Guaranty Bancshares Inc
NYSE:GNTY
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Earnings Call Analysis
Q4-2023 Analysis
Guaranty Bancshares Inc
In the face of last year's economic headwinds, the fourth quarter 2023 earnings call painted a picture of resilience. A sense of accomplishment was felt, with barriers overcome and margins slowly strengthening after some compression during the year. This was aided by steadfast asset quality with singular, manageable credit stress moments, rather than systemic complications.
An intentional balance sheet contraction was chosen as the prudent path forward, seen through a decrease of $166 million in total assets and $175 million in total liabilities. This strategic shrinkage reflected a careful sidestep from added economic risks, netting out to be a tactical advantage and maintaining profitability without an extended reach for risk.
Net income tallied at $5.9 million for the quarter and $30 million yearly, translating to returns on average assets and equity that showed moderate declines. Nevertheless, these numbers were cushioned by a recovering net interest margin (NIM) which rose from 3.02% to 3.11% by the fourth quarter's end. The call signaled investor rewards through dividends, amounting to $10.7 million, and strategic share repurchases. The bank had repurchased nearly 435,000 shares in 2023, strengthening shareholder value through a deliberate capital allocation strategy.
Despite a considered decrease in loan portfolios, new loans sustained robust yields. CRE loans stayed a focal point, with careful attention limiting exposure. Nonperforming assets, though ticking up slightly, were mostly contained thanks to robust collateralization, with no further provisions for credit losses required for the year. A crucial metric showcased was the loan loss reserves, hovering at a steady 1.33% coverage ratio.
Deposit base shifts were seen, with a $25 million reduction reflecting maturity and non-renewal of brokered CDs. However, the core deposit stability remained a beacon of assurance, with a granulated customer base and modest uninsured deposits. Liquidity ratios ended strong at 12.2%, and capital remained robust enough to continue share repurchases, indicative of an institution on solid footing despite the surrounding economic tides.
The future looks steady with deposit costs near their peak, suggesting stability could be ahead. The path to a 3.5% NIM is being charted, with aspirations to bolster the margin by 25 to 30 basis points throughout the year. However, with a realistic lens, a target of 3.5% may not be within the year's grasp, yet the measured climb in margin points shows a positive trend.
Loan growth is expected to be minimal as the bank adopts a watching brief, intending to strike when economic signals are ripe for growth. This tactical pause aims to ensure readiness to capitalize on opportunities without being mired in a defensive posture. It’s a wait-and-see approach nested in cautious optimism for a stronger balance sheet and soaring liquidity to fuel future offensives.
Credit quality continues to be a watchful area. A notable $14.5 million Austin credit is being managed, slated for foreclosure, underscoring the proactive steps to maintain loan health. The aim is to curtail losses, with discussions hinting at the readiness to take on necessary actions for liquidation should the need arise, a move reflecting both caution and preparedness.
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Good morning. Welcome to Guaranty Bancshares Fourth Quarter 2023 Earnings Call. My name is Nona Branch, and I will be your operator for today's call. I want to remind everyone today's call is being recorded. [Operator Instructions]. Our host for our call today will be Ty Abston, Chairman and CEO; and Shalene Jacobson, Executive Vice President and CFO.
To begin our call, I will turn it over to our CEO, Ty Abston.
Thank you, Nona. Good morning, everyone. Welcome to our fourth quarter 2023 earnings call. I'm coming to you from a Chile Mount [indiscernible], which is 15 degrees and Shalene, Cappy [indiscernible], where it's warmer at 16 degrees.
So just to recap our year for last year, as I've done through the last few quarters, we did have a good year with acceptable results. Our margin is improving. We did see margin compression throughout the year like a lot of banks did. That seems to bottom down after Q2 during the year, and it's been rebuilding. We anticipate that to continue rebuilding in the year.
Our asset quality remains strong. We are seeing one-off stresses on credits. But to date, we've been able to resolve those successfully by the restructuring and/or moving them out of the bank. So at this point, we don't see anything systemic. It's just been one-off stresses on individual credits that will pop up. As you would expect, with a 500 basis point increase in rates we've seen over the last 24 months.
