Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q3 2022 Earnings Conference Call October 17, 2022 11:00 AM ET
Company Participants
Ty Abston – Chairman & CEO
Cappy Payne – Senior Executive Vice President & CFO
Shalene Jacobson – EVP & Chief Financial Officer of the Bank
Conference Call Participants
Brad Milsaps – Piper Sandler
Matt Olney – Stephens
Michael Rose – Raymond James
Brady Gailey – KBW
Operator
Good morning, and welcome to the Guaranty Bancshares’ Third 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. Welcome to our third quarter call. As reported in our press release, we — our company did experience strong growth for the quarter, and good financial results. We outlined that we, like everyone, are anticipating a downturn in the economy starting in Q4 and in ‘23. But we do think Texas will remain resilient in this downturn and our company, we think, is also well positioned for any economic downturn we see going forward. We do have several slides to kind of walk through, and then at a high level, we’ll kind of detail some of the main areas of the company. Then we’ll open it up to Q&A. Cappy?
Cappy Payne
Okay. Thank you, Ty. I’ll read some of the highlights of both the balance sheet and the income statement here pretty quickly. Total assets for — at the end of Q3 were $3.39 billion that’s up $109 million or 3% for the quarter and it’s up $304 million or 10% year-to-date. Then, diving into a little bit of that on the asset side, total loans were up $144 million at 6.8% for the quarter and that’s ex-PPP and warehouse lending. And for the year, there were $439 million increase or 24% year-to-date, and again, ex-PPP and warehouse lending.
We do have a chart in our earnings release, you can tell that $400 million-plus, about $200 million came in — increase in CRE and about $85 million was an increase in the C&D bucket, construction and development. Those are the bigger drivers of our growth for this year. Each of our four regions are seeing growth this year. And our Central Texas region was leading that growth with about 50 — almost 50% of the year-to-date growth.
And looking at our new loan originations, they proved again strong for the quarter. They were higher in Q3 than they were in Q2 and Q1. And then looking at our payoffs and paydowns, they were pretty steady in Q3 versus Q2. Pipelines are beginning to slow down, as Ty has already talked about and we’ll talk a little bit more about that in detail in the next slide or two.
And looking into the securities portfolio, the main event was decrease in our treasuries, short-term treasuries that matured during the quarter again, $80 million, we’ve got about $120 million that they will mature before year end in the treasury category. We still have about 2% yield on that remaining $830 million bond portfolio and the duration is still is right at 3.5.
Along those lines, we do have some Federal Home Loan Bank advances maturing that will kind of match some of those deposit — some of those treasuries that are maturing. The other — I’ve got $140 million in Federal Home Loan Bank advances that will that will mature. We’ll roll some of those into 2023, but not all of them.
Then looking at our deposits, they were up $11 million for the quarter and up $120 million year-to-date, that’s 4.5%. And as you can see, most of that — almost all of that increase was in the DDA, which continues to represent 40% of our total deposits, which they pretty (ph) well have averaged all of this year. Public fund money is just 10% of our deposits. They were actually down during the quarter, about $9 million. So our retail — our all other deposits were actually up about $20 million for the quarter.
Our shareholder equity did increase by $6 million from the linked quarter. Earnings were $10.9 million offset by a decrease in our AOCI of $2.4 million. From linked quarter, we did pay dividends of $0.22, so that’s 2.2 million. And then, we did buyback a little bit of stock about $700,000 worth. We repurchased a little over 19,000 shares during the quarter. Our cash dividend is on track to pay out $0.88 for the year, which is right at a 25% payout of earnings. Based on current price that’s about a 2.5% yield and it’s a 10% increase over our dividends we paid in 2021.
And looking at the income statement, our Q3 net earnings were 10.9%, as I said, that was $0.92 per share. Very similar, but actually a little bit better than Q2 and Q1 of this year. Basic earnings per share year-to-date are right at 2.71 — $2.71 compared to last year’s $2.55, again, that is for the first-three quarters or year-to-date. As in prior quarters, we do include a table in the earnings release that describes our net core earnings. It was $13.8 million in Q3 and has shown an increase in each of the last five quarters. And again, we define core earnings as pre-tax pre-provision and pre-PPP effects.
Our return on average assets on those net earnings was 1.3% and return on average equity was 14.87%, both strong results for the quarter and very comparable to each of the first two quarters of this year. Our stated net interest margin fully tax equivalent was 3.59% that’s down 2 basis points from linked quarter. The results of it were 3.61% and it’s up from same quarter last year 19 basis points. Since PPP activity is pretty well wound down, especially in Q3, it did not have any effect of our — on our net interest margin in this quarter.
