Guaranty Bancshares Inc

NYSE:GNTY

Earnings Call Transcript 2024-Q1

[Nona Branch, executive]

Good morning. Welcome to the Guaranty Bancshares First Quarter 2024 Earnings Call. My name is Nona Branch, and I will be your operator for today's call. I would like to remind everyone that today's call is being recorded. [Operator Instructions] Our host for today's call will be Ty Abston, Chairman and Chief Executive Officer; Shalene Jacobson, Executive Vice President and Chief Financial Officer. To begin our call, I will now turn it over to our CEO, Ty Abston.

[Tyson Abston, executive]

Thank you, Nona. Good morning, everyone. Welcome to Guaranty Bancshares First Quarter 2024 Earnings Call. As you read in our press release, we just issued, we did have a good quarter. I'm very proud not only on the quarter, but our entire team, our team remains focused on developing strong banking relationships in all of our markets across the state of Texas. Our asset quality remains strong. Our net interest margin continues to build and our local economies appear to be -- continue to remain stable across the board. We did -- we release quite a bit of detail in our press release. However, we do have a presentation on some highlights that I'm going to turn it over to Shalene to go through. And then after that, we'll answer any questions you have. Shalene?

[Shalene Jacobson, executive]

All right. Thanks, Ty. I'm going to start off with the balance sheet. Total assets decreased by about $57.4 million and total liabilities decreased $59.4 million during the quarter. We have continued with our strategic decision that began really back in early 2023 to shrink the balance sheet rather than grow at this time because we've got a core earnings stream that allows us to really continue to have good profits without taking on the added risk from various economic uncertainties and other headwinds that we believe are still in place today. The year-over-year decrease in assets during the quarter consisted of lower cash balances of about $16 million, lower securities balances of about $8 million, net of some repurchases that I'll talk about here in a second and a decrease in net loans of $57 million during the quarter. These asset decreases were used on the liability side of the balance sheet to pay down Federal Home Loan Bank advances by $65 million and also to repay $25 million in matured brokered CDs that we obtained back in 2023 to test as a source of liquidity, and we did not renew those when they've matured in February. Total deposits decreased $5.4 million during the first quarter, but excluding those $25 million in brokered CDs were up slightly by $19.6 million. We also have $30 million in short-term treasuries that we invested in back when we had lots of cash after COVID that matured during the quarter. And we reinvested those treasuries along with some additional cash into new available-for-sale securities. We purchased just over $39 million during the quarter at a weighted average yield to maturity of 5.23%. We've got -- with respect to those treasuries -- short-term treasuries, we've got about $40 million of those remaining, and they will mature between now and June of 2025. Our total equity increased $2.1 million during the quarter as a result of $6.7 million in net earnings and was offset by dividends paid of $2.8 million or $0.24 per share, which is an increase from $0.23 per share that was paid in dividends during each quarter in 2023. We also repurchased 11,651 shares of guaranteed stock at a weighted price of $28.76 per share. On the income statement side, the bank earned $6.7 million in net income in the first quarter which equates to $0.58 per basic share, which is up from $0.51 per basic share in Q4 and down a bit from $0.69 in the first quarter of '23. Our return on average assets was 0.85% for the quarter compared to 0.73% last quarter. Our return on average equity was 8.93% in the first quarter compared to 7.93% in the fourth quarter. Net interest margin was 3.16%, which is an increase from 3.11% in the prior quarter. That increase resulted from an 11 basis point improvement in our interest-earning asset yields, which was offset by only a 6 basis point increase in our interest-bearing liability costs. Our NIM was helped by new and repricing loans during the quarter for sure, lower Federal Home Loan Bank advances and primarily by a slowdown in the repricing of our interest-bearing deposits as rates have remained constant. Noninterest income increased by $462,000 during the quarter, which resulted primarily from the recovery of just under $500,000 of SBA guarantee accounts receivable that had been partially charged off back in 2022 due to uncertainty at that time about the full collectibility of those guarantees from the SBA. However, as the SBA has reviewed those over the last 1.5 years and after their final review, the full amount of the guarantee was actually received. So we were able to recover the full amount and recover those amounts that have been previously charged off back in 2022. We also had 2 SBA loan sales during the quarter, which helped us increase our gain on sales of loans during the quarter by $76,000 quarter-over-quarter. Noninterest expense was $700,000 lower in the first quarter, primarily due to the retirement accrual of $600,000 that we booked back in the fourth quarter of last year that we did not have again this quarter. We also had some lower general and administrative expenses in the first quarter. As I've mentioned on some calls in the past, we continue to anticipate that noninterest expense will be about 2.5% of total assets, which is a threshold that we really try hard to stick with. I think that's a good measure for us. All