Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q1 2024 Earnings Call Transcript

Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q1 2024 Earnings Call Transcript April 15, 2024

Guaranty Bancshares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to the Guaranty Bancshares First Quarter 2024 Earnings Call. My name is Nona Branch, and I will be your operator for today’s call. I would like to remind everyone that today’s 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; Shalene Jacobson, Executive Vice President and Chief Financial Officer. 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 Guaranty Bancshares’ first quarter 2024 earnings call. As you’ve read in our press release we just issued, we did have a good quarter. I’m very proud not only of the quarter, but our entire team. Our team remains focused on developing strong banking relationships in all of our markets across state of Texas, our asset quality remains strong, our net interest margin continues to build and our local economies appear to be — continue to remain stable across the board. We did release quite a bit of detail in our press release. However, we do have a presentation on some highlights that I’m going to turn over to Shalene to go through. And then after that, we’ll answer any questions you have. Shalene?

Shalene Jacobson: All right. Thanks, Ty. I’m going to start off with the balance sheet. Total assets decreased by about $57.4 million and total liabilities decreased $59.4 million during the quarter. We’ve continued with our strategic decision that began really back in early 2023 to shrink the balance sheet rather than grow at this time because we’ve got a core earning stream that allows us to really continue to have good profits without taking on the added risk from various economic uncertainties and other headwinds that we believe are still in place today. The year-over-year decrease in assets during the quarter consisted of lower cash balances of about $16 million, lower securities balances of about $8 million net of some repurchases that I’ll talk about here in a second, and a decrease in net loans of $57 million during the quarter.

These asset decreases were used on the liability side of the balance sheet to pay down Federal Home Loan Bank advances by $65 million and also to repay $25 million in matured brokered CDs that we obtained back in 2023 to test as a source of liquidity, and we did not renew those when they matured in February. Total deposits decreased $5.4 million during the first quarter, but, excluding those $25 million in brokered CDs, were up slightly by $19.6 million. We also had $30 million in short-term treasuries that we invested in back when we had lots of cash after COVID that matured during the quarter. And we reinvested those treasuries along with some additional cash into new available for sales securities. We purchased just over $39 million during the quarter at a weighted average yield to maturity of 5.23%.

We’ve got — with respect to those treasuries — short-term treasuries, we’ve got about $40 million of those remaining, and they will mature between now and June of 2025. Our total equity increased $2.1 million during the quarter as a result of $6.7 million in net earnings and was offset by dividends paid of $2.8 million or $0.24 per share, which is an increase from $0.23 per share that was paid in dividends during each quarter in 2023. We also repurchased 11,651 shares of Guaranty stock at a weighted price of $28.76 per share. On the income statement side, the bank earned $6.7 million in net income in the first quarter, which equates to $0.58 per basic share, which is up from $0.51 per basic share in Q4, and down a bit from $0.69 in the first quarter of ’23.

Our return on average assets was 0.85% for the quarter compared to the 0.73% last quarter. Our return on average equity was 8.93% in the first quarter compared to 7.93% in the fourth quarter. Net interest margin was 3.16%, which is an increase from 3.11% in the prior quarter. That increase resulted from an 11 basis point improvement in our interest earning asset yields, which was offset by only a 6 basis point increase in our interest-bearing liability costs. Our NIM was helped by new and repricing loans during the quarter for sure, lower Federal Home Loan Bank advances, and primarily by a slowdown in the repricing of our interest-bearing deposits. Those rates have remained constant. Noninterest income increased by $462,000 during the quarter, which resulted primarily from the recovery of just under $500,000 of SBA guarantee accounts receivable that had been partially charged-off back in 2022 due to uncertainty at that time about the full collectability of those guarantees from the SBA.

However, as the SBA has reviewed those over the last year and a half, and after their final review, the full amount of the guarantee was actually received. So, we were able to recover the full amount and recover those amounts that had been previously charged-off back in 2022. We also had two SBA loan sales during the quarter, which helped us increase our gain on sales of loans during the quarter by about $76,000 quarter-over-quarter. Noninterest expense was $700,000 lower in the first quarter, primarily due to the retirement accrual of $600,000 that we booked back in the fourth quarter of last year that we did not have again this quarter. We also had some lower general and administrative expenses in the first quarter. As I’ve mentioned on some calls in the past, we continue to anticipate that noninterest expense will be about 2.5% of total assets, which is a threshold that we really try hard to stick with.

