Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q2 2022 Earnings Conference Call July 18, 2022 11:00 AM ET
Company Participants
Ty Abston – Chairman & Chief Executive Officer
Cappy Payne – Senior Executive Vice President & Chief Financial Officer
Shalene Jacobson – Executive Vice President & Chief Financial Officer of the Bank
Conference Call Participants
Matt Olney – Stephens
Brady Gailey – KBW
Brad Milsaps – Piper Sandler
Michael Rose – Raymond James
Operator
Good morning, and welcome to the Guaranty Bancshares’ Second Quarter 2022 Earnings Call. My name is Nona Branch, and I will be your operator for today’s call. This call is being recorded. After the prepared remarks, there will be a Q&A session.
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.
Ty Abston
Thank you, Nona. Good morning everyone and again, welcome to our second quarter earnings call for 2022. As outlined in our press release, we did have a good quarter had strong growth and good earnings for the bank. We remain cautiously optimistic. Our state is doing well. Texas has a lot of growth going on. We’re more cautious though with — like everyone else with the rates and everything going on from a macro standpoint. We’re going to go through our slide deck and Cappy and Shalene will go through that, and then we’ll answer questions at the end of the presentation. Cappy?
Cappy Payne
Okay Ty. Thank you. Good morning. I’ll just briefly recap some of the highlights of the earnings release. And you can see our total assets at the end of Q2 were $3.28 billion, that’s up $91 million during the quarter and that’s up $195 million for the year for the first six months.
And diving into the balance sheet, I guess, on the asset side of the balance sheet, probably the focus is on loans and securities. Our total loans ex-PPP and warehouse were up $140 million for the quarter at 7.1% and a total of $297 million for the year-to-date for the first six months, roughly 16%.
Our new loan originations were strong, actually higher than Q1, but our payoffs were elevated a little bit also from Q1. Shalene will go over some of the little more detail here in just a minute in some of the loan yields and what we’re doing in the loan portfolio. But looking at the securities portfolio, you’ll notice a few changes.
I think if you see the trend, we did transfer $120 million of AFS bonds to held to maturity. We don’t plan on selling those bonds before maturity, and they really have a relatively short duration. Our hope securities portfolio is relatively short in duration. We did buy some securities during the quarter, about $100 million. You’ll see they’re up net of about $100 million during the quarter. Some of that was more treasuries and some mortgage backs, again, that don’t have a lot of duration.
We basically just took that out of Fed funds and that helped improve our total interest earning asset yield for the linked quarter that actually increased 33 basis points. So, total earning asset yield was 3.87% for the quarter.
From the liquidity standpoint, we’ve got about $200 million in treasuries that are maturing in the next six months, actually about $150 million in the next three months and then another $100 million, $150 million in Q4. So, that’s just going to be with pay downs, it will be closer to about $250 million and cash flow coming out of our bond portfolio. And even looking in the next 12 months, it’s about $350 million.
So, I’m not too concerned about the liquidity with the short-term duration of the bond portfolio and some of the changes we’ve made in the last three and six months.
So looking over on the liability side, our deposits, they did decrease $17.8 million, which was really driven by a decrease in our public fund deposit contract accounts. Public funds decreased by $38 million. That’s very typical for Q2 and actually looking ahead, it will probably happen in some decrease in Q3 based on the history of performance of what we’ve seen in our public fund money. And then they’ll typically increase in Q4.
The public fund money was — came out of interest-bearing — generally came out of interest-bearing accounts. And it’s — public fund money is about 10% of our total deposits, so not a large concentration currently. Our DDA accounts continue to increase. They increased $40 million during the linked quarter and now DDA is noninterest-bearing about 40% of total deposits.
You see in our shareholder equity, we did have some changes. It did decreased $9 million during the linked quarter. We discussed details in the press release, but obviously, the bigger component reflects a decrease in our accumulated other comprehensive income related to continued decreases in fair value of the AFS securities that was $11.7 million decrease in value of those AFS securities. And that along with our buyback that we did during the quarter and our dividend payout, those are all decreases, obviously, in the capital count and then offset by the good earnings we had for the quarter.
Just a real quick discussion on the buyback. We did buy back quite a few shares during the quarter. Our Board authorized back about a year ago, 1 million shares that we could buyback, we’re close to 250,000 shares a little under it. I really think that probably will slow down. We just had an opportunity to buy at a good price to help offset some earnings per share dilution created by the — some debt issue that we did last quarter.
So — and looking then at the income statement or on the earnings, our second quarter earnings were good, as Ty has already alluded to, is $10.8 million, that’s $0.90 per basic share and $0.89 per diluted share. That’s very similar to our — the strong first quarter we had of 2022.