right. On to the loan portfolio and credit quality. Gross loans, as I mentioned, decreased $57.3 million in the first quarter, primarily in our C&I, CMD and CRE buckets. With respect to the CRE bucket, we did have $14.9 million move out of the CRE category in to REO when we foreclosed on a property in Austin, Texas back in February, which I'll talk more about here in a moment. We did originate $62.9 million in new loans during the first quarter of '24 at an average yield of 8.39%. So new loan yields do remain strong. Our nonperforming assets really continue to remain at historically low levels at 0.68% of total assets for the quarter compared to 0.18% in the prior quarter. Charge-offs are also are low. We only had $110,000 during the quarter, and our net charge-off to average loans ratio was 0.02%. Back to the nonperforming assets, that figure includes both REO and nonaccrual loans and it, of course, increased in the first quarter primarily due to that $14.9 million that we recorded in REO from the foreclosure of the property in South Austin. We mentioned that property in prior calls, it has been on substandard list in the past as we tried to work that loan out but we did -- like I said, foreclosed on it in Feb of 2024. The property is in very hot vibrant area in South Austin and had a pre-foreclosure LTV of 68.5% based on an appraisal from early 2023. And it is an operating property, and we do expect to start recording noninterest income and expense related to that property in the second quarter of 2024 until it's sold. And there has been quite a bit of interest in it. So I'll let Ty talk about that during Q&A once our remarks are finished here. Commercial real estate and office-related loans continue to be a hot topic. However, we manage them very well. We have a diverse portfolio and really don't have any significant concerns in those areas. Commercial real estate represents about 40% of our total loan portfolio. But of that 40%, only 4.6% is office related and those loans have an average loan balance of only $516,000. So it's primarily mom-and-pop office real estate. Nonaccrual loans also remained low, but did increase slightly during the first quarter. We're continuing to work through the problem loans, but most of them are well collateralized, and we don't expect any significant losses at this time. Finally, our substandard loans were $17.5 million at quarter end, which is down about $4.6 million from year-end. The decrease resulted from the $14.9 million move to REO, but was offset partially by an increase in smaller dollar loans. And we do have -- the substandard loans are pretty granular. We've got 141 of them with a low average balance of about $109,000. We did have a reverse provision for credit losses of $250,000 during the quarter. That resulted primarily from lower loan balances and really just overall stable credit trends and we did adjust for economic conditions back in 2023 in our key factors. We feel like those are still applicable to today. So we didn't make any further adjustments to the key factors during this quarter. Our quarter end ACL coverage is 1.35% of total loans. Just slightly higher than the 1.33% that we had at year-end. And then finally on to deposits, liquidity and capital. Our deposits decreased by $5.4 million during the quarter, which, again, was primarily due to the maturity of the $25 million in brokered CDs that were not renewed. We also had some continuing shift from noninterest-bearing to interest-bearing deposits during the quarter. Noninterest-bearing deposits decreased $27.1 million, while savings and money market accounts increased by $30.8 million and certificates of deposit, excluding the brokered CDs, increased $15.9 million. Despite those shifts, however, our noninterest-bearing deposits still represent 31.5% of total deposits at quarter end. But we do expect that ratio to be closer to our historical average of mid- to high 20s as we continue moving later into 2024 and early 2025. With respect to overall deposit risk, Guaranty has a very granular and historical stable core deposit base. At quarter end, we had over 88,000 deposit accounts with an average account balance of $29,696. And our uninsured deposits also remain relatively low, excluding public funds, which are lateralized by investments and guarantee on account, our uninsured deposits were 25.43% of total deposits at quarter end. Our liquidity remains good. We ended the quarter with a liquidity ratio of 10.6%, and we used some of that liquidity during the quarter, cash flows for matured securities to pay down Federal Home Loan Bank advances and $65 million this quarter, and we've paid down our advances by $265 million over the past 12 months. Our FHLB advances are down to $75 million at quarter end. We continue to have total contingent liquidity of about $1.3 billion available to us through various sources, including the Federal Home Loan Bank, Federal Reserve Bank and some correspondent Fed funds lines and a revolving line of credit. Our total net unrealized losses on investment securities remains reasonable at $53.6 million of which $21.1 million is attributable to our available-for-sale portfolio and included with the other comprehensive income. Finally, capital is also strong. We used some of our excess capital in the first quarter to repurchase shares of Guaranty stock and continue to add intrinsic value for our shareholders. We repurchased 11,651 shares at an average price of $28.76 per share. And also, as I mentioned previously, the Board also increased the dividend paid during the quarter to $0.24 a share from $0.23 a share previously. So that concludes our prepared remarks for today. I'll turn it back over to Nona for Q&A.

