Guaranty Bancshares, Inc.

Guaranty Bancshares, Inc.GNTY) Q4 2022 Earnings Call Transcript January 17, 2023

Operator: Good morning and welcome, Guaranty Bancshares’ Fourth Quarter 2022 Earnings Phone Call. Nona Branch and I will be your operator on today’s call. This call has been recorded. After the prepared remarks, there will be a Q&A session. Today’s host will be Ty Abston (Chief Executive Officer and Chairman of the Company); Cappy Payne (Senior Executive Vice President, Chief Financial Officer and Chief Financial officer of the Company); Shalene Jacobson (Executive Vice President, Chief Financial Officer and Chief Financial Officer at the Bank). I’ll now give the call to Ty Abston, our CEO.

Ty Abston Nona, thank you. Good morning to everyone and welcome again to our fourth quarter earnings conference for Guaranty Bancshares. We were very proud to have had a great year. We did experience some noise during our quarter, so we will go over and explain how it affected our presentation. Then we’ll talk about our 2023 projections. We’ll get into our slide deck and go through that and then we’ll open up for Q&A. Cappy, would you like to start this?

Cappy Payne Okay. Ty, thank you. Let’s quickly go over some highlights from the balance sheet, and then I’ll cover the income statement. If you are looking at your computer, there are some highlights of the slide deck. Our assets total for the year were $3.4 billion. This was down by about $39 millions for the quarter but up by $265 million for the whole year. A lot of this was due to an increase in loans. We had a very good year, with strong loan growth. For the quarter, we were up $112 million. This is ex-PPP lending and warehouse lending. We were up $33 million for the year, or about 30%, and we had $553 million more. You can see that we had growth in each of our four regions. That was something we are proud of and that is why we have a strong emphasis on activity in each of these regions.

As you can see, the earnings release does include a loan composition table. Of course, the majority of this loan growth is based on real estate. You can clearly see that the components include CRE (construction, development, and so on). It did see a decrease in its bond portfolio during the quarter. We told you in the last earnings release that we had $120 million of treasury, short term and matured bonds. They were at an extremely low rate. In reality, the yield on the portfolio rose but volume fell by about $133million for the quarter. Our year-end balances in the bond portfolio were up $175 million over last year. The liability slide is the most notable change. This is because people are now focusing on deposits.

We had a quarter-end deposit decrease of $109million. About $89 million of that was in noninterest bearing DDA balances. The remaining balances were about $20 million each in interest bearing balances. Some of that was not unexpected. The restructuring was merely to position some funds that were being invested elsewhere. I will talk briefly about some calls that were involved in this restructuring, but it is a comment. The fourth quarter is usually when public funds money rises. It did increase, but not as much as usual. This is probably indicative of what we are seeing. A lot of our customers are being forced to consider alternative investment rates for other investments. The majority of public money is contracted at a particular rate. Some of what they were seeing was much higher than our contracted rate.

Our $2.7 billion total deposits are not large enough to cover our public funds money, which is approximately 11% $300 million less than our deposit. However, it is just to illustrate what we all see in the banking sector regarding competition. Our deposits increased by about $10 million year-over year, and our DDA balances were up $38million year-over year. Our non-interest bearing balances account for 39%, which helps with that funding cost. For the quarter, Federal Home Loan Bank borrowings increased. The loan growth and some deposits decreases in the fourth quarter will be major factors. They were $290 million in total Federal Home Loan Bank fundings at year-end.

Evidently, our shareholder equity increased due to earnings. This was offset by the dividend we paid. Another $0.22 cash dividend was paid. Also, we saw a slight improvement of our accumulated additional comprehensive income due to the unrealized bond portfolio loss. The tangible common equity ended 2017 at 7.87%, which is a slight decrease due to the significant increase in the unrealized bond portfolio loss. The $0.22 dividend we paid in the quarter was $0.88, which is a 10% increase year-over year. Our history shows that there has been an increase in annual dividends for about 30 years. We did not increase the dividend in any of the last two years for those 30 plus years.

