months?
Ty Abston
Yes, we’re in the middle of the road as far as our rates on time deposits and the marginal — our marginal cost of time deposit right now is around 5% I believe, 5%, 10% maybe. And that, I mean, that mix is, as Cappy and Shalene talked about, has a lot to do with the fact that, you know, our customers are moving money out of transaction accounts into time deposits, which makes sense, because we’re yield now. So we’re seeing some of that and that definitely has slowed, but we’re continuing to see some of that migration of our deposits.
As far as our goal of loan to deposit ratio has always been around 90% bogey, as far as the max and we’re comfortable below that. My guess is we will be in the mid-80s during the year. We continue as part of our model to focus on retail banking core deposits. That’s what we did two years ago, three years ago, and what we’re doing today. So as we continue to build core deposits and the loan side is more muted, then we’re going to probably lowering our loan deposit ratio throughout the year, which we’re comfortable with, because that gives us plenty of funding as the economy turns to start lending more aggressively as things turn around.
We are adding duration to the bond portfolio each month in small increments, but we think now is a good time to add some duration. So we’re taking $5 million to $7 million or so of cash flow and adding a little duration to the bond portfolio and have really all year long.
Graham Dick
Okay, that’s really helpful. And I totally understand the pull forward of growth here for what could be a pretty strong economy in Texas over the next, you know, the long-term. And I guess the lastly on the NIM would be just how you guys are thinking about, I guess, your non-interest bearing deposit levels, I know Shalene said mid to high-20s? How are you modeling that? Like what’s the cadence of that drawdown from here? If it’s at 34% today, I mean, are we talking 30% by the beginning of 2024? Or what’s it look like on your [Indiscernible] end?
Cappy Payne
I think 30% Graham is really what we’re modeling. I think it could go to high-20s probably — possibly, but 30% what we’re modeling.
Graham Dick
Okay, great. Got it, thank you guys that’s all for me today.
Ty Abston
Thank you, Graham.
Operator
Our next question will be from Brady Gailey with KBW. Brady can you unmute?
Brady Gailey
Yes. Good morning, guys.
Ty Abston
Good morning, Brady.
Cappy Payne
Good morning, Brady.
Brady Gailey
I know in the past we’ve talked about expenses for this year being around that $82 million, $83 million mark, but it looks like, you know, we’ve already seen the first three quarters, so there’s only one quarter left. It looks like you all could do a little better than that. Maybe just talk about expenses in 4Q? And then longer term, I think you’ve talked about expenses being around 2.5%. Is that still the right way to think about it as we head into ‘24?
Cappy Payne
Yes, Brady, that’s still our yield sign and something we pay attention to at that 2.5% of asset level. I still think we’re going to be in that, you know, $82 million range, $81 million to $82 million range, which that’s right at the 2.5%, maybe a little bit over. But we pay attention to that number and that’s our marker that we want to stay within.
Brady Gailey
Okay. And then, you know, another quarter of a zero provision. I know credit is still pretty clean here, but how do you think about that, you know, provision line as we head to next year? I mean, credit, I know you had a couple of CRE loans go into substandard, but that, you know, it’s still a relatively low level. So how do you think about credit and the provision into next year?
Ty Abston
Brady, this is Ty. We’re starting to work on that for ‘24. I mean, we’re going to project out some conservative assumptions for credit. We don’t see any concerns at this point. But just the lack of clarity is going to have us project some, moderate level of provision for ‘24. We will not, we’re not projecting a lot of net growth. So any kind of addition we make would be additional reserves just to show up the portfolio. But at this point we don’t have an exact number, but it’s going to be — we’ll project enough that we’re comfortable that we can more than cover and anticipate downturn if we see one.
Brady Gailey
All right. And then finally for me, if you look at the first-half of the year, deposits were down a little bit, but you grew deposits 8% link quarter annualized in 3Q, which was great to see. Looks like a lot of that growth came from core deposits. Maybe just talk about how you’re thinking about deposit growth going forward?