[Nona Branch, executive]

Thank you, Shalene. Our first question will be from Woody Lay with KBW.

[Unknown Analyst]

Wanted to just touch on that $30 million of treasuries that matured in the first quarter that you mentioned in the opening statement. Any color on when those mature in the rate that those treasuries had?

[Shalene Jacobson, executive]

$15 million, Woody, renewed at the end of -- I'm sorry, matured at the end of February and the other $15 million at the end of March. And I don't know exactly, but I believe they were in the middle 1%, so 1.5%, 1.6% yield.

[Unknown Analyst]

Got it. So with that in mind, I think last call, you sort of said internal expectations were for the margin to improve 2 to 3 basis points a month. Does that still seem like a realistic target going forward?

[Tyson Abston, executive]

Woody, this is Ty. I think so, yes. If we can -- are able to continue to hold our cost of funds relatively stable as far as increased rate increases, which we've been able to do for several months, then we're repricing the loan book every day. So I still think 2 to 3 basis points a month a good run rate, and that's our goal as far as to continue to increase our margin.

[Unknown Analyst]

Yes. And then the 350 longer-term sort of internal target, I mean, is that -- is that a 2025 target? And is there any -- do you think we need rate cuts to see you all hit the 350 level?

[Tyson Abston, executive]

I don't think we need rate cuts. We need time. That probably is a 2025 to get to that level. But we're certainly -- that's our target. We're heading that direction. And -- but I mean, I think that's still a target. It's going to be probably in '25 before we can get there. Whether we have rate cuts or not because, again, we're repricing. We still have a pretty short duration loan portfolio, and we're repricing that. And that's just -- that's catching up with the significant increase in rates on the deposit side.

[Nona Branch, executive]

Our next question will be from Matt Olney with Stephens.

[Matt Olney, analyst]

I want to ask about that Austin project that you mentioned in the press release. Any more color you can give us? I think you said it was an operating property what kind of property is it? And what's the occupancy of that property? And what does that translate to in terms of maybe a more recent debt service coverage ratio?

[Tyson Abston, executive]

So Matt, the property is, it's kind of a mixed use. The part that we own now is retail in the first floor, then there's condos above it, and there's a large parking garage that we own. The property -- this was part of a larger company that had multiple projects, most of them under construction, had problems internally and externally apparently. Our property was stabilized, leased up. They actually were making the payments through year-end. It just -- ultimately, they started liquidating the company, the trustees did. We're yielding -- the loan was at 4%. We're actually yielding around 4.5% now on net NOI on the property. We have 2 vacancies. We have a lease that's about to execute. We did hire a really good property manager there in Austin, managing for us. And we do have this in a real estate subsidiary of our bank that they're holding us in. We do have 2 vacancies, one lease that they should have signed any day now that will bring the yield up about 5%, a little over 5%, maybe 6%. And then the second location -- the second space, we're in discussions with one group and going back and forth [indiscernible] if we get that closed, and that will be 100% occupied. It will be yielding 6.5% -- between 6.5% and 7%. And our plan is to market the property and sell it. We do think there's -- we have it marked appropriately based on the appraised value we have, and we're going to mark the property above where we're carrying it. And we're very pleased with the yield we achieved on the property while we're marketing the property. And like Shalene said, it's been a really great part of South Austin. So that's kind of the status of it.

[Matt Olney, analyst]

And then I guess, it sounds like given we've taken ownership of this, it sounds like there could be some noise in some of the results over the next few quarters until it's fully dispose of. Is that fair?