So the first six months were good earnings. There wasn’t really much extraordinary activity during the quarter. We did not do a provision or a release and really, our PPP activity is beginning to wind down. So our core earnings were stronger than they’ve historically been in the last four-plus quarters.
Our return on average assets on net earnings was 1.35% and our return on equity was 14.85%, both strong results for the quarter and again, very comparable to Q1. Our stated net interest margin was 3.61%, that’s up 24 basis points linked quarter, and it’s up 17 basis points from same quarter last year.
So, again, pretty good results on our interest — net interest margin. Again, Shalene will talk about the loan side. I’ve already discussed on the bonds, we’re able to do some movements there that helped. And then on our cost of funds, which comes off of that, although rates are trending up as we all know. Our cost of funds is trending up and is 23 basis points for the quarter compared to 18 basis points for Q1. So that’s up about five basis points.
We’re pretty well using a deposit beta of 30%. So we’re looking to see as rates continue to go that – continue to go up, will — our cost of funds will also go up some. But we’re monitoring that closely. And as you can see, has haven’t been affected that too much, but we know that more of that’s coming as rate drives.
Looking at non-interest income for the quarter, it was — it reported lower than Q1. But if you remember, in Q1, we did have some extraordinary gains, $685,000 in our swap gain. So looking at recurring income, non-interest income was up for the — this quarter, about 290,000. That’s 5%. That’s driven by increased volume in our debit card transactions.
We did have – but we did record during the quarter, our annual bonus income from Mastercard, which is about $270,000. And if you look back to this quarter last year, that comparable number was $230,000. So very comparable to what we normally get in that, but it also is reflective of increased activity.
To the offset of that, though our mortgage volume and loan sold and gain-on-sales is down about 30% from last year. And our warehouse lending also is down, although not as big a contributing factor to our non-interest income is down about 60% year-over-year as mortgage rates continue to rise.
Looking then — looking at expenses, they were up about $600,000. It’s 3.2% for the linked quarter and up about $2 million was about 11% from Q2 2021 a year ago. The main driver continues to be staffing and related benefits to be competitive and properly staff for the growth that we have had and anticipate going forward.
Our FTE fully — I mean our FTE count is actually up, full-time equivalent, about 501 employees now. That’s up 23 full-time equivalents from a year ago, but our assets are up $350 million over the same time span. I think I told you last earnings call, we were looking to add some production staff and our — most of our metro markets, Houston, Austin, DFW and in SBA.
We added one in Houston, one in Austin and one in the SBA department. So in Q2, we also added some back office in the mortgage staff that I’ve talked about in Q1 call. So in Q2, we did that. And we talked about how we’ve changed over some leadership in that department, too. So that’s beginning to settle in now.
But our — we do look at our expense to asset ratio. That’s about 2.44%, which is in line with what our goals are and what we think is appropriate. So that’s one of the targets that we continue to look at and stay in tune with. Then our efficiency ratio, as we stated in there was a little under 60%, which shows improvement over the last four quarters.
That’s kind of a brief overview, so I’ll turn it over to Shalene.
Shalene Jacobson
All right. Thanks, Cappy. Next, I’ll cover some of the highlights of our loan portfolio, credit quality and the allowance for credit losses. First of all, the Texas economy is still doing relatively well and our loan demand continues to be good. I know it’s not strong, but we probably feel like loan demand is more good than strong at this point.
For the second half of the year, we believe that our loan pipeline will be able to backfill payoffs and pay downs, but we really don’t anticipate much loan growth during the second half of 2022. And then I’m sure Ty will probably give a little bit more color on that during the Q&A session. But we’re — we think if our loan loans stay flat during the second half of the year, then we’ll probably be in good shape compared to some of our peers.
And as Cappy mentioned a moment ago, excluding PPP and warehouse loan changes, our loans increased by about $140 million or 7.1% during the quarter. And the new loan originations and advances that were booked during the second quarter had an average loan yield of 4.65%. Overall, our loan yields are turning upwards, excluding PPP, our average loan yield increased this quarter to 4.7% from 4.59% in the first quarter and 4.66% in the fourth quarter of 2021.
The next bullet there, talks a bit about rate sensitivity for our loans. We have $1.37 billion of loans that are either fully floating or adjustable at various states and $267.8 million of that amount are fully floating and $1.1 billion are adjustable at various states. So, we ran a model that says, if rates increase is expected, which we assumed would be 75 basis points in July, 55 basis points — sorry, 50 basis points in September and 25 basis points in each meeting in November and December, then $453.6 million of those loans will reprice by year-end. And of course, adjustable rate while it’s not repricing, have the next repricing date subsequent to December 31.