Our loan yield on that $2.2 billion loan book did increase 26 basis points linked quarter and is now 4.96%, that was somewhat offset though by the same period. The cost of our interest bearing deposits increasing 21 basis points to a total of 59 basis points from — for this quarter compared to linked quarter of 38 basis points. But as I said, we have 40% of our deposits in DDA so that, that does bring down our total cost of deposits. It is 35 — as showed it’s 35 basis points from the quarter and that’s up from Q2 of 23 basis points.
We have had our interest bearing deposit beta is right at 15%. We are projecting that to increase on future rate hikes and we’re projecting that to be closer to 25% near term. Because of loan growth, we did do a provision for the quarter, we’ll talk a little bit more about that when Shalene talks about the ACL.
Then looking at our non-interest income, it did decrease 2,78,000 from linked quarter, really three main reasons. The biggest being gain on sale of loans decreased 5,44,000 that’s 60%. Obviously, volumes are down. We know because of higher mortgage rates, but I did talk in last earnings release, we’re basically restructuring the leadership of our mortgage department that’s been going on and is now getting geared back up. And we also restructured in leadership our SBA department. So both of those departments should have higher volumes going forward certainly than we saw in Q3.
The second reason our debit card income was down. We did record an annual bonus payment in Q2 of 2,74,000 so that made the quarter-on-quarter non-comparable. Year-over-year though, we are showing an increase in our debit card income of about 7%, that’s going to be 400,000 to 500,000 increase in income top line revenue debit card, and that’s due to increased volume. Then to offset those two — first two reasons, we did have a gain on sale of an airplane asset for a gain of just under 900,000 recorded this quarter.
So then looking at our expenses, non-interest expense that did show an increase of 543,000 that’s 2.8% from linked quarter, primarily due to a write-down that we did during the quarter of 487,000 and an SBA receivable that we described in the earnings release that we discovered that during the quarter.
So guidance on our non-interest expense for 2022, we’ll probably have a total expenses of $78.5 million that’s still within our 2.5% of asset metric, probably going to be about 2.43%, that’s 9.5% increase over 2021 expenses. And then projecting ‘23, we’re looking at anywhere from around $83 million to $84 million which again will be in within our 2.5% of average assets and show about a 7% increase over 2022 expenses.
So I’ll turn it over to Shalene and she will talk about the next slide.
Shalene Jacobson
Hey. Thanks, Cappy. Next, I’ll cover some of the highlights of our loan portfolio, credit quality and the allowance for credit losses. As Cappy mentioned, our loan demand continued to be strong in the third quarter, actually stronger than we expected it to be, but the pipeline is beginning to slow down some as we move into the fourth quarter. And the slowdown is partially due to the higher interest rates and partially because we’re tapping the brakes on rapid growth as we prepare for a likely recession in the near future.
As Ty mentioned, all of you know, the Texas economy is still doing relatively well, but we believe that higher rates will soon impact borrowers’ capacity to repay. Therefore, we’re tightening underwriting standards and really being pretty conservative with balance sheet growth going into 2023. Ty will provide more thoughts on the loan outlook for fourth quarter and 2023 on our next slide.
Overall, our loan yields are trending upwards. Our weighted average loan yields increased this quarter to 4.96% from 4.7% in the second quarter and from 4.59% in the first quarter of 2022. And our weighted average rate of new loan originations in the third quarter was 5.65%, which is a whole percentage point more than the weighted average rate of 4.65% that was originated during the second quarter.
The next bullet talks a bit about rate sensitivity for our loans. We have $1.46 billion of loans that are either fully adjustable or fully floating or adjustable at various rates — various states in the future. $264.4 million of the $1.46 billion are fully floating (ph) and the remaining $1.2 billion are adjustable at various states in the future. So if rates continue to increase as we expect in the fourth quarter, $354.5 million which is about 15.7% of our total loan portfolio will reprice by year end.
Non-performing assets continue to remain relatively low at 0.28% compared to 0.3% in the prior quarter. A large portion of our non-performing assets, which are primarily non-accrual loans, consist of four loans made to two related party borrowers and were acquired from Westbound Bank back in 2018. These four loans are 75% SBA guaranteed and are collateralized by two hotels in Houston.
They have total balances currently on our books of $6.7 million, of which our non-guaranteed exposure is $1.7 million and we’ve got reserves of about $1 million associated with those right now. We don’t really expect there to be a material loss, if any, as we work through resolving these problem loans, and we believe that these are the last of the problem ones that we identified when we acquired Westbound and reserve for them back in 2018.
