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spk07: Good morning. Welcome to Guaranty Bank Shares third quarter 2021 earnings call. My name is Nona Branch and I will be your operator for today's call. I want to remind everyone that this call is being recorded. After our 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. Shalane Jacobson, Executive Vice President and Chief Risk Officer. To begin our call, I will now turn it over to our CEO, Ty Abston.
spk03: Thank you, Nona. Good morning, everyone. I, too, want to welcome you to Guaranty Bank Share's third quarter earnings call. As all of you or some of you, I'm sure, probably read our press release, we had a good quarter, one we're very proud of. We continue to be very optimistic about the strength we're seeing in the Texas economy and the strength we're seeing in our bank and our footprint and our business model. We are starting to plan for 2022 and have that same confidence as we go into next year and feel like that our state is set up to do really well and our bank in particular with our footprint throughout the state is set up to do really well. I'll turn it over to Kathy who's going to kind of go over some of the highlights and then we'll go through some of the things we want to present to you and then do a Q&A at the end. Kathy?
spk04: Thank you, Tom. If y'all are joining us by Zoom, you'll see our quarterly highlights on the screen. Let me just recap some of the main points, both on the balance sheet and the income statement. We did finish Q3 with total assets of $2.97 billion. A slight increase of about $35 million for the quarter. And then in comparing where we were a year ago, assets are up about 306 million year over year. So that's about 11 and a half percent increase. Our average cash and cash equivalents, which mainly is fed funds, did decline this quarter, approximately 15 million. Cash continues to remain elevated. We've talked about this in prior quarters. And as compared to, I guess, our historic normal levels, it still remains elevated and probably a drag on our NIM, our net interest margin of approximately 20, 22 basis points. So I think that will continue to stay elevated for a while and then probably return something closer to our historic levels. Gross loans then, a net of PPP, And our loans held for sale increased 132.8 million for the quarter, a really nice increase. And that's also 168.6 million year to date. So for for three quarters, that's that's a 10% increase annualized. That's if you annualize all those three quarters, about a 13, 14% increase with really Q3 being a a big driver of that with that $133 million increase. Shalane will talk about some of the PPP activity. Of course, all this is net of PPP when you look at the total loan loans outstanding. Our loan growth, and I think we talked about this in the earnings release, our loan growth is internally generated. It's coming mainly from our Central Texas market, as well as our Houston MSA, and even some of the markets in the DFW are really showing nice increases. But actually, if you look at it, and we've talked about this in prior quarters, We do break down our markets into four regions, and all four of our regions showed an increase in loan balances for Q3. We continue to have a strong pipeline, and we'll talk a little bit about that. And we did see the payoffs and paydowns, which have been pretty elevated over the last couple of quarters, decrease a little bit in Q3. So that was good to show that and part of that net growth that we're talking about. We did have a shift in average earning assets, showed an increase in loans, obviously with this growth, and even an increase in securities during the quarter. And then a correlating decrease in our fed funds, which obviously helped maintain our net interest margin. As well as showing, I think we'll talk about it in a little bit, but we showed a decrease again in our cost of funds. In the security section, though, you'll see that we moved some of our securities into held for sale, held to maturity, out of available for sale. And that was due really just to capture some of that unrealized gain, just to move for, I guess, for accounting purposes more than anything. Mainly, all those were our municipal securities. Then on the liability side, our deposit showed another increase for the quarter, about 30 million. We're now showing year-to-date increase in deposits of just right at 277 million for the three quarters. About 195 million of that is in non-interest bearing. So that's a good portion of that growth is really onboarding new relationship accounts in our DDAs. That's about 70% of our growth coming in the DDA non-interest bearing checking account balances. And really, we continue to have an elevated balance of those in our total deposit. So here today, they've averaged about 36% of our total deposits, that being in our non-interest bearing section. Then looking at the capital account, our shareholder's equity was $297 million at quarter end. That's a growth of about $9.7 million for the quarter and $24.8 million year to date. Again, we did not buy back any stock during the quarter. And we again paid a 20 cent dividend to shareholders. So annualized out the dividend is 80 cents. That's paying out about 24% of our earnings per share. And at current stock price, that's about a 2.2% yield. And looking at the income statement, as Ty's already mentioned, we had another really good quarter in our earnings. Our net earnings for Q3 were $9.3 million. That's $0.77 per earnings per basic share or $0.76 earnings per share fully diluted. And that's compared to link quarter net earnings were $10.4 million or $0.87 per basic share. For Q3, that gets us to a return on average assets of 1.24%, and our return on average equity, 12.44%. So again, this quarter, as I think we've done in the past, I don't know, five or six quarters, we provide some additional tables in our earnings release. So you can see how we highlight our net core earnings, which we define in our press release as being our earnings before any credit provision or release, which we've done the last couple of quarters and before income tax. And then also before So our net core earnings for the quarter were 9.7 million, that's 87 cents earnings per basic share. And that's compared to link quarter of 9.8 million, which is also 81 cents per basic share. Our margin was very steady for the quarter. It came in at 3.40% for Q3 compared to 3.44% for Q2. And if you X out PPP, which again, we provide a table in the earnings release, our NIM was 3.39% for Q3 compared to 3.38% for Q2. So really just very steady in the NIM. Our loan yields when you X out PPP did decline. They were showing 4.73% in Q3 compared to 4.82% in Q2. I guess the offset to that or the positive note is the increase in our loan balances is that loan balance increased obviously our interest income having come out of fed funds at earning a much lower yield. Then our cost of interest bearing deposits decreased again this quarter. They were 33 basis points in Q3, that's down four basis points from Q2. Then when we add back or add in or include our non-interest bearing balances, our total cost of deposits was 22 basis points for Q3 compared to 24 basis points in Q2. And if you look back a year ago in Q3 of 2020, that figure was 41 basis points. We've had a good opportunity to maintain a level of cost of deposits that are appropriate and pretty close to peer. Looking at our non-interest income, we did show an increase in Q3 of $479,000. That's 8%. Biggest part of that driver was a gain on sale of loans that was up 515,000. And that was both increase in mortgage volume and SBA activity from the linked quarter. SBA did add about two thirds of that increase and mortgage was the other third. So mortgage activity, which was significantly higher in 2020, is down some about 12% year over year. So we obviously we did project the decrease in mortgage activity and it's been 12% is I think we had about a 15% decrease projection. So we're in line with about what we thought. And our service charge income volume you'll see in there is really kind of returned to a pre-pandemic level. And with adding the accounts and the relationships I talked about on our DDA, I think that trend will certainly be maintained and probably increasing from here. You'll notice in the release the detail, our debit card income was less. Actually, our debit card volume did increase during the quarter slightly, but in Q2, we had an extraordinary annual bonus paid from our Visa MasterCard contract of $250,000. So it did show a decrease in total income for Q3 compared to Q2, but that was the reason. Then on our non-interest expenses, they did increase 1.6 million. We detail in the press release just under 800,000 that came in salary and benefits. I think we will see an increase in salary or this level increase in salary over the future quarters, no doubt, as pay scales are being adjusted somewhat. We did increase, we talked about in the press release, some of our benefits, health insurance payments due to some higher claims than we had projected, and then also benefits of payroll tax and 401k payments related to our ICOMP that we paid this quarter that was related to the first half of the year. We did make a note in there, we did have a non-recurring transaction of a termination fee on Payment of $434,000 to unwind two of the two swaps that we had on our trust preferred. This termination fee actually charges about $0.03 per share to the quarter earnings, and it will save us interest immediately going forward. right at $200,000 a year in decreased earnings on those trust preferreds or the swaps related to those trust preferreds for the next two and a half years. So I do think our annual expense run rate will be up some, probably in the 74 million or 75 million per year annual expense run rate. And then our efficiency ratio showing 64% of the X out PPP is 66 and a half percent. We we do maintain our 22 efficiency ratio goal of right in the 62% range. So with that, I'll turn it over to Shalane and she'll talk about COVID response.