[Tyson Abston, executive]

No, I don't think so. I mean we're yielding actually more on it owning the property than we were on the loan. And they're all triple net leases. I mean, the only noise would be if we sold it for less and we carried it. And based on the -- just the valuation that we back into based on the NOI and the appraised value and the comps, we think we've got it marked below market -- fair market value. So we shouldn't have anything in there really even from an earnings standpoint just based on the yield on the property.

[Shalene Jacobson, executive]

Matt, we will be recording the earnings, the rental earnings in noninterest income and any related expenses and noninterest expense. So if those are material numbers, we'll certainly point that out in our next earnings release.

[Tyson Abston, executive]

Yes, that piece would actually not be an interest income and be a noninterest income, yes. So we'll have a component there that's moved from one account to the other. We will highlight for sure.

[Matt Olney, analyst]

Okay. And then as far as the appraisal, I think you mentioned you got that appraisal before you took possession of the property. Is that right? And when would you be required to take a new appraisal in that property?

[Tyson Abston, executive]

I mean we -- the appraisal we have, we feel like is good. We'll talk to examiners about it. But just given where we're carrying the property and the appraised value we have and the time period in it and the return on the property itself, that's a performing property. I don't anticipate they're going to ask us to update it, but we certainly can.

[Matt Olney, analyst]

Okay. That's helpful, Ty. And then I guess sticking with credit, but moving beyond this credit -- this single Austin credit. I think you mentioned there were some inflows into substandard list this quarter. Any color on some of the larger additions into that list?

[Tyson Abston, executive]

So we have a $7 million credit in the Dallas market that has a 40% SBA, junior lane in front of us. So it has a very low LTV, which is the stress in the cash flows. We went ahead and substandard the loan. We have a couple of loans around $1 million -- between $1 million to $1.5 million that have low LTVs the remaining loans are below $1 million. So other than -- those 3 credits represent a significant portion of the substandard loans we have. And again, we're comfortable where we are with those with our position in them and we think they'll actually work themselves out. We did foreclose on a single-family residence that did not -- that -- I don't think is in the Q3, actually it was in April. It's $1 million single family residents, $1.8 million appraisal. We'll get the household, I anticipate probably before end of this quarter. And that's pretty much the larger credits that we have. But like I mentioned, probably a year ago. I mean, I anticipate one-off credits with the rate increases we've seen. I don't see anything systemic in the portfolio. But I do continue to expect to see one-off credits that come up for various reasons. And we'll deal with those one at a time and clear them out and just address them as they come up.

[Matt Olney, analyst]

Okay. Perfect. And then on the loan growth this year, I think the goal for -- at the beginning of the year was to keep loan balances flat for the year. And obviously, there was some shrinkage here in the first quarter. What's the updated view on loan balances. Should we hold those flat next few quarters? Or would there be additional contraction?

[Tyson Abston, executive]

There could be additional contraction. I mean, we're -- obviously, we're continuing to lend and -- but the reality is with current rates, I mean, demand is softer and opportunities just don't make sense at the current rates like they did at lower rates. And so there could be -- we could continue to shrink the portfolio. We can see a 5% shrinkage in the portfolio. It's just not something that we're not focused on growing the portfolio, but we certainly will as we see opportunities that make sense to us.

[Nona Branch, executive]

Our next question is from Michael Rose with Raymond James.

[Michael Rose, analyst]

Just following up on Matt's last question here, just on the size of the balance sheet. Certainly understand that loans could be under some pressure. But as we think about maybe the liability side, I know you guys have paid down some of the borrowings. You've paid down essentially all the brokered deposits. How much more is there on the FHLB side that you want to kind of bring down and not renew? And could we see a balance sheet inflection hopefully in the back half of the year? Is that the way we should be thinking about it?

[Tyson Abston, executive]

Michael, I think that's fair. I mean we're -- we had the Federal Home Loan balance pretty low now. Obviously, we have excess funds and we're not deploying them in the bond portfolio or the loan book, and we'll pay that down further. We continue and always have and today in every cycle, every part of our history, focused on core deposit relationships and retail banking and commercial banking, treasury management. So our team remains focused on building core relationships. And that's -- that focus has not been more intense this year or last year versus 5 years ago, put it that way. I mean we've always felt like core deposits were the key to franchise value in a bank. And we're continuing to focus on that.