We do continue to see strong and stable economy in Texas, which is encouraging for us. And as we see that going into the year for '24, we plan to have results that are very comparable to '23 with the exception of a building margin. At this point, asset quality, again, remains to be strong, and we don't see anything that's concerning to us, other than just individual credits periodically, which at this point, like I said, we've been able to kind of resolve [ our ] satisfactory. And again, with margin improving, hopefully, we're going to continue to see our earnings grow, which is only a real metric that we're not satisfied with.
I do want to say our team, our whole team throughout our company, I'm really proud of the results our company and our team produced for '23. It was an year that had some challenges as everyone knows, in our industry, but our team has always did a great job of just executing, serving our customers well and continuing to execute on a community bank model.
Before I turn it over to Shalene to go through the investor deck, just I want to recognize Cappy who's on our call. This will be his last earnings call. So anybody who has a question for Cappy, he's on the call, he can certainly fill those. Cappy is retiring, as everyone knows at the end of this quarter. He's been with our company 40 years and it's been an invaluable asset to our company. And as we've stated multiple times, we really appreciate his contribution and everything he's match for our company. And so he's on this call. This will be his last one, and we want to recognize him. But I'm going to turn it over to Shalene to go through our investor deck, and we can open it up to any questions that anyone want to ask. Shalene?
All right. Thank you, Ty. And yes, hopefully, you all have some very hard questions for Cappy's last earnings call here. Certainly, some big shoes to fill, and we're going to miss him. I hope that we can continue to do as great of a job as he has done over the next 40 years.
So thank you for the opening remarks, Ty. I will start off with the balance sheet. For the year, total assets decreased about $166 million and total liabilities decreased about $175 million. Shrinking the balance sheet with a strategic decision of ours over the past year because we've got a core earnings stream that allows us to have good profits without taking on added risk from the various economic uncertainties and headwinds that existed in 2023. So you'll see throughout these comments on the balance sheet that shrinking the balance sheet was strategic decision of ours.
The year-over-year decrease in assets consisted of lower cash of about $17 million, lower securities balances of about $98 million and a decrease in net loans of $53 million. The asset decreases were used on the liability side of the balance sheet to pay down Federal Home Loan Bank advances by $150 million during the year, and a $48 million reduction in total deposits.
During the fourth quarter, total assets decreased $46 million, which consisted of about a $41 million decrease in cash and unsold and a $24 million decrease in other assets. Now the decrease in other assets was kind of just a onetime deal. We had a security mature on September 30 during the third quarter, that we didn't receive the cash for until the first day of the fourth quarter. So we had a receivable recorded of $20 million. That was a result of that matured security. The decrease was offset by an increase -- a small increase in net loans of $5 million during the fourth quarter and an increase in investment securities of $13 million. The decrease in cash [indiscernible] used to pay down $35 million in advances during the quarter and to repay $25 million in brokered CDs that we did not renew.
Total equity increased $8.2 million during the year as a result of $30 million in net income and was offset by dividends paid during the year of $10.7 million or $0.92 per share and by the repurchase of $11.2 million or nearly 435,000 shares of guarantee stock during 2023. In the fourth quarter, we repurchased a small amount of 24,800 shares of guaranteed stock.
On the income statement side, the bank earned $5.9 million in net income during the fourth quarter and $30 million for the year, which equates to $0.51 per basic share in Q4 and $2.57 per share for the year. Our return on average assets was 0.73% for the quarter compared to 0.78% in Q3 and 0.92% for the year. Our return on average equity was 7.93% for the quarter compared to 8.43% in Q3 and 10.10% for the year. So the decline in return on average equity is partially a result of improved AOCI during the quarter of $4.2 million as the fair value of our available for sale securities improved.