spk06: Thanks, Kathy. Thankfully, it appears that COVID and the Delta surge is slowing down quite a bit here in Texas with fewer hospitalizations and more and more people getting vaccinations statewide. So we're happy to see that. All of our locations are open and our employees are back in their offices and branches, although we have rolled out a remote work policy for positions that are conducive to that type of arrangement so that we can provide certain of our employees with some more flexibility when needed. At the end of last quarter, we had seven hospitality loans that remained on an interest-only deferral because of COVID. All seven of those have returned to their contractual payment schedules and are current. We also had a good quarter for loan forgiveness under both PPP round one and two. With PPP round one, those loans that originated back in 2020, we've only got about $4 million to 109 borrowers left under that round. And then PPP round two, which originated earlier this year, we've got 71.4 million to 664 borrowers left. So as a percent of total dollars, we've had 98.1% of PPP round one forgiven, and we've had just under 30% of PPP round two forgiven so far. We have a little over 1.8 million in deferred origination income that's left to be recognized. And we think that about half of that will be recognized during the fourth quarter and then hopefully the remainder in 2022. In terms of PPP success and new customers, several of you have asked some questions about this, and we'll have some information about it in our 10Q. But we had a little over 880 brand new relationships as a result of PPP. We asked our loan officers to go through those and really try and gauge how many of those 880 will result in PPP. a more long-term banking relationship. And they felt like about half of those, or maybe a little less than half, will actually have already opened other types of banking relationships or will have the potential to do so in the near future. So we're excited about that growth as a result of the PPP program as well. So now I will turn it over to Ty to talk about the loan portfolio.
spk03: Thanks, Chalene. So as we've outlined and mentioned, our loan portfolio remains strong. The asset quality of the bank remains strong. Our non-performing asset ratio is, I believe, 12 basis points, which is pretty nominal. We continue to have about two thirds of our loans that have great floors, which has helped us kind of defend the rate. Like all banks, our bank will benefit with more normalized rate environment, which we're expecting to see. In the interim, we think we've been able to defend our NIM and our yields pretty well through this cycle. Our asset quality, not only strong today, but we look at down the road in the future and different parts of the economic credit cycle. And so with that, we continue to maintain strong underwriting discipline. We continue to look at a lot of credit opportunities that either we pass on or we miss because of either pricing and or a structure that we want and have in place. So while we're seeing good growth in all four of our regions, as we've mentioned, we're doing that with continued strong credit underwriting and plan to continue that. As Kathy mentioned, while we've had growth in all four of our regions, which we're very proud of and feel optimistic about. The majority of that this quarter was in the Austin-Houston regions. The DFW region had good growth. We had some pay downs in the DFW region in Q3 that kind of net the number down where it wasn't a strong growth. But in East Texas region, we had growth. And I've mentioned in prior quarters, we continue to see a lot of strong growth in the East Texas region from companies and individuals that are relocating in some of the smaller markets that they may not have necessarily relocated prior to COVID. So we remain pretty optimistic about that. Our state as i've said is strong the business environment is strong we're uh it's a very strong business climate and we continue to see not only current businesses doing well but businesses moving into the texas market from different parts of the country which is very encouraging uh chalene i think it's going to outline a little bit of acl a little bit of acl provision and uh for the quarter
spk06: Yes, we did have a $700,000 reverse provision during the quarter, which was primarily due to continuing to unwind our COVID-specific Q factor, which I've mentioned before on prior calls. Although we're being very cautious and fully unwinding that and the timing of that as we continue to watch the economy now that many of the economic stimulus programs are coming to an end for consumers and small businesses. We want to make sure we are fully reserved for those types of risks. In the third quarter, our allowance for credit losses as a percentage of total loans was 1.55%. And excluding the PPP loans was 1.62%. So we still have a pretty strong reserve in place that we feel comfortable with going forward. So that's all we have in our prepared remarks today. I'll turn it over to Nona for some Q&A.
spk07: Thank you, Shalane. As she cited, it's time for our Q&A session. If you have a question, you may hit the raise your hand button at the bottom of your screen. If you're participating by telephone, star nine will raise your hand, star six will unmute your line. So our first call today will be from Brad Millsaps with Piper Sandler. And Brad, you should be able to unmute your line.
spk01: Thanks, Nona. Am I coming through?
spk07: Yes, sir.
spk01: All right, great. Hey, guys, nice quarter. Just kind of wanted to follow up on some of the new loan generation. Just kind of curious, you know, where new loans are coming on the books relative to the current book yield?