And finally, our net charge-offs and our net charge-offs to average loan ratios continue to be low. Next step is the allowance for credit losses. Did have a $600,000 provision for credit losses during Q3. We had no provision during Q2 and we had a $1.25 million provision release in Q1. So we’re still in a 650,000 release situation for year-to-date 2022, but we do expect that to change going forward.
We adjusted many of our Q factors earlier this year in the second quarter, especially those related to economic factors and forecasts that we believe were still mostly appropriate at the end of third quarter. So, Q factor adjustments during this quarter were pretty minimal and the provision was due mostly to the loan growth that Cappy spoke about.
We believe it’s likely that we’ll continue to make upward adjustments to our Q factors as we continue to evaluate the expectations for future rate hikes. The probabilities and impossible impacts to our borrowers of a recession in the near future. And then continued uncertainty around the war in Ukraine and its economic impacts on the world and in our nation. ACL coverage was 1.29% of total loans for the quarter compared to 1.36% in the prior quarter and 1.59% at year-end 2021.
So next, I will turn it over to Ty for other comments on 2023 outlook and asset liability management.
Ty Abston
Thanks, Shalene. So like, we’ve been saying, and kind of the theme for us in ’23 is slower growth. We’re anticipating that, [indiscernible] part of that’s by design and how we’re going to manage the balance sheet, but part of that’s just economic forecast that we have and everyone else has, I think, going into the coming year.
We do think we’re well positioned for downturn and with a strong balance sheet and we do have a core deposit base and we have, from our — since our founding and that’s kind of a key to our business model, we think it will be a real advantage for us from the standpoint of just core funding going forward.
We do think our ALC as very manageable. We went into this rate increase with a very strong liquidity position and we’re actually adding some duration now of the portfolio, but our ALC and our market risk, the bond portfolio is very manageable and will be even with additional rate increases.
And like Shalene said, with CECL, I mean, we anticipate and plan to budget additional reserves above and beyond what we anticipate actual losses to be, but that’s just the way CECL works. We didn’t see or anticipate significant losses with COVID. We actually ended up having no losses during COVID, but we still did $13 million in reserves just do the way that CECL works in front end loading those, the impacts of those factors.
So we’re like every bank, I’m assuming that’s on CECL, we’re anticipating significant increases in our reserves just given the factors of going into this slowdown and the velocity of rate increase that we’ve seen. This last year has been unprecedented and all of that’s going to have an impact. Obviously, nobody knows the severity, but it’s very clear. It’s going to have an impact on the economy, even here in Texas. And so we think it’s prudent to anticipate that and that’s what we’re planning to do as we start planning for ‘23.
I’ll open up to questions now and try to answer your questions anyone has.
Question-and-Answer Session
Operator
Thank you, Ty. It is now time for our Q&A portion of our call. [Operator Instructions] So our first call today is going to be from Brad Milsaps. Just a moment. Okay. Brad?
Brad Milsaps
Hey. Am I coming through?
Ty Abston
Yes. Hey, Brad.
Brad Milsaps
Hey, Ty. Hey, Cappy. Hey, Shalene. How are you all doing?
Ty Abston
Good.
Brad Milsaps
Maybe I just wanted to start on fee income. Appreciate all the detail that you guys have given. I know, obviously, that the mortgage kind of piece of it speaks to itself of what’s going on. I’m just curious if you could talk a little bit about, the SBA market. I know she didn’t have any gains this quarter? I know premiums have come down. Are you also retaining some of that production on the balance sheet? Is that what’s driving some maybe — some of the better loan growth. Just kind of curious if any of that’s correlated and just kind of your general outlook for fees in general?
Cappy Payne
Well, specific to SBA, no, we haven’t retained any material pieces of SBA that we’ve originated. It’s just originations have been soft and that may improve as things get tougher that SBA department may actually have a little more opportunity, but we have not retained any significant piece of that. I mean, we’re budgeting and planning for fee income to be soft in ’23 just giving the different components of mortgage and warehouse and SBA and other areas that just have significant headwinds. So that’s kind of how we’re looking at it. We’d obviously be, enjoy being pleasantly surprised, but we’re anticipating slowdown in fee income across the board.
Ty Abston
But Brad, I would say our guidance for ’23 would be in the $23 million to $24 million.