Non-performing assets continue to remain relatively low, although our non-performing assets to total asset ratio did increase from 0.08% as of March 31 to 0.3% as the quarter end. This increase was due to poor [ph] loans which were made to two related party borrowers that moved to non-accrual during the quarter. These loans are 75% SBA guaranteed. They were acquired in our 2018 acquisition of Westbound Bank and they’re collateralized by two hotels in Houston.
The loans have total balances of $6.7 million. So, our non-guaranteed exposure is about $1.68 million and we’ve got reserves of about $1 million on these loans. So, we really don’t expect there to be a material loss, if any, as we work through resolving these problem loans. And just in general with respect to the acquired Westbound loans, we’ve identified a handful potential problem loans during that acquisition process. And these, we believe, hopefully, are the last of those that we’re working through. The others that were identified as problems have already been successfully resolved. And in those cases, we were able to release some, if not all of the related reserves that we put aside for those.
So, we’re continuing to work with these borrowers towards a positive outcome. But if that doesn’t happen, like I said, we don’t anticipate a material loss.
And then the last couple of bullets there, you can see that net charge-offs and the related ratios continued to be very low.
The last thing I’ll talk about is the allowance for credit losses and we had no provision for ACL during Q2. As you know, during Q1, we recorded a $1.25 million reverse provision as we fully unwound the remaining COVID specific Q factor that we had applied across our loan portfolio. And during the quarter the effects of that unwinding was offset by portfolio growth and a slight downward adjustments to some of our standard Q factors.
At the end of Q1, we felt like there was a greater level of economic uncertainty around the war in Ukraine, and the Fed’s plans to raise interest rates and by how much then there really was at the end of Q2. So, we essentially looked at our Q factors across the board relative to pre-COVID levels and expectations and adjusted some of them accordingly.
We still have some Q factors, particularly macroeconomic related that are elevated with respect to pre-COVID. And we think it could continue to change in future quarters based on any new knowledge of the impacts of inflation, whether or not a recession occurs and the possible impact of those events on our borrowers. So, as of the end of Q2, ACL coverage is about 1.36% of total loans, compared to 1.46% at the end of Q1 and 1.59% at the end of last year.
So, that covers our prepared remarks. I’ll turn it over to Nona for Q&A.
Question-and-Answer Session
Operator
Thank you, Shalene. It is now time for our Q&A session. [Operator Instructions] Okay. Our first call today will be from Matt Olney with Stephens.
Matt Olney
Hi. Thanks. Good morning, everybody.
Ty Abston
Hi. Good morning, Matt.
Cappy Payne
Good morning, Matt.
Matt Olney
I want to dig more into the commentary about the slowing loan growth, the back half of the year. And is there any more color you can share on this? Just trying to appreciate how much of that’s being just conservative due to the economic headlines out there versus actual evidence of this in the pipelines? Thanks.
Ty Abston
So Matt, this is Ty. I mean we’re definitely seeing a slowing demand, and we’re seeing some slowing in the economy. Part of it is our being — us just being conservative and tightening underwriting a little bit, and we’ve been doing that actually for about a year. But we’re definitely seeing some slowing economic activity. And like I said, even, I mean, Texas overall is doing really well, and we think it will do better than most. But these rates moving up as quickly as they have and as much as they have.
And as much as we’re anticipating, there’s no — I don’t think there’s any doubt we’re going to see slower economic activity. We do think we have enough momentum as we mentioned, to kind of backfill pay downs. So, we’re kind of shooting for a flat outcome in the second half of the year. But we’re seeing slowing, and we’re going to see slowing in all of our markets.
Matt Olney
Okay. Thanks for that Ty. And then on deposit balances, I think end of period, deposit balances were down in the second quarter. I think you mentioned public funds were a big driver of this. What are the expectations for deposit growth in the back half of the year?
Cappy Payne
Matt, I’ll answer that. This cant be — I did say public funds were down about $38 million. Again, that’s typical in Q2. I think they’ll go down again in Q3, which our history supports and then back up in Q4. But again, that’s 10% of our deposits. So it’s not a big factor.
But we’re really projecting more of a flat growth in loan and deposits also with some of the movement around as rates go up, that we see beginning to happen when customers begin to put funds and other investment products. So I’d say pretty flat for the rest of the year, also, just like the loans.
Matt Olney
Okay. And Cappy, you mentioned some security purchases that were made in the second quarter. At this point, do you expect any more incremental purchases in the near-term?