spk03: Hey, Brad, this is Ty. They're coming a little bit lower than the current book yield. I think Shalene probably has the exact rates, but within 25, 30 basis points, I believe, is kind of where we're trying to maintain them. And that's part of what I was saying with kind of underwriting discipline. Part of that's a credit underwriting discipline, but also pricing discipline. And while we're being competitive and aggressive, certainly on very strong credits, we're not You know, we're not getting into rates that we don't think we'll be comfortable with long term. So we're managing that piece of it as we also manage to, you know, to grow the loan book.
spk04: Brad, they're coming in around four, four and a quarter, which is very consistent with what the Q2 numbers were.
spk01: Okay, great. And Kathy, I appreciate the disclosure around the loan floors in the slide deck. Ty, I know you mentioned that, you know, you guys will benefit, you know, if we do get a change in the short end of the curve. I was curious if you might, you know, be able to quantify that a little bit more. It would seem, you know, based on where your loan floors are, you might need at least, you know, 75 or 100 basis points from the Fed to see a lot of the book move. But just kind of curious if we do get, you know, say 50, you know, kind of what you would see the impact of that being on your net interest margin.
spk03: So, so, Brad, you're right. It would be 75 to 100 before it would be material in the 50 basis points. I think we see some improvement just in nothing else, just just the rate sensitive side of the balance sheet that it would be 75 to 100 to actually see material improvement. But anything to anything that moves us toward a more normalized rate environment is a is a net positive for us for sure.
spk01: Okay, great. I'll hop back in the queue. Thank you guys. Thanks, Brad.
spk07: Okay, our next call will be from Michael Rose with Raymond James. Michael, you should be able to unmute.
spk00: Great. Can you hear me?
spk07: Yes, sir.
spk00: Hey, how are you? Hi. Just wanted to delve into this quarter's loan growth. It was really strong. You know, if I look, kind of ex-PPP, ex-warehouse, about 30% annualized. You guys are running about 11.5% year-to-date. You previously talked about mid-single digits with the potential for a high single digit, but, you know, based on kind of good pipeline commentary, you know, paydown slowing a little bit. Is there any reason to think Then on a go forward base, I know this quarter was boosted a little bit by what appears to be retaining some one to four family mortgages on the books, but even XSAT really, really solid growth. Any reason to think that that low double digit range isn't more appropriate as we move into next year? Thanks.
spk03: Yeah, Michael, I think you were saying low double digit, is that more appropriate? That's possibly, I would still guide to high single digit possibly lower double digit. I'm remaining cautious with pay downs because they have, while we had lower pay downs this quarter, we're seeing a lot of pay downs just for various reasons in the portfolio. Again, we're also, you know, continue to be pretty cautious and thoughtful in our underwriting. So, you know, it's very possible we could We could end up in the low double digit, but it's going to be very low double digit to a high single digit more than likely would be where I would guide you and be comfortable saying it would be a good target.
spk00: Okay, that's helpful. And then maybe just going to the securities book, I understand the change from AFS to HTM this quarter. But as we think about just kind of the continued growth in cash, which will likely continue maybe at a slower rate, as we move forward. Do you guys generally feel good about the size of the securities portfolio? I think it's about 15.7% of earning assets for the quarter. Just any thoughts there, just given that yields have moved a little bit higher. Thanks.
spk03: Well, Michael, let's tie again. As we've been doing, we've been buying securities each quarter. I think it's likely you'll see us net up our security portfolio uh each quarter we're doing that pretty systematically we still are maintaining a lot of cash on the balance sheet uh but at the same token we're not willing to stay totally in cash and so we're we're buying each quarter and kind of you know It's either going to be dollar cost averaging or, you know, to the good or the bad. I mean, but that's kind of what we've been doing for the last couple of years. Been kind of buying into the portfolio each quarter, but not moving significant dollars over at one time. So we're basically covering the pay down of the portfolio and trying to net up each quarter as we go along.
spk00: Okay, that's helpful. And maybe just one last one for me, just on capital deployment. No buyback again this quarter. You guys are trading around 1.7 of tangible, so pretty acceptable earn back on any sort of buyback. But maybe you can just talk about your thoughts around the buyback dividend and then maybe potential M&A. We saw a larger deal in Texas announced here recently. Thanks.