A – Ty Abston
Well again, I mean that’s a big part of our model and core competency is retail banking and core deposits. And that’s a — we are very likely going to name a Chief Retail and Deposit Officer in the coming year to refocus our efforts in that area corporately, because it’s just a big part of our model. We’re — I would say we’re probably going to project low-single-digit growth in deposits just, because of the pressure — deposit pressures are out there, but we plan to I mean that’s a big part of you know how we look at franchise buying a bank and we’ll — we continue to.
Brady Gailey
Okay, great thanks for the color guys.
Cappy Payne
Thanks, Brady.
Operator
Our next question is from Matt Olney with Stephens.
Matt Olney
Hey, thanks. Good morning.
Ty Abston
Good morning, Matt.
Cappy Payne
Hi, Matt.
Matt Olney
Going back to the margin outlook, I think you said around 3% in the near-term. But I guess if we move forward a couple quarters and assuming there’s a Fed pause from here, any color on how you see that margin performing into 2024? Is that just going to flatten out or given those loan repricing dynamics from a shorter portfolio, you think you can recapture some of that pressure you experienced this year into next year?
Ty Abston
Matt, let me speak to that. I mean, like I said, we’re projecting, you know, conservative NIM going forward just because of the unknowns, but I would say that we have more of a tailwind than a headwind with net interest margin, because of the repricing of the asset side of our balance sheet. So I would anticipate that we can expand our margin very likely in ‘24. We’re just hesitant to come out and say that directly, because just everything we’ve seen in the last year with the moves in rates and the migration of deposits within all banks balance sheets. So we certainly don’t see it losing a lot of significant margin from here. We’re very likely can actually expand it, but we’re just trying to be conservative in how we’re projecting it, given the unknowns at this point.
Matt Olney
Okay, thanks for that, Ty. And then on the loan side, I think Shalene mentioned that the contraction of loan balances on it was on the construction side. As those loans move at construction phase, any more color on are those being refinanced within the bank or into other banks or with other investors? Any kind of general commentary you have on those construction loans when they reach the end of that construction phase?
Ty Abston
It would be a mix of both. Some of them are going on mini-perm within the bank. Some of them are exiting the bank depending on the project and the plans when we went into the construction piece of it. So I think it would be a mix of both.
Matt Olney
Okay, thanks for that. And then I guess there were a few credits that were called out in the press release as far as the downgrades. And I guess specifically the loan that’s in Austin. Appreciate all the color you guys gave us there. Any color on what type of CRE loan this is? And it sounds like you expect some resolution in the near-term. Just any color on the appraisal process or kind of why you expect resolution there I think before the end of the year?
Ty Abston
Yes, it’s part of a bigger group and they have multiple properties. This property is self-cash flows, so it actually cash flows itself. The project cash flows with the debt we have. But we’re just working through a bigger group of loans that this group has that are not in our bank. This is the only credit we have. But ours is one we think will be resolved pretty quickly as part of overall resolution of this company. And we’re very comfortable with it, where it’s located. The top property is cash flow. We just felt like giving everything going on with the borrower, it made sense to downgrade it.
Matt Olney
Okay, and then I guess more broadly, just the loan portfolio. I think this one was in the Austin market. Any color on just how much exposure the bank has in that Austin market just overall at this point?
Ty Abston
I mean, not at this point. We don’t see any real loss exposure. I mean, I think, like I’ve said before, with rates moving up where they’ve moved, you’re going to see one-off credits bubble up to the surface and have some weakness in all portfolios. I think the key is to make sure that you have capacity to handle those, which we keep our decks pretty clear, as far as problem assets and to proactively work on those credits. We’ve been aggressively moving credits out of the bank if we felt like it was either weak or we felt like it would turn, you know, it could become a weak credit in a different rate environment or economic environment.
And our goal is to, as we identify credits to work those, get them shored up or get them moved out of the bank and kind of position ourselves where we could — we’re able to handle others, if we do see other credits that surface in the environment, we’re going to see going forward with higher rates and potentially slower economic activity.
Matt Olney
Okay. Okay, thanks for all the color guys.
Ty Abston
Thank you. Matt.
Cappy Payne
Thanks, Matt.
Operator
Thank you for your questions. I would like to remind everyone the recording of this call will be available by 1:00 p.m. today on our investor relations page at gnty.com. Thank you for attending. This concludes our call.