It is increased every other year. We just kept them flat for the past two years. They didn’t decrease, but they weren’t increased. Based on current prices, the $0.88 dividend yields about 2.5%. If you look at the income statement, it is clear that our fourth quarter net earnings were $8million, which was lower than the three previous quarters. That $8 million is $0.67 each share. This quarter’s significant events or decrease was due to a $2.8 million provision we made as a result of our CECL modeling. Shalene will go into more detail about that in a moment. I won’t get into the details. However, this event was a result of our preprovision, pretax pre-PPP activity. This is our net core earnings.

This chart has been there for the past two years. You can see that the quarter’s earnings before provision and pre-tax was $12.6 million. Our year-to date was $50.2million. This compares to the previous year’s fourth quarter, which saw $10 million, and the previous year 2021 that saw $39 million. That’s a 29% increase of $11.2 million year-over-year. Looking at the year-to-date returns on average assets and net earnings, we had 1.24% declared earnings for 2022, 1.24% in 2021, and 1.36% in 2021. The difference in 2022 provision versus 2021 release, which was a swing in excess of $3.9million, would play a major role in that change.

The average return on equity was 13.76% for the year, compared to 13.72% for 20 21. We had great earnings again. Ty mentioned that we were proud of the year, and in 2022 as well as 2021, net earnings were significantly more than the previous years. The net interest margin is what everyone’s focusing on when we look at the components. It did decrease by 2 basis points in Q4. It was 3.57% less than the linked quarter but it was higher than 18 basis points in the same quarter last years. We discuss that loan yields are increasing as interest rates rise in the earnings release. Shalene will be back to discuss that and current rates. But, I think that more attention should be paid to our cost of interest bearing deposit.

Some of us look at all-the time and made some decisions this quarter that weren’t exactly what we had hoped for. As many banks, I believe we saw that we saw an outflow in deposits. We increased our interest bearing deposit costs for the quarter to stay competitive. This was more than we expected. The quarter’s interest cost was 108 basis point. This is an increase of 59 basis points from Q3. However, these are decisions that we made to stay competitive in all markets. We’re also seeing increased competition in large and small banks.

We stated in our press release that the interest bearing cost of deposits beta rose 40% during the quarter. This is a result of our decisions to raise some CD rates as well as our money market rates, more than we anticipated. It is important to note that the total cost for funds when we use our non-interest bearing accounts is 64 basis point. That’s an increase from 35 basis point linked quarter. So I would make a total deposit beta rise of 23%. Non-interest income is still lower than it was in 2021 and 2022. When you remove the unusual items, Q3 was very consistent with Q4.

My view is that we will continue to have problems in our non-interest income categories back last year, when the mortgage rates were lower. We saw a lot more profit on sales. If we look at year-over-year, our gain on sale in €˜22 was 55% lower than it was in ’21, that’s about a $3 million swing. As we look to 2023, we expect the volume to be lower as well as mortgage activity and related fees income. However, we did see some positive trends in the non-interest income. The debit card volume continues growing and showing good volumes. Even in the volatile stock market, our fiduciary income remains stable. We did experience some higher expenses in Q4, as we have historically.

Each year, we give raises in fourth quarter. This starts in October in the first half of the fourth quarter. When they’re justified, they were generally greater — the razors were generally larger this year than in prior years. This was due to inflation, but also the competition pressures that some staff positions are facing. We have reported in the past quarters that our health care expenses are slightly higher this year than last year. In Q4, we had to do a bit of catch-up in order to properly fund the period (ph). You’ll also notice the second category, which is our software and technology. We constantly look at software providers for opportunities and have made some upgrades to our core system and other systems that increased the cost.

This is a summary of income statements. I’ll give it to Shalene.

Also see 15 Most Influential Companies to Invest in Jim Simons Stock Portfolio.

Shalene Jacobson: Cappy, thank you. Next, I’ll discuss the highlights of our loan portfolio credit and the allowance of credit losses. Cappy said that loan demand continued its strong fourth quarter. This was due to loans in the pipeline from 2022. But, although our pipeline is slowing down, it’s partly because of higher rates and because we’re preparing for a possible downturn. Although the Texas economy is doing well, we’re not immune to downturns. We are tightening our underwriting standards, and being cautious with balance sheet growth in 2023. Ty will also provide some thoughts on the loan outlook 2023 on the next slide.