spk03: yeah so we we continue to look at buyback and analyze that and buyback opportunities on our stock uh we have some metrics in place that we've had in place for a few years that we use to kind of monitor that and certainly as we see a advantageous price like we did during the middle of kobe we're very aggressive in buying back shares and our dividend stream is has That's been a growing dividend for over 30 years. We have it modeled out to continue growing it because that's a big part of our total return story. As far as M&A, I mean, there are a lot of discussions going on. We're in a lot of those discussions. It's hard to say how those kind of pan out. I think the buyers are being very disciplined, and we certainly are. But at the same token, there's opportunities, too. I think you're seeing banks... really come to realize the value of scale and or succession management, the succession challenges that are out there and technology challenges. And those are probably the three main themes I think you're seeing a lot of smaller banks look at and think about as they go forward. And the reality is either banks below a billion dollars with those three main themes are going to have to look at strategic options of either getting bigger or joining a larger organization or get comfortable with lower returns more than likely. And I think as that realization is coming to light with a lot of boards, you're seeing more conversations happen. And like I said, we're in those talks a lot of times and having those conversations with banks.
spk00: Great. I'll hop back in the queue. Thanks for taking my questions.
spk03: Thanks, Michael.
spk07: Our next question is from Brady Gailey with KBW. Brady, you can hit star six and unmute your line.
spk05: Hey, good morning, guys.
spk04: Hi, Brady.
spk05: Hi, Brady. So I just want to start with gain on sale in fee income. I know you guys mentioned some strength in SBA. But, you know, it had a nice step up here in the third quarter. to 1.7 million. How do you think about what that fee income line should be kind of normalized longer term?
spk04: Well, this is Kathy. We did have an increased volume in an SBA as I talked about. What we're seeing happen in an SBA is a lot more activity, so opportunity. So I think that level is probably going to maintain. It's about, I think we did around 700,000 this year and 500,000 this quarter. So I think that We're going to see an increase there. The challenge is in our mortgage activity, we still are trying to get more producers in their different regions and on the ground. So as I said earlier, we projected about a 15% decrease from our higher volume in 2020. I think a 10% to 15% decrease is probably what we'll project out for, well, what we'll end up having for 2021 and in 2022, keeping that relatively flat.
spk05: Okay. All right. That's helpful. And then on expenses, you know, I heard you guys talk about kind of a 74 to $75 million run rate. What were you talking about this year, 2021, or is that next year?
spk04: No, no, that's next year. That's looking forward. This year is going to be about 72 to 73 max, probably. So probably 72 in that, in that range. But that, what I was talking about was 2022. Okay.
spk05: And then finally, for me, I mean, you look at credit quality and it's still pretty clean here, but your reserve is still, you know, ex-PPP, it's a little over 1.6%. You know, over time, assuming credit stays pretty healthy, where do you think that reserve lands? It still feels like that's a pretty robust amount, looking at, you know, a bank that just doesn't have that many problems. How low do you feel like that reserve can go over time? Okay.
spk03: Brady, let me speak to that. So we continue to have factors in our CECL model related to COVID and obviously doing that to try to hold our reserves as long as we can. That being said, as COVID, you know, abates, it becomes a bigger challenge to do that. We're likely going to see some reserve release and possibly in Q4, but certainly in 22. The reality is while, you know, different methodologies, you can grow into your reserve and that's a Pretty good strategy actually, but with Cecil, it's truly more mark to market. And so it is much harder to hold that reserve with our asset quality and with the metrics we have. So very likely we're going to see more releases in 22 as we come out of COVID. That's just going to be the reality of how we're going to have to account for with Cecil.
spk06: Yeah, and our day one adjustment was around 125 basis points. And so, you know, we certainly think that longer term, it'll probably be higher than that, but lower than where it is now.
spk05: Okay, great. Thanks, guys. Thanks, Brady.
spk07: Our next call is with Matt Alney with Stevens. Matt, you should be able to unmute your line.
spk02: Great. Thanks. Good morning, guys. Hey, Matt. Good morning. Going back to the loan growth in the third quarter, you've mentioned a few times that slower payoffs and paydowns were a pretty big driver of the third quarter growth. What about overall production levels in the third quarter? Any color on how those compare to the previous quarters?
spk04: They were increased also, Matt. I mean, we had... an elevated origination and or advance on existing lines for the quarter compared to quarter two.