Brad Milsaps
Okay. Great. Thank you guys for that color. And then just as a follow-up, maybe on the margin, I think you guys noted in the deck that you, may be expected to, maybe peak or plateau kind of early mid next year. Just curious if you could kind of talk about maybe a level at which you expected to peak? And then Cappy, can you just maybe repeat what you said about maybe the timing of some of those FHLB advances being paid off and rolling off the balance sheet. I know there’s a lot of moving parts there, but just kind of wanted touch on those two items?
Cappy Payne
Yeah. I said that, Brad, just because we do have a lot of treasuries that are rolling off, as I said, about $120 million in treasuries. And we timed our Federal Home Loan Bank maturities to line up with that somewhat. They get $140 million in Federal Home Loan Bank advances that will mature in Q4. Some of those, we will, some of that, we’re going to roll over into 2023. But some of that will be paid down with the treasuries that are maturing.
On the margin, we think there’s still opportunity to increase when we’re seeing loans being booked at. I said, I do think our cost of funds, we will continue to increase. No doubt. Just to stay in the market where we need to be to take care of our customers. But I think our margin, as we said in early 2023 probably should peak in and around the probably 3.65% to 3.7% range.
Brad Milsaps
Great. Thank you, guys. I appreciate it.
Ty Abston
You bet.
Operator
Our next call is with Matt Olney with Stephens.
Matt Olney
Hey. Thanks. Good morning, guys.
Ty Abston
Good morning.
Matt Olney
Cappy, with your commentary of the FHLB maturing securities portfolio, some of the securities maturing there. It feels like the overall asset size should see some contraction of the overall balance sheet in the fourth quarter and perhaps even in early ‘23. Am I thinking about that right?
Cappy Payne
From that standpoint, yeah, Matt, that’s correct. I’m not — I think as Ty has already said, we’re looking at pretty flat growth for multiple reasons. But in part, due to some of these treasuries, no doubt, in addition to the loan — the pipeline grind up some and slowing down.
Matt Olney
Okay. That’s helpful. And then I guess taking a step back, you talked about expectations for the ACL ratio to build in ’23 and certainly appreciate shaped bag given the uncertainty in the economy. Can you talk more about if you still think you can grow EPS in ’23 versus ’22 if the ACL ratio does build next year? Thanks.
Ty Abston
Well, go ahead, Cappy. As I say, if we build the ACL ratio like we think we are, then earnings per share will not grow. I think we will have somewhat of a less earnings in ’23 due to ACL build.
Cappy Payne
But Matt, the reality is we don’t see actual exposure to loss as we said here today for our company in the downturn. But like, I mean, we’re just with CECL, we’re going to have to front end load that. So we’re going to be floating (ph) more reserves in, just given the environment will be in. Again, as anticipated, any bank will be that has views in CECL.
Matt Olney
Yeah. No. I understand. That’s how the CECL works. So I definitely appreciate that. And just lastly, I guess, the commentary in the slide deck, it reminds us that the bank has experienced very low levels of charge-offs in the prior downturns. Any color on how the loan portfolio has changed since the 2008 time frame and specifically, I guess, it seems like back then it was much more heavily weighted towards East Texas and not as much in in metro Texas. Just any kind of big picture thoughts you can give us on how it’s changed over the last 15 years? Thanks.
Ty Abston
Yeah, Matt. The portfolio has changed without a doubt. I would say that in a good way, it’s much more diversified geographically. And we’ve been in the metro markets now for seven, going on eight years. So we’ve actually half of that period you’re referring to, we’ve been in some of the growth markets, metro markets. And the key is our underwriting philosophy and individuals that are actually directing credit in our company are the same individuals. So our core credit philosophies have remained the same.
We think we’re very conservative in how we underwrite and that’s why we think we’ll weathering a downturn well. But the portfolio has changed, but I would argue that in a lot of positive ways just from its standpoint, not only geographic diversification, but even sector diversification, and how we look at the portfolio just being a little more resilient in different downturn, downturn impacts different areas of different sectors and different parts of the state.
Matt Olney
Thanks, guys.
Ty Abston
Thanks, Matt.
Operator
Our next questions are from Michael Rose with Raymond James.
Michael Rose
Hey. Good morning, everyone.
Ty Abston
Good morning.
Michael Rose
Just a couple — good morning. Just a couple of follow-up questions here. So certainly understand the pipeline slowing a little bit, but you guys are kind of ex-PPP, ex-warehouse of 24% year-to-date. I know you’re talking about slowing next year. Can you give us a sense on magnitude in terms of what you mean you’re obviously in good markets, but I assume some of it is self-imposed just given term and structure and pricing are under pressure. Just wanted to get — I’m not trying to pin you down, but just trying to get some semblance for what kind of magnitude to slow down or are we expecting here?