As Ty mentioned, our net interest margin was 3.11% in the fourth quarter, which is an increase from 3.02% in the third quarter, and we ended the year at 3.15%. The increase results from a 17 basis point improvement in our interest earning asset yields, which was offset by only an 8 basis point increase in interest-bearing liabilities. So our NIM was certainly helped during the quarter by new and repricing loans. We had lower Federal Home Loan Bank balances and slower repricing of interest-bearing deposits during the quarter. We did have some shifts, which I'll talk about in a minute from noninterest bearing to interest bearing. So that was part of the increase. And we continue to have some CDs repriced into higher costing CDs.
Noninterest income was fairly in line with prior quarter, but continues to be lower than prior year, mostly due to lower mortgage-related gains on sales and fee income. And then on the noninterest expense side, I know some of you brought this up in the first look, noninterest expense was $888,000 more in the fourth quarter, primarily due to higher salaries and employee benefits. Now the press release attributed this to increase in annual salaries, which is correct, so we also recorded about [ 600,000 ]new contractual retirement obligation accruals, during the fourth quarter after retirement announcement of some of our long-time bank executives. So I should have said that in the press release as well, but we also had a $600,000 retirement obligation accrual that we recorded in the fourth quarter.
As we've mentioned on some of these calls in the past, we anticipate that noninterest expense will be about 2.5% of total assets, which is a threshold that we really try to stick with. So we're anticipating that total noninterest expense in 2024 will be similar to 2023 or about $83 million in total.
On to our loan portfolio and credit quality. Gross loans increased slightly by $4.3 million in the fourth quarter, that decreased during the year by $56 million, primarily in our C&I and construction and development buckets, as we've been cautious about risk and we position our balance sheet for economic improvements in growth, hopefully sometime in 2024, early 2025. We did originate about $89.6 million in new loans during the fourth quarter at an average rate of 8.61%. So new loan yields remained strong. Our nonperforming assets continue to remain historically low levels. They were at 0.18% of total assets during the quarter compared to 0.09% in the prior quarter. And charge-offs also remained low. They were [ 222,000 ] during the quarter, and our net charge-off to average loan ratio was 0.04%.
CRE and office-related loans continue to be a hot topic. However, we manage those concentrations very well. We have a diverse loan portfolio, and we don't have any significant concerns in those areas. CRE represents about 40% of our total loan portfolio. And of that 40%, only about 4.6% is office loan related, and those loans have an average loan balance of only $515,000. So we have quite a few smaller office type loans.
Nonaccrual loans also remained low, but they did increase $2.7 million during the fourth quarter, primarily due to 2 loans, 1 of which is in the process of being paid off now, I believe, this week, and the other with the balance of $1.1 million that we're continuing to work through. Those lens are well collateralized, and we really don't expect any significant losses at this time.
Finally, our substandard loans decreased slightly during the fourth quarter and ended the year at $24.6 million. We did have one $3.8 million loan that was really sub-standard that paid off during the fourth quarter, and we're continuing to work with those remaining borrowers towards positive resolutions. And again, we don't expect any kind of significant losses on those loans at this time as we continue to work through this.
We did not have a provision for credit losses in the fourth quarter or for the year, the qualitative factor adjustments that we previously made in our CECL model back in the fourth quarter of '22, and we've made some small adjustments since then, are still relevant, and the decrease in our loan portfolio has allowed us not to need additional provisions during 2023. Our quarter end ACL coverage is 1.33% as [ for the month ].
And then lastly, before we go into Q&A, I'll talk about deposits, liquidity and capital. As I mentioned previously, our total deposits decreased $25 million during the quarter. The decrease resulted largely from the maturity of the $25 million in brokerage CDs that I mentioned that were not renewed. But we also had some shift from noninterest-bearing to interest-bearing deposits. Noninterest-bearing deposits decreased $50.4 million, but were offset by an increase in interest-bearing deposits of $25.4 million.