spk02: Okay, great. And then I think one of my items that was strong in third quarter growth was farmland. Any color on the sequential growth there?
spk03: So math is tied. So farmland category, that is in Texas, I think most of you know that You know, property that has an exemption stays in farmland, even though it's probably it could be development property long term. And the biggest dollar move there for us was in the Austin MSA. We have different projects that are actually, you know, currently exempt. but more than likely in the plan is probably to be developed. So that there's those that isn't actually traditional farmland, but that's how it's categorized based on the exemption of the properties.
spk02: So Tire Sandoz will eventually become construction or residential construction loans, it sounds like. Yes.
spk03: Yeah. They will be put into some sort of development project is the long term plan for the property. Right now, though, they're ag exempt and they're in farmland category.
spk02: Okay, got it. And then, Cappy, you mentioned the termination of those swap agreements with respect to the trust with birds. And you mentioned there was a saving associated with that we should see. Where are we going to see that over the next few quarters? What line items, I guess?
spk04: It's going to be a decrease in our interest expense, Matt. The swaps that we're talking about, we have 10 million on the books. Five million of those had a swap attached to it that was unfavorable. So we just decided to unwind it. So that's going to be about a $50,000 a quarter decrease in interest expense related to that.
spk02: Okay. Got it. And then I guess lastly on deposit growth, I guess we cooled off quite a bit in the third quarter compared to the last few quarters. And it sounds like you're still running out of some higher cost deposits. Any more color you can give on that? And what are the expectations for funding loan growth from here? Do you expect to bring down liquidity levels in the fourth quarter or grow deposits? Just any color. Thanks.
spk04: Well, I think we will spend some of our liquidity to fund loan growth. But I do anticipate, if you go back and look at our history, I do anticipate an increase in deposits in Q4. There's some of that is seasonal deposits that will come in, but traditionally will increase in Q4. It all depends on loan growth for Q4, but my projection is that we will use our liquidity to fund it to the most part.
spk03: I'll add something to that, Matt. I mean, we still continue to see the main driver of franchise value in a bank is core deposits. So while we obviously, like a lot of banks, are very flush with liquidity, we'll use that where we can. We're still very actively growing our core deposit base, mainly, as Kathy said earlier, in the DDA balance and checking account and relationships side of the transaction side of the bank. But we're still focused on core deposit development. The company is part of our strategy.
spk02: Okay, great. Thank you. Thank you, Matt.
spk07: Looks like we have another call. Looks like Brad Millsap would like to ask another question. Brad?
spk01: Yeah, thanks, Noda. Just a quick follow-up. Ty, I know you guys were really aggressive hiring new lenders, you know, end of last year and end of the early part of this year. It seems like every bank in Texas is looking to hire new officers. Can you talk about, you know, your appetite, maybe how much capacity, you know, those lenders that you brought in still have? And then, you know, Kathy mentioned, you know, some wage inflation, you know, kind of what are you seeing in that regard in terms of what it takes to bring in new folks?
spk03: I'll start with that, Brad. So our lending team still has quite a bit of capacity. Like we mentioned before, we developed some real strength in our lending team during COVID, kind of the slowdown during COVID. That being said, we're adding to our lending team, especially down the Austin market. We have some traction there and have some opportunities to continue to add to our lending team down there. you know, expectations are lenders and, you know, when they're able to produce that, then it's a win-win. If not, then we look at, you know, bringing in new lenders. So the overall environment, though, I will say just from the standpoint of staffing costs, it's, you know, you're going to see real wage increases in all companies, but certainly banks and maybe across the board. We've kind of gotten in front of that this last couple of months and looking and really done a deep dive in our salary and compensation across the board and have made some adjustments, especially in our starting salaries in different markets. And so, because again, trying to just preemptively get in front of what we're seeing is some real wage pressure going forward. Kathy, you want to add anything to that?
spk04: No, I think that's exactly, you said, well, that's what we're trying to get ahead of the curve on, just keep our staff properly compensated.
spk01: Great, thank you.
spk04: Thanks, Brad.
spk07: Okay, we have no more questions in the queue. I would like to remind everyone, there will be a recording of this call available by 1 p.m. today on our investor relations page at gnty.com. Thank you for attending. This concludes our call today.
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