Ty Abston
Yeah, Michael. I would like we kind of put up, I would say low-single digit growth would be appropriate. I mean, part of it is just the fact that we’re going to be a little more cautious in how we’re underwriting and looking at credits. And without a doubt, we’re seeing a slower pipeline, lot of what the growth we booked in Q2 and Q3 really were just part of the momentum was in our pipeline starting first year.
So I just think I would be shocked if we’re not — if we don’t see slower growth across the board with all banks. And certainly, we’re going to be part of that. And even though Texas is doing well, it’s going to slow here too, and I think it’s probably kind of a natural byproduct to just kind of, again, the velocity of rates that, the rate moves we’ve seen this last — this last six to nine months.
Michael Rose
Appreciate that. One other thing I picked up on that you guys mentioned some restructuring the leadership in both SBA and mortgage. Can you just give a little color and context there as to what happened and maybe what that could mean as we move forward?
Ty Abston
So we’ve brought in two new leaders both for mortgage and SBA. Just we think probably we’re able to actually take advantage of this downturn to actually bring some talent on board. We don’t — the delta when it’s going to, as far as operating expenses are minimal, but we do think that the strength we’ve added to the bench in both those areas will work well for us as things kind of improve and both those areas start seeing better prospects.
Michael Rose
Okay. Perfect. And then, I think you mentioned, expenses, I think in a range of 83 to kind of 84. How much of — is that — is kind of the inflationary impact versus your new hiring versus just general growth of the business if you can kind of break it down just roughly?
Ty Abston
Well, I don’t have detail on that, Michael, but per se, but it’s a 7% increase that we’re projecting and obviously that’s going to be related to inflationary factors. As far as new hires, we still have a new hire openings, but we’re going to really monitor those into — going into 2023 just because of slowdown in the economy, so I don’t foresee a lot of new hires related to that.
Michael Rose
Okay. So most inflation.
Ty Abston
Yeah.
Michael Rose
Okay. Thanks for thanks for taking my questions.
Ty Abston
Sure, Michael.
Operator
Our next caller will be Brady Gailey with KBW.
Brady Gailey
Hey. Good morning, guys.
Ty Abston
Good morning, Brady.
Brady Gailey
So we’ve asked a lot about the asset side, but I wanted to ask about the liability side. If you look at deposits, it’s been pretty flat here for the last couple of quarters around that $2.8 billion level. How are you thinking about deposit flows going forward. It feels like the industry still has some excess deposits. So do you think you can hold that flat or do you think you could potentially see some shrinkage in 4Q and next year?
Ty Abston
I think fourth quarter, we may see a little bit of increase but we’re really projecting flat, no growth, but maintaining the deposits, the level that we have looking into 2023. Okay. And
Brady Gailey
Okay. And then if you look, I mean, you guys are still earning money, you’re going to have flat assets. So your capital should grow here, outside of changes with AOCI. I know buybacks were pretty limited in the third quarter. So do we think about buybacks ramping from here or since we’re headed into a recession or do buybacks go away?
Ty Abston
I think, I mean, we look at that Brady just based on valuation. Right now, our value has held up, I mean, fairly decent. So we haven’t been as active in buyback. But if we saw a significant dropping our valuation and versus what we see the intrinsic value of the company being, then we would be more aggressive with buybacks like we were doing the downturn with COVID. So it’s really dependent just on kind of where the market is relative to our view of intrinsic value of the company.
Brady Gailey
All right. And then finally for me, you mentioned $120 million of treasuries rolling off, I mean, that’s a decent size of your bought portfolio. Do you let that roll off and just go away or do you think about replacing some of that. I’m just wondering your bond book is around $900 million. How should we think about that balance end of next year?
Cappy Payne
So we’re about — we have right at $250 million in short term treasuries and so about 30% of the portfolios in those short term treasuries. We will use some of that to actually add some duration at this point because we still have a pretty short duration portfolio. And — but then we also will pay down some advances, which we took out to actually buy some of those short treasuries. So I would say you could probably take half those dollars and reinvest the portfolio to add duration and probably the other half that we would pay down some of the advances we have.
Brady Gailey
Okay. All right. Great. Thanks for the color guys.
Cappy Payne
Thanks, Brady.
Ty Abston
Thanks, Brady.
Operator
Thank you for your questions. I would like to remind everyone that the recordings of this call will be available by 1:00 P.M. on our Investor website relations — our investor relationship page at gnty.com. This concludes our call for today. Thank you.
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