Noninterest-bearing deposits represent 32.4% of total deposits at year-end. So we really continue to expect to see that ratio move more towards our historical average in mid- to high 20s as we move into 2024 and beyond. We also have $25 million remaining of brokered CDs that are going to mature in February. And at this time, we expect that we'll not [indiscernible] those down, so we won't have any brokered CDs or meeting after February.
With respect to overall deposit risk, Guaranty has a very granular and historically stable core deposit base. At year-end, we had nearly 88,000 deposit accounts with an average account balance of $30,000. Also, our uninsured deposits are relatively low, excluding public funds and Guaranty owned accounts, uninsured deposits were 25.07% of total deposits at quarter end.
Our liquidity also remains good. We ended the quarter with a liquidity ratio of 12.2% and use in cash flows from mature securities to pay down [indiscernible] bank advances, like I mentioned, we ended the year at $140 million, which is down from $290 million at the beginning of the year. We have total contingent liquidity available of about $1.2 billion from Federal Home Loan Bank advances, Federal Reserve Bank and correspondent Fed funds and revolving lines.
Capital is also strong. We used some of our excess capital in the third quarter to continue to repurchase shares of Guaranty's stock and add intrinsic value for our shareholders. We repurchased 24,800 shares during the quarter at an average price of $27.76 per share. And then with respect to the declines in the fair value of investment securities, we mentioned this last quarter as well, that even if we had to liquidate our entire portfolio, which we certainly don't expect to do at all, our total equity to average assets ratio will remain pretty good at 8.8%.
That concludes our prepared remarks for today. So I'll turn it back over to Nona for some Q&A and hopefully some hard questions for Cappy.
Thank you, Shalene. Okay. Our first question today will be from Graham Dick with Piper Sandler.
Sorry about that. Can you guys hear me?
Sure.
Okay. So I just wanted to start on deposits and the NIM. So around deposits, obviously, the cost of interest-bearing deposits slowed in terms of the increase a lot this quarter. I'm just wondering if you have enough vision into the next couple of months that you're confident that deposit costs are close to topping out here? I mean I know you've got the $25 million of broker that's going to mature in February as well, that's probably around 5% or more. And then, obviously, it seems like rates around the industry are also starting to fall as well. So do you think the deposit costs and interest-bearing in particular are about at their peak right now? .
Go ahead. Go ahead, Shalene.
They're very close to their peak. If they're not at their peak, yes. Most of our CDs over the past year have been short term. I think the longest that we did on specials for 13 months. So some of those will start to renew at a little bit higher rates into '22. But in terms of on-time, deposits, we have not increased those rates in a couple of months now, and we don't anticipate continuing to do so. So other than the shift from noninterest-bearing into interest-bearing, we don't really anticipate much change there.
Okay. And then you guys have talked about keeping the NIM above 3% when we're feeling pressure to the downside. Now it looks like your margin is starting to bounce a little bit higher. Is there any sort of margin target you have going forward as it pertains to a level you'd like to get above by, I don't know, at some point this year?
Well, I mean, our internal target is 3.5%, which we likely won't hit this year. We are building NIM, at least at this point 2 to 3 basis points a month [indiscernible]. So you can kind of just run that forward to some and no changes that should increase our NIM 25 to 30 basis points throughout the year from where we are now, and we'll be pleased with that. It certainly builds [indiscernible].
Okay. Yes, that's helpful. And then I guess on loan growth, it sounded like in the release that you're a little more optimistic around the potential for that returning at some point and your position when that does occur. Are you still expecting flattish balances this year? Or do you think that there's some possibility that growth rebounds a bit more in the back half of the year?
We're still expecting, Graham minimal loan growth this year. I think our confidence in our ability to participate in a stronger economy comes from the strength of our balance sheet and our liquidity, and that's what we plan to maintain. And once we see it's time to kind of go on the offensive again, we're in a position to do that. And I think that's the key right now is to be in that position and not be playing a lot of defense. But right now, as we said, we're continuing to project pretty flat loan growth for the year.
Okay. And then I guess the last thing for me would be on credit. I know there was some standard that paid down this quarter, but I just wanted to know if there's any update on the $14.5 million Austin credit and then also about $7 million [indiscernible] that moved to substandard last quarter?
