Guaranty Bancshares Inc
NYSE:GNTY
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Earnings Call Analysis
Summary
Q3-2023
The company is seeing a shift in customer behavior, with money moving from transaction accounts into time deposits, raising the marginal cost of time deposits to around 5%. Loan-to-deposit ratios are anticipated to be in the mid-80s percentile range. Asset levels remain stable at $81 million to $82 million, with conservative credit projections set for 2024 to cover any potential downturn. Deposit growth is expected to be low-single-digit, attributed to pressures in the market. Net interest margins (NIM) are projected conservatively, but expansion is more likely than contraction, given asset repricing. For expense projections, $82 million to $83 million is the target, aligning with asset levels, while provisions for credit are estimated to be moderate, with no specific number confirmed. Overall, the company models for a provisioning rate of around 30%, potentially dipping into the high 20s.
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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 would like to remind everyone this call is being recorded. [Operator Instructions] Our host 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.
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 in 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?
All right. Thank you, Ty. We'll take a quick look at the balance sheet and the income statement here and 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 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 maturities 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 addressed 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 the 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. We ended the quarter at $296.8 million. That's 9.2% of average assets, and it's a TCE, 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 repurchased 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 and 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%, 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 noninterest income of about $250,000 when you compare it to the core noninterest income of Q2.
So I thought it would take a little bit of down and look into the components of the margin because that's -- it's obviously a 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 cost in deposit -- cost. On that same average balance and yield table, our noninterest-bearing for our DDA checking accounts decreased $60 million, and then our money market accounts or our noninterest-bearing -- nonmaturing interest-bearing remain pretty steady. So both the DDA and the money market balance accounts were affected in part by decrease in our public fund money of $12 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 -- increase than what we had projected, but that's obviously affected by that shift in deposits and of course, higher fee rates. But again, almost 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 million which is 45 basis point from the linked quarter, when it was 1.53%. Another one, 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 in 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 noninterest income. Our core noninterest income decreased about $250,000 from linked quarter's, core noninterest 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 loan portfolio and capital and liquidity.
Yes. Thank you, Cappy. As Cappy mentioned, loans are down about $15.7 million in this quarter, primarily in our construction and development portfolio, projects that have been on our books for a while or moving to permanent financing where they're paying off. Overall, it has slowed down as we 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 nonperforming 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 remained 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 concentration 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 tech buildings instead of the larger commercial office development.
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 2 loans, one that had a balance -- 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 the 2 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 guarantee 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 20 -- I'm sorry, 90.6% in the same quarter in 2022. Although down from the prior quarter, Cappy mentioned noninterest-bearing deposits still represent 34% of total deposits.
We expect that ratio to continue to move down towards our historical pre-pandemic average, which is more in the mid- to high-20s. And as far as the deposit betas, they were high again in the 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 and higher rate CDs, and some of the customers will continue to move from noninterest-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 our cash flows from mature securities and loans to pay down several home and 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 used some of our excess capital in the third quarter to repurchase shares in Guaranty's stock and add intrinsic value to our shareholders. We repurchased 61,688 shares at an average price of $27.38.
And then finally, with respect to the decline budgets 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.
Thank you, Shalene. It's time of our Q&A session, our first question today will be from Tim Mitchell with Raymond James.
I appreciate the color there on -- this quarter. Obviously, it's getting pretty close to that 3% level. You've been talking about staying above through the cycle. I guess kind of getting to how things developed this quarter, could you talk about where you think Bancshares goes from here?
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 were 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, but 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.
Awesome. And I guess next on the loan growth front. Loan growth down a little bit this quarter, which was kind of consistent with what you've been talking about previously, being comfortable with -- kind of let 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 we stay elevated for longer?
Tim, it's Ty. I think loan 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 modeling for '24 and budget for '24, but that's kind of how we're going to look next year.
Awesome. And then just lastly for me. Buybacks 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?
I mean, like we said in the past, it's a capital priority for us when it hits the metrics on valuation. And we did not buy as much stock back -- this last quarter just because the price was stronger than it had been in previous quarters during the year. But as we see the opportunities to buy back stock at lower valuations, we certainly will.
Our next question today is from Graham Dick with Piper Sandler.
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 over the last 3 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 got [ $75 million ] of originations, you had certainly a lot of renewals and repricing going on in the quarter, so just a ton of churn. Do you think that 20-plus basis point improvement is kind of sustainable over the next couple of quarters? And if so, I mean, does that mean that demand is, like you said, pretty close to the bottom, I guess, here?