Cappy Payne
Not to a great degree, Matt. Again, that was pretty well just putting our liquidity to use — a little bit better use and putting them in treasuries and getting a little better yield. I don’t see us doing a whole lot of that going forward. Again, it will depend on loan demand and deposit or loan growth and deposit growth. But I think that will slow down in second half of the year, yes.
Matt Olney
And just lastly, remind us what the duration is of the overall investment securities portfolio?
Cappy Payne
Well, currently, it’s 3.2, but that’s — it is weighted down with a lot of treasuries. We’ve got about $300 million of unilateral treasuries in. Again, a lot of that I told you, all would go about — the cash flow is going to come out those treasuries in the short-term. So if you — and that’s about 30% of our bond portfolio, $300 million of the $900 million. So without those, it’s going to — the duration will be a little higher, probably half, 4:5.
Matt Olney
Okay, got it. Thanks, guys.
Cappy Payne
Thanks, Matt.
Ty Abston
Thanks, Matt.
Operator
So our next call will be from Brady Gailey with KBW.
Brady Gailey
Hey, thanks. Good morning, guys.
Ty Abston
Have a good morning, Brady.
Brady Gailey
I wanted to start with expenses. I know we’re seeing inflation pressure everywhere. And I think last quarter you guys targeted an annual expense number around that $77 million to $78 million range. Is that still — and if you look at the first half of the year, it seems like you’re kind of on track to do that. But any update on how you’re thinking about expenses from here?
Cappy Payne
Yes. I would — we’re up in that, Brady, again, as we’ve added some production staff and some back office staff. Again, we’re — our FTEs are up quite a bit and just to handle our growth. But I would say the — in the $79 million to $80 million, looking forward would be more of the range.
Brady Gailey
Okay. All right. And we’ve had several quarters here with the provision being zero or negative. Any update, as we potentially head into a recession and maybe the CECL model changes a little bit. Any update on how you think the provision could trend from here? Is it likely that we’ll start to see a number — a positive number in that line going forward?
Ty Abston
Brad, this is Ty. I’m sure, we will. I mean, we’ve been effectively unwinding COVID and just with our modeling and our loss history, I mean our provisions, we think, are very conservative where they are. But we also are looking forward into economy that we think will be slowing. So we’ll definitely, I think, be starting to see some provisions going forward as we move forward.
Shalene Jacobson
That said. I have got a couple of things I can add to that, Brady. We did look at our key factors and our overall methodology compared to how it was pre-COVID and when we first implemented CECL and some of the expectations that we had in terms of the forward-looking loss estimates when we implemented CECL, where we’re with the expectation that there was going to be a downtrend in the economy, not necessarily a recession, but we felt like we were at the end of a good cycle and maybe in the ninth inning with some expectations of that declining.
So, we’re still quite a bit higher than we were on day one CECL, 1.36% versus a little less than 125 basis points back then. So, I think relatively, we’re still much more conservative than we felt pre-level COVID pandemic.
Brady Gailey
Okay. And then my last question is just on the buyback. Pretty good activity, you repurchased about 1.5% of the company. It sounds like that’s going to slow. Is the messaging that you’ll still be active in the buyback, but just not at the level that we saw in 2Q?
Cappy Payne
We’ll be active, Brady, in the buyback. If we think it’s a fair price. I think that’s going to slow though. And then just because of other things going on, I do see that slowing down looking forward in the next six months.
Brady Gailey
All right. Great. Well, thanks for all the color and Shalene, congratulations on your promotion.
Shalene Jacobson
Thank you, Brady.
Operator
Our next call will be from Brad Milsaps with Piper Sandler.
Brad Milsaps
Hey, good morning. Am I coming through?
Ty Abston
Yeah, Brad. You got it.
Cappy Payne
Good morning.
Brad Milsaps
Thank you. You guys have addressed a lot, but I did want to touch on Cappy, it looks like you guys added some FHLB advances towards the end of the quarter. Just kind of curious kind of your thinking around that, sort of what the duration, the cost and kind of how long those might hang around, just some other strategy you’re working on there?
Cappy Payne
Yeah. Brad, that was more just liquidity positioning. They’re all short-term, all of those — not all of them, but the majority of those advances will mature in the next six months. So, we kept them short-term, kind of, line up when those treasuries roll off and they should just be able to offset each other, and then we’ll handle growth or whatever deposit and loans happen in the interim.
Brad Milsaps
Okay. So, you kind of answered my next question there. So, the $150 million or so that rolls off in the treasury book in the next three months, I should think about that as paying down those advances and not necessarily going back into the bond book?
Ty Abston
Yes, that’s correct, Brad.
Cappy Payne
Yes.