The Austin credit, I can update on. We had that posted for a foreclosure. And so assuming we get to that point, and we'll have a management [indiscernible] to step in and we'll start working to liquidate that if we don't sell them steps. We have a pretty large appraisal on it with a pretty good equity position in it. So I don't know if we'll get to foreclosure or not, but we had a teed up for that. .
The other credits, [indiscernible] plan to answer that 1 because I'm trying to wrap [indiscernible]
[indiscernible] under construction. There have been some construction delays on that, but we actually are in the first position behind the company who's financing the construction and believe that we've got pretty good [indiscernible] there, and that will not have any losses from that once it's fully funded and resolved.
Yes, they're getting that business open. So they're starting to move towards positive cash flow. But [indiscernible] said, we're very comfortable in our position in it. But we downgraded it because it's a start-up, and they don't have the cash flow today, and they're moving in that direction, but we're like we were comfortable being having that substandard. .
Okay. All right. That's helpful. Congratulations Cappy.
Thanks, Graham.
Our next call will be from Brady Gailey with KBW.
So I heard the guidance as far as loan growth to be pretty minimal or flat this year. I was wondering how you're thinking about deposits and the outlook for '24. I know the loan-to-deposit ratio was about [ 88% ]. So are you comfortable with that? And what's the outlook on deposit growth?
Our projected deposit growth is pretty flat, maybe 1% or 2%, but it's pretty flat for the year, Brady, and that's kind of what we're projecting at this point. We feel like just maintaining our core deposit base, and it's kind of a win right now with how competitive the deposit market is, and we've been able to do that and still have attractive, but not market-leading pricing, and that's kind of our strategy for '24 .
Right. And then 1 more on the margin. If you look at the forward curve, it has a decent amount of rate cuts coming up over the next couple of years. I was just wondering how you guys think about your sensitivity to rate cuts going forward? Like if we get all these rate cuts, do you think your margin will come under pressure? Or you have so much asset repricing that the NIM could still go higher even if we do get cuts?
Shalene, do you want to go over kind of your projections on [indiscernible] modeling? .
Sure. Yes. So -- in our budget, we went a little bit conservative back in December, and we only budgeted into rate cuts during 2024, 1 in July and 1 in September. And if those rate cuts occur, as we expected, along with the repricing, which our model has our loan level and deposit level instruments built in within it, so it knows exactly when those are repricing.
We'll still have positive NIM increases throughout 2024, Brady at the bank level for sure. Yes, I mean, we're predicting that even with those, we'll still be in a, I guess, liability-sensitive position.
All right. That's helpful. And then you saw a modest amount of share repurchases in the fourth quarter. I think if you look at the full year, you bought back about 3.5% of the company. How are you guys thinking about share buybacks in '24?
I mean our current valuation and price on our shares is above kind of our target for buybacks. So as long as we're above that, we're probably not going to be in the market [indiscernible]. But like last year and prior years, if it gets below that, and it's a priority for us, and we'll be buying back with our excess capital. So we haven't bought any in several months because we've had some strength in our price. And as long as that stays in place, and we probably won't be as active.
Okay. All right. Great. Cappy, good luck in retirement. .
Thank you, Brady.
Nona, are you there?
No, I guess you couldn't hear me. Our next question is from Matt Olney with Stephens.
I want to drill down on the loan yield commentary. It sounds like -- or I guess it looks like in the fourth quarter, the loan yield performance was really good, and it sounds like you expect some additional loan risk set to further benefit the margin. Any more just color on the amount of loan resets you expect during the course of 2024. .
So Matt, our loan portfolio turns over about -- well, it's got a duration of about a little over 3 years. So we expect it to continue turning over that rate. I don't know the exact dollar amount, but we'll continue to see some improvements in loan yields, I think, through at least third quarter of 2024.
Yes. It's about $100 million a quarter. That's changed all math, but that's ballpark on loans that are maturing that are repricing or not floating rate loans.