[Michael Rose, analyst]

Very helpful. And then maybe just going back to the margin question at the beginning of the Q&A. Just I know you guys are liability sensitive. You have pulled some levers and reduced some costs as was kind of discussed. But the new loan production yield was lower Q-on-Q growth is -- the balance is probably going to kind of shrink here. So maybe you can certainly -- I'm just kind of looking for what are the puts and the takes to that kind of 2 to 3 basis points a month in NII upward progression if we are in a higher for longer type environment? And then how is it kind of reconciled with the thought process that noninterest-bearing deposits could continue to decline. I think you guys have talked about a more normalized range somewhere in the mid- to high 20%. Just trying to get a sense of what the puts and takes are, where you could do better and maybe where you can do a bit worse?

[Tyson Abston, executive]

Yes, Michael. So the main part of that is just repricing the loan portfolio. We're repricing a significant portion of the portfolio each month. And as those loans repriced and we're not having to move deposit rates as aggressively, and we really haven't moved those up in the last 3 months, [indiscernible] significance, then we're just able to reprice the asset side faster than the deposit side and liability side is repricing. So that's where we're seeing the increase. We're also with our excess liquidity, we're able to buy bonds and increase the portfolio -- the yield on the bond portfolio. So between the 2, those that we've had a net -- been able to net increase our margin, and we're modeling out -- being able to continue to do that just by simply repricing the asset side faster than the liability side.

[Michael Rose, analyst]

Very helpful. And then just to put [indiscernible] point on everything you just said, Ty. Do you guys actually think that you have a chance to grow NII year-over-year just given some of the challenges, most of which are conservative to your point, which I think is great, just given how low credit quality -- how great credit quality is. But I mean, do you actually think you can grow NII this year?

[Tyson Abston, executive]

I don't have to -- I have to look at that and think about that a little bit from an NII standpoint. Our margin, yes, our actual NII, I'm not sure. And that's the piece that we're still kind of getting a sense of based on where we see the balance sheet going for the year. But again, we're just -- we're letting some of that kind of happen organically, and we're not forcing growth, but we're certainly not passing on growth opportunities. We're just -- we're kind of keeping ourselves pretty flexible with the environment that we're in, just as we see kind of how things kind of unfold. So it's -- I don't have a lot of clarity specifically on the balance sheet on where we're growing this year, we're more than likely going to see more contraction, which would obviously contract the NII. So...

[Michael Rose, analyst]

Certainly, I can appreciate how challenging the environment is. So thanks for the color. Maybe just one more for me. I know you guys intra-quarter increased or announced a new buyback program that was a little bit bigger than the prior one. You haven't been that active, I think maybe the earn back was a little bit higher. But can you just talk about the desire to buy back shares? And then just separately, would you take a portion of your excess capital and look to do at least a partial balance sheet restructuring maybe to just improve the NIM and NII trajectory.

[Tyson Abston, executive]

So the buyback, yes -- I mean, we are very interested in buying back shares once it hits our valuation metric, and our share price has been up this quarter versus last, so we bought back less shares. But whenever it gets down below that, it's a priority for us to buy shares. And if it goes further below that, we're -- it's a larger priority. So we accelerated our interest as the price drip drops below kind of our threshold.

As far as restructuring the bond portfolio, I just don't -- I'm not really looking to do that because I don't think -- 2 things. One is we're actually adding bonds to our portfolio, and I don't know whether everybody is doing that. We don't have a significant AOCI account. And that portfolio continues to -- we continue to increase the yield of portfolio. I just don't know that, that makes sense because for sure as we do that, and rates are down next year and some of those projections are out the window. So that's not something I'm looking at. I think as long as we continue to reprice the loan portfolio, we continue to add additional new securities to bond portfolio at higher yields and the fact that our AOCI is really a nominal amount of our total capital, then the plan is at this point, just to continue like we're doing and let time kind of cure a lot of that.

[Nona Branch, executive]

Our next call is Graham Dick with Piper Sandler.

[Graham Dick, analyst]

Most of my stuff has been asked and answered, but I just wanted to follow back up on the new loan yield that was down a little bit this quarter. Is that more of a reflection of production mix maybe being more weighted towards 1 to 4 family? Or are overall market rates starting to come in a little bit, I guess, this year so far?