Brad Milsaps
Okay.
Ty Abston
Brad, I’ll add a little bit to that. I mean, as you know, the last couple of years, we’ve carried a lot of liquidity. Just the intent was not to buy bonds were written rates were extraordinarily low. So, we’ve been pretty aggressive in buying bonds this first half of the year. That’s going to slow. And we’ve, kind of, pre-purchased effectively some bonds, and that’s what those events are offsetting. But primarily in a two to three-year treasury space, we also bought some mortgage backs too recently, but that’s going to slow down. We just — we kind of bought ahead as the market started getting pretty attractive.
Brady Gailey
Got it. And then — very helpful. Thank you. And then on the deposit side of the equation, Cappy, I think you mentioned a 30% deposit beta, you were 23 basis points on average for the quarter. Do you have a sense of where, kind of, maybe your spot rate was at June 30? Just wanted to get a sense of maybe how things might or might not have accelerated in June as the rate increases really picked up in terms of where you may have had to move rates to in order to compete?
Cappy Payne
I think, Brad, we — the 30 basis — 30 beta factor is high. I think we’ll probably be in the — we’re probably around the 25% or lower at Q1 — at the end of the quarter. So I’d just say 30, just to speak as rates begin to move and we’re going to have to look and see what we’re paying our customers and be fair to that. And so I think we may have a little bit more movement in rates as they start to — or continue to increase in the next few months. But I think that 30 beta factor is high.
Brady Gailey
Okay, very good. Thank you guys. I appreciate it.
Cappy Payne
Thanks, Brad.
Ty Abston
Thanks, Brad.
Operator
Our next call is from Michael Rose with Raymond James.
Michael Rose
Hey, guys, can you hear me?
Ty Abston
Yeah, Mike.
Cappy Payne
Yeah. Good morning Michael.
Michael Rose
Great. Good morning. Thanks for taking my questions. Just a couple of follow-ups to what’s already been kind of asked and answered. So it seems like loans, deposits, not a lot of growth there. The securities to assets bumping up around 28%, cash is relatively low at this point. You get some repricing opportunities here in the nearer term. But if I look at last quarter’s rate sensitivity in the 100, 200 basis points, not a lot of lift. Does it feel like maybe we’re getting over the next couple of quarters, assuming we get what was laid out in your slides and what we get from the Fed, but are we getting closer towards a peak in margin? And then would NII dollars potentially really just be a function of balance sheet growth into next year. But it sounds like you guys are being a little more cautious. So I guess, overall, what I’m trying to ask is, is the outlook for NII going to slow as we move into next year? Thanks.
Ty Abston
Do you want to take that Cappy?
Cappy Payne
Yeah, I’ll take that, Michael. I do think — again, I think, it will slow as we begin to raise rates a little bit on the deposit side. And it all depends on the loan growth. Shalene’s already talked about the new loan rates yields that we booked were higher than we projected.
Our loan yields increased a little more than we thought they would. So I mean all that from that standpoint is certainly positive. But then again, lower – if we don’t book as many loans, and plus have to see how that works on our loan book. But I do think that, it will be slower in the second half of the year. So the net interest income, I think it will change due to balance sheet growth. And as rates rise, we’ll – we’ll see – I think we’ll see some lift in our margin on the – certainly on the top side, total earning asset yields.
Michael Rose
Okay. That’s helpful. And then can you just talk about exception requests on deposit pricing? Have you started to see that? I think based on my channel checks it seems like that really began to ramp in the last two weeks of June have really picked up to start off this month. Just any sort of color there? And then on the asset side, it seems like you obviously have some loans that you are pricing higher, but you do have a fair amount of commercial real estate loans. What’s the pricing like in that market? Thanks.
Cappy Payne
I’ll take the exception to deposit – on the deposit side. We really hadn’t begun to see much of that, Michael. We did put out a CD special that has gained some interest – its nothing – nothing crazy. It’s pretty – it’s not even highest in the market by any stretch of imagination, that’s a 150 CD rate on 13-month CD. So, we really haven’t seen a whole lot of requests that would say, hey, you pay me more, I’m moving our money. We’re paying pretty straight to the sheet rate on that. That’s on deposit side.
Ty Abston
On the loan pricing, it’s in the mid-5s kind of the baseline on where we’re starting on loan pricing.
Michael Rose
Okay. Thanks for taking all my questions.
Ty Abston
Sure. Thanks, Michael.
Operator
That concludes our Q&A portion of our meeting. I would like to remind everyone that the – the call recording will be available by 1 PM today on our Investor Relations page at gnty.com. Thank you for attending. And this concludes our call.
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