Okay. That's helpful. And I guess the other side of that on the credit front, I guess there was a mention in the press release about working with borrowers on loan resets, I guess, implying that some borrowers may need some assistance with a lot of resets. Any more color you can give us on just how many borrowers you're seeing that need some assistance. And when that's the case, what type of assistance do you typically focus on?
Well, we focus on -- I mean, kind of the position of the credit, the strength of the credit to borrowers and what type of issues that they're facing, if it was just a cash flow issue that we address -- try to address that cash flow side of it. But I mean, we're not seeing anything systemic in the portfolio. We are seeing one-off credits like I said in my opening comments, as you would expect, I think every bank is going to be dealing with that if credit repricing from 4% to 8%. That's a material change and obviously the [indiscernible] debt service for that credit.
So we are seeing one-off stresses that we're addressing, either through restructuring, additional collateral, additional guarantors or moving the credit out of the bank if they have better opportunities outside the bank to refinance the credit and we're working with them to get that done. And we're just addressing them 1 at a time as we see them. And there's probably 5 or 6 credits that we're dealing with at any given time and getting them resolved to our satisfaction and moving on. Main thing is we're keeping the deck clear as far as any problem assets or foreclosed properties or just keeping our balance sheet strong. So there's additional credits that come in, we have the capacity to deal with those and do it on our time line.
Okay. That's helpful. And I guess kind of circling back on that same topic, when you provide assistance, how often does that fall into the category of a, I guess, a loan modification if it stays within the bank, there's something else that you're forgiving?
Well, there's not -- I mean there may be a modification, but there's not beginning [indiscernible] we haven't any debt or given us at this point, but there may be a restructuring again, getting additional collateral, additional guarantors are just restructuring credit where the credit works, it's a passing grade credit in today's environment. And that's [indiscernible] variety of restructurings that we may do, but it's basically to get it to that point. .
And to elaborate on that just a little bit. We have a process in place where if there are any material changes to terms, there's a material change form that needs to be filled out, and that gets captured in our system so that we can go through and evaluate whether the 4 criteria that are required to be disclosed around modifications are met. So if we do have those, you'll see those in our loan modification disclosures.
Okay. Yes, that's helpful. Okay. That's all for me. I appreciate the color. And Cappy, congrats on the retirement and best wishes in the future. .
Thank you, Matt.
Next question will be from Tim Mitchell with Raymond James .
Good morning, everyone. Tim in for Mike. I guess just to start, fee income took a small step back quarter. You [indiscernible] called out credit card income and mortgage. I was just kind of curious what your outlook is for fee income through '24. And if you're baking any sort of kind of recovery in mortgage or anywhere else in that segment?
Tim, this is Todd. We're really now -- we're kind of projecting flat from '23 during '24, if there's opportunities to expand certainly mortgage income, we will. But obviously, that's market dependent. So just given the lack of clarity on that, we projected pretty flat fee income for the year.
Okay. And then just kind of the loan and deposit kind of the competitive dynamics within your markets. Have you guys being -- like what trends are you seeing now? And then on the loan side, like what are you seeing from demand? Are there any markets or kind of verticals that have any trends worth calling out?
Not really, Tim. I think everything is preset like it's been in the last few quarters. I mean there's obviously, economic activity going on. And again, Texas is continuing to be a pretty strong and stable market, but it is definitely muted from prior couple of years, just given the current rate environment. And so projects are getting put on hold or they're getting restructured either on the front end with more equity just to make them work in today's rate environment and banks are being very prudent in how they're looking at new opportunities, as you would expect in the current environment.
And again, the strategy from our standpoint is to maintain a strong balance sheet, where we're positioned, where we can take advantage of an increase in uptick in economic activity as it develops.
Awesome. Those were all the questions.
Thank you for your questions. I would like to remind everyone the recording for this call will be available by 1:00 p.m. today on our Investor Relations page at gnty.com. We thank you for attending, and this concludes our call. Have a good day.