I think that’s a good measure for us. All right, on to the loan portfolio and credit quality. Gross loans, as I mentioned, decreased $57.3 million in the first quarter, primarily in our C&I, C&D, and CRE buckets. With respect to the CRE bucket, we did have $14.9 million move out of that CRE category into REO when we foreclosed on a property in Austin, Texas back in February, which I’ll talk more about here in a moment. We did originate $62.9 million in new loans during the first quarter of ’24 at an average yield of 8.39%. So, new loan yields do remain strong. Our non-performing assets really continue to remain at historically low levels at 0.68% of total assets for the quarter compared to 0.18% in the prior quarter. Charge-offs are also low.

We only had $110,000 during the quarter and our net charge-off to average loans ratio was 0.02%. Back to the non-performing assets, that figure includes both REO and non-accrual loans, and it of course increased in the first quarter primarily due to that $14.9 million that we recorded in REO from the foreclosure of the property in South Austin. We mentioned that property in prior calls as it has been on our substandard list in the past as we tried to work that loan out, but we did, like I said, foreclosed on it in February of 2024. The property is in a very hot vibrant area in South Austin and had a pre-foreclosure LTV of 68.5% based on an appraisal from early 2023. It is an operating property, and we do expect to start recording noninterest income and expense related to that property in the second quarter of 2024 until it’s sold, and there has been quite a bit of interest in it, so I’ll let Ty talk about that during Q&A once our remarks are finished here.

Commercial real estate and office-related loans continue to be a hot topic. However, we manage them very well. We have a diverse portfolio and really don’t have any significant concerns in those areas. Commercial real estate represents about 40% of our total loan portfolio, but of that 40%, only 4.6% is office related, and those loans have an average loan balance of only $516,000. So, it’s primarily mom-and-pop office real estate. Nonaccrual loans also remain low, but did increase slightly during the first quarter. We’re continuing to work through the problem loans, but most of them are well collateralized and we don’t expect any significant losses at this time. Finally, our substandard loans were $17.5 million at quarter-end, which is down about $4.6 million from year-end.

The decrease resulted from the $14.9 million move to REO, but was offset partially by an increase in smaller dollar loans. We do have — the substandard loans are pretty granular. We’ve got 141 of them with a low average balance of about $109,000. We did have a reverse provision for credit losses of $250,000 during the quarter. That resulted primarily from lower loan balances and really just overall stable credit trends. We did adjust for economic conditions back in 2023 in our Q-factors. We feel like those are still applicable today. So, we didn’t make any further adjustments to the Q-factors during this quarter. Our quarter-end ACL coverage is 1.35% of total loans, just slightly higher than the 1.33% that we had at year-end. And then finally, onto deposits, liquidity, and capital.

Our deposits decreased by $5.4 million during the quarter, which, again, was primarily due to the maturity of the $25 million in brokered CDs that were not renewed. We also had some continuing shift from noninterest-bearing to interest-bearing deposits during this order. Noninterest-bearing deposits decreased $27.1 million, while savings in money market accounts increased by $30.8 million, and certificates of deposit excluding the brokered CDs increased $15.9 million. Despite those shifts, however, our noninterest-bearing deposits still represent 31.5% of total deposits at quarter-end, but we do expect that ratio to be closer to our historical average of mid- to high-20%s as we continue moving later into 2024 and early 2025. With respect to overall deposit risk, Guaranty has a very granular and historical stable core deposit base.

At quarter-end, we had over 88,000 deposit accounts with an average account balance of $29,696. And our uninsured deposits also remain relatively low, excluding public funds, which are collateralized by investments and Guaranty-owned accounts, our uninsured deposits were 25.43% of total deposits at quarter-end. Our liquidity remains good. We ended the quarter with a liquidity ratio of 10.6%. And we used some of that liquidity during the quarter, cash flows from matured securities to pay down Federal Home Loan Bank advances $65 million this quarter. We’ve paid down our advances by $265 million over the past 12 months. Our FHLB advances are down to $75 million at quarter-end. We continue to have total contingent liquidity of about $1.3 billion available to us through various sources, including the Federal Home Loan Bank, Federal Reserve Bank, and some correspondent Fed funds lines and a revolving line of credit.

Our total net unrealized losses on investment securities remains reasonable at $53.6 million, of which $21.1 million is attributable to our available for sale portfolio and included with other comprehensive income. Finally, capital is also strong. We used some of our excess capital in the first quarter to repurchase shares of Guaranty stock and continue to add intrinsic value for our shareholders. We repurchased 11,651 shares at an average price of $28.76 per share. And also, as I mentioned previously, the Board also increased the dividend paid during the quarter to $0.24 a share from $0.23 a share previously. So that concludes our prepared remarks for today. I’ll turn it back over to Nona for Q&A.

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Q&A Session

Operator: Thank you, Shalene. It’s now time for our Q&A. Our first question will be from Woody Lay with KBW. I’ll get my mouse there. Woody, can you unmute your line?

Woody Lay: Hey, good morning, guys. Sorry about that.