Graham, it's 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 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 have -- 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.
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 -- a bunch more time deposits, I guess. I'm just wondering how you guys are thinking about that and how it might play into your funding strategy over the next several months.
Yes. We're in the middle of the road as far as our rates on time deposits and our marginal cost of time deposit right now is around 5%, I believe, 5%, 10% maybe. And that I mean, that mix, as Cappy and Shalene talked about, has a lot to do with the fact that our customers are moving money out of transaction accounts into time deposits, which makes sense because your 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 where 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 2 years ago, 3 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 lower our loan deposit ratio throughout the year, which we're comfortable with because it gives us plenty of funding as the economy turns to start lending more aggressively as things turn around.
We are adding duration to the loan -- I mean, to the bond portfolio each month in smaller increments, but we think now is a good time to add and sets 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 that have really all your loan.
Okay. That's really helpful. And until we understand the pull forward of growth here for what could be a pretty strong economy in Texas over the next -- the long term.
I guess the -- lastly on the NIM would be just how you guys are thinking about, I guess, your noninterest-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? It's at 34% today. I mean, were you talking 30% by the beginning of 2024? Or what's it look like on your owns end?
I think 30%, Graham, is really what we're modeling. I think it could do to high 20s possibly, but 30% is what we're modeling.
Okay. Great. Got it. That's all -- that's all from me today.
Our next question will be from Brady Gailey with KBW. Brady, can you unmute?
I know in the past, we've talked about expenses for this year being around that $82 million to $83 million mark. But it looks like we've already seen in the first 3 quarters, so there's only 1 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 talked about expenses being around 2.5%. Is that still the right way to think about it as we head into 2024?
That's still our yield sign and something we pay attention to is that [ $2.5 million ] of asset level. I still think we're going to be in that $82 million range, $81 million to $82 million range, but that's right at the [ $2.5 million ], maybe a little bit over, but we pay attention to that number, and that's our marker that we want to stay within.
Okay. And then another quarter of a 0 provision, I know credit is still pretty clean here. But how do you think about that provision line as we head to next year in credit? I know you had a couple of CRE loans go into substandard, but that -- it's still a relatively low level. So how do you think about credit and the provision into next year?
Brady, this is Ty. We're starting to work on that for '24. I mean we're going to put out some conservative things 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, which we will not -- we're not projecting a lot of net growth. So any kind of addition we made would be additional reserves just to shore up the portfolio. But at this point, we don't have an exact number, but it's going to be -- it's going to be -- we'll project enough to where we're comfortable that we can more than cover any anticipated downturn if we see one.
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%, linked quarter came annualized in 3Q, which is great to see. It looks like a lot of that growth came from core deposits. So maybe just talk about how you're thinking about deposit growth going forward?
Well, again, I mean, that's a big part of our model and core competency is retail banking and core deposits. And that -- 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 that are out there. But we plan to -- I mean, that's a big part of how we look at franchise buying a bank, and we continue to.
Our next question is from Matt Olney with Stephens.
Thanks. 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 of 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, do you think you can recapture some of that pressure you experienced this year into next year?
Matt, let me speak to that. I mean, like I said, we're projecting conservative NIM going forward just because of the end loans. 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 movements in rates and the migration of deposits within all base balance sheets. So we certainly don't see it losing a lot of significant margin from here. We very likely can actually expand it. But we're just trying to -- we're trying to be conservative in how we're projecting it given it known at this point.
Okay. And then on the loan side, I think Shalene mentioned that the contraction of loan balances within 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 into that construction phase?
It would be a mix of both. Some of them are going on many [ perm ] banks, some of them are exiting bank depending on the project -- plans when we went into the construction piece of it. So I think it will be a mix of both.
Okay. And then I guess there were a few credits that were called out in the press release as far as the downgrades. I guess, specifically the loan that's in Austin, I appreciate all the color you guys gave us there. Any color on what type of CRE loans 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.
Yes, it's part of a bigger group, and they have multiple properties. This property is self cash flow, so it actually cash flows itself while the project cash flows with the debt we have. But we're just working through a big 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 given everything going on with the borrower, it made sense to downgrade it.
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?
I mean, not -- at this point, we don't see any real loss exposure. I mean, I think, like I 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 aggressive in moving credits out of the bank. If we felt like it was either weak or we felt like it would turn -- 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 -- are able to handle others that reduce the other credits to surface in the environment we're going to see going forward with higher rates and potentially slower economic activity.
Okay. Okay. Thanks for all the color, guys.
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. Goodbye.