[Tyson Abston, executive]

That's going to be more related to production mix, Graham. We're seeing some more in-house single-family opportunities that we're doing. But -- and we've also had some really high-quality credits that we booked in the 7s that probably average that down -- in the high 7s, mid- to high 7s. So that's going to be just a question of the mix probably for the quarter.

[Graham Dick, analyst]

Okay. Would you assume that NAV starts to expand a little bit more, I guess, through the balance of the year from here, assuming no major changes in the Fed path?

[Tyson Abston, executive]

Say that one more time, Graham. Sorry, I'm not sure I caught the question.

[Graham Dick, analyst]

Yes. Sorry, do you think that we'll be able to see that new loan yield maybe expand maybe back to where it was in 4Q over the next couple of quarters? Or do you think it will kind of sit around this level?

[Tyson Abston, executive]

That's hard to project. I would say it's probably going to stay around this level, but that's hard to project, truly.

[Graham Dick, analyst]

Okay. Understood. And then lastly, I just wanted to -- I know you talked about capital with the buyback. But just wanting to know if an M&A conversations are starting to pick up at all in [indiscernible] markets, maybe with some of the smaller banks, they're looking at maybe rate cuts aren't really coming. Are they starting to look more to the market as some of the smaller bank sellers out there?

[Tyson Abston, executive]

So I'm hearing a lot of conversations for sure, and that may be something that gets -- becomes more active in '25. I mean, from our standpoint, we're certainly having conversations. We're interested in anything that we think would make strategic sense for our company and makes financial sense for our company. I mean -- but currently, like a lot of banks for our stock price setting, we would rather buy our own stock versus buy someone else' at a higher multiple. We just think that makes more sense without the execution risk. So there are conversations, but -- right now, our primary focus is buying our own stock back when we have the opportunity to and -- but continue to have conversations because those may develop into something more meaningful down the road.

[Nona Branch, executive]

We have another question from Matt Olney with Stephens.

[Matt Olney, analyst]

Yes, thanks taking the follow-up. Going back to the deposit cost commentary. I think we said before that the first quarter was a pretty big quarter for repricing of the time deposits. Just curious if you have that with the average time deposit cost was in the first quarter, and you could help us out thinking about how much more incremental pressure you can see there? Do you have kind of what your promotional CD rate is? Or any commentary from that perspective?

[Tyson Abston, executive]

Shalene? Yes, go ahead, Shalene.

[Shalene Jacobson, executive]

Yes, Matt, I'm not sure where we said first quarter because we actually -- they repriced pretty evenly throughout the year. We started our CD specials back in late '22, early '23, and those at the time were 9 and 13 months, I believe. So a lot of those who bought CDs back in that time period has started to mature and are repricing. As far as our current rate special, if it's a jumbo CD, I believe the highest one we have is a 13-month at 5% for the jumbo CDs. And other specials that we have are lower than that, I think, 4.7% for a 9-month non-jumbo. Does that answer your question, Matt?

[Matt Olney, analyst]

Yes, that's perfect. Shalene. And then, I guess, kind of a related topic on the noninterest-bearing deposits. I think you mentioned in the prepared remarks some more pressure in the first quarter. Anything -- any more commentary on that? I think you said in the prepared remarks that we could land in the mid- to high 20% range later on this year or even next year. Just trying to appreciate kind of what your perspective is on that? And kind of what you're seeing maybe so far early in the second quarter?

[Tyson Abston, executive]

Matt, I'll take that. I mean -- so obviously, like every bank, we've had historic noninterest-bearing deposit balances the last 3 years. I mean -- but 20 years ago and really for the last 20 years, we've averaged around 25%. So I continue to believe that ultimately, we'll kind of revert back to more of that average that we've had historically. And there's -- but -- and that makes sense that we would. So we think we'll continue to -- as there's more yield opportunities in money markets and other products in the bank as people move more money over to see that come down but I don't see it going below 25% because like I said, it's been 25% for a long time, but it just makes sense that it's going to continue to migrate down.

[Nona Branch, executive]

Thank you for your questions. I would like to remind everyone that the recording will be available by 1:00 p.m. today at our Investor Relations page at gnty.com. We appreciate you attending today, and this concludes our call.