Ty Abston: Good morning, Woody.

Woody Lay: Wanted to just touch on that $30 million of treasuries that matured in the first quarter that you mentioned in the opening statement. Any color on when those matured in the rate that those treasuries had?

Shalene Jacobson: $15 million, Woody, renewed at the end of — I’m sorry, matured at the end of February and the other $15 million at the end of March. And I don’t know exactly, but I believe they were in the middle 1%. So, 1.5%, 1.6% yields.

Woody Lay: Got it. So, with that in mind, I think last call you sort of — that internal expectations were for the margin to improve 2 basis points to 3 basis points a month. Does that still seem like a realistic target going forward?

Ty Abston: Woody, this is Ty. I think so, yes. If we can — are able to continue to hold our cost of funds relatively stable as far as increase — rate increases, which we’ve been able to do for several months, then we’re repricing the loan book every day. So, I still think 2 basis points to 3 basis points a month is a good run rate, and that’s our goal as far as to continue to increase our margin.

Woody Lay: Yeah. And then, the 3.50% longer-term sort of internal target, I mean, is that a 2025 target? And is there any — do you think we need rate cuts to see you all hit the 3.50% level?

Ty Abston: I don’t think we need rate cuts. We need time. That probably is a 2025 to get to that level. But we’re certainly — that’s our target. We’re heading that direction. But, I mean, I think that’s still a target. It’s going to be probably in ’25 before we can get there, whether we have rate cuts or not, because again, we’re repricing. We still have a pretty short duration loan portfolio, and we’re repricing that. And that’s just catching up with the significant increase in rates on the deposit side.

Woody Lay: Yeah. All right. That’s all for me. I’ll hop back in the queue. Thanks for taking my questions.

Ty Abston: Thanks, Woody.

Shalene Jacobson: Thank you.

Operator: Our next question will be from Matt Olney with Stephens.

Matt Olney: Hey, thanks. Good morning, guys.

Ty Abston: Good morning, Matt.

Shalene Jacobson: Good morning.

Matt Olney: I want to ask about that Austin project that you mentioned in the press release. Any more color you can give us? I think you said it was a operating property. What kind of property is it? And what’s the occupancy of that property? And what’s that translate to in terms of maybe a more recent debt service coverage ratio?

Ty Abston: So, Matt, the property is kind of a mixed use. The part that we own now is retail on the first floor. Then there’s condos above it, and there’s a large parking garage that we own. The property — this was part of a larger company that had multiple projects, most of them under construction, had problems internally and externally apparently. Our property was stabilized, leased up. They actually were making the payments through year-end. It just, ultimately, they started liquidating the company. The trustees did. We’re yielding — the loan was at 4%. We’re actually yielding around 4.5% now on a net NOI on the property. We have two vacancies. We have a lease that’s about to execute. We did hire a really good property manager there in Austin, it’s managing it for us.

We do have this in a real estate subsidiary of our bank that they’re holding us in. We do have two vacancies, one lease that they should have signed any day now that will bring the yield up to about 5%, a little over 5%, maybe 6%. And then the second location — the second space, we’re in discussions with one group and going back and forth on LOI. If we get that closed and that’ll be — it’ll be 100% occupied. It’ll be yielding 6.5% — between 6.5%, 7%. And our plan is to market the property and sell it. We do think there’s — we have it marked appropriately based on the appraised value we have. And we’re going to mark the property above where we’re carrying it. And we’re very pleased with the yield we’re achieving on the property while we’re marking the property.

And like Shalene said, it’s in a really great part of South Austin. So that’s kind of the status of it.

Matt Olney: Okay. Thanks for the color there. And then I guess, it sounds like — given we’ve taken ownership of this, it sounds like there could be some noise in some of the results of the next few quarters until it’s fully disposed of. Is that fair?

Ty Abston: No, I don’t think so. I mean, we’re yielding actually more on it owning the property than we were on the loan. And they’re all triple net leases. I mean, the only noise would be if we sold it for less than we’re carrying it and based on just the valuation that we back into based on the NOI and the appraised value and comps, we think we’ve got it marked below market — fair market value. So, shouldn’t have anything in there really even from an earnings standpoint, just based on the yield on the property.

Shalene Jacobson: Matt, we will be recording the earnings, the rental earnings in noninterest income and any related expenses in noninterest expense. So, if those are material numbers, we’ll certainly point that out in our next earnings release.

Ty Abston: Yeah, that piece would actually not be an interest income and be a noninterest income, yes. So, we’ll have a component there that’s moved from one account to the other. We will highlight for sure.

Matt Olney: Okay. And then, as far as that appraisal, I think you mentioned you got that appraisal before you took possession of the property. Is that right? And when would you be required to take a new appraisal on that property?