Our loan yields are trending up overall. The weighted average yield on our total portfolio increased to 5.2% this quarter, up from 4.96% during the third quarter. However, the fourth quarter’s average weighted loan rate was 6.53%. This is 88 basis points more than the average weighted rate of 5.65 that was booked during the third quarter. After the Fed hikes in December, we booked loans at the 7.5% average rate. The next bullet will talk about the rate sensitiveness of our loans. There are approximately $1.5 billion in loans that are either fully floating or adjustable at future times. 256 million of the $1.5billion is fully floatable, and the rest are adjustable at future dates.

About $213 of the $1.3 that can adjust for future dates is contractually set up to adjust during 2023. This includes the $256 fully floating loans. The number of non-performing assets is still relatively low at 0.32%, compared to 0.2% in the previous quarter. Our non-performing assets consist mainly of non-accrual loans. This includes the four loans that I mentioned in previous quarters. They were acquired from Westbound Bank in 2018. The four loans I mentioned are 75% SBA-guaranteed and secured by two loans or two Houston hotels. We have about $1 million reserve on the loans, which have a total of $6.7million. As we work through the problem loans, we don’t expect any material loss.

The fourth quarter saw the downgrading of a $1.4million land loan to non-accrual status. We expect the loan to have a low LTV. The guarantors, who we consider very strong, will be able to repay the loan in the near future. Also, we don’t expect losses on that one. This quarter, our net charge offs and net charge-offs to average loan ratio are both very low. Next, we need to adjust for credit losses. Cappy pointed out that the fourth quarter saw a credit loss provision of $2.8 million. In Q3, we also had $600,000. Q2 had no provision, and the first quarter saw a $1.25million release. It’s amazing how much can change over a year. However, the total provision cost for 2022 was $2.15million.

We adjusted our CECL model so that we included economic forecasts for a 2023 recession in our CECL model. There was consensus among economists in the fourth quarter that there would be a recession. The Wall Street Journal published an October survey that showed that 65% of economists they polled expected a recession. We had greater support in adjusting our forecasts because of the consensus reached in the fourth quarter, as well as other factors. We’ve had very few losses in past downturns, so we don’t anticipate any large losses during this possible downturn. Comparable to 1.29% in quarter prior, our ACL coverage was 1.3% of total loans at quarter’s end.

The next step is Ty, who will be discussing 2023 asset liability management.

Ty Abston So, thanks, Shalene. So for the coming year, like, we’ve been saying, we’re anticipating slower growth, the loan growth we had in fourth quarter really was those were credits primarily that were approved in the first half of €˜22 that have been funding up their equity portion. This is a significant portion of the total. We are seeing a slower pipeline in €˜23 as we would expect. As Shalene stated, although our state is doing well overall, it will slow down here as in every other region of the country. We are seeing deposit challenges. We are seeing deposit challenges.

Although we don’t support that, we do defend core deposits. A lot of depositors have been earning very little in the past few decades and are looking for some yield. They are also looking at what the Treasury market has to offer. We’ve seen a lot of liquidity being pulled from the system by the treasury markets where people are moving into Treasuries they normally wouldn’t. So we expect some net interest margin compression in €˜23. It’s manageable. But it just makes sense that as we continue to price loans, we will continue to see these. However, we also see that our liabilities and deposits are costing us more. We did have good earnings in €˜22 as we mentioned. Our goal when we started the year was to try to improve on €˜21 because €˜21 had $5 million or $6 million extraordinary income.

Once we saw we looped that, then we felt it was prudent to go ahead and look at our factors and our CECL model going into €˜23. So that’s exactly what we did for the quarter. As Shalene mentioned, we believe that it is a strength that our ALCI(ph) is manageable. We are not only at the moment, but we can also imagine where we might be if we were to shock a further 100 or 150 basis point increase in rates. It’s very manageable which means that our capital remains strong. Let me stop there, and we will then open up to questions.

To continue reading the Q&A session, please click here.