Guaranty Bancshares, Inc.

Good morning and welcome to Guaranty Bank Shares first quarter 2023 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 hosts for today's call will be Ty Abston, Chairman and Chief Executive Officer of the company. Kathy Payne, Senior Executive Vice President and Chief Financial Officer of the company. Shalane 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 Aston.

Thank you, Nona. Good morning, everyone, and welcome to our earnings call for the first quarter of 2023. I'm going to make a few comments and I'm going to turn it over to Kathy and Shalane to go through our presentation. We had a solid quarter given the environment that we were in, all of us as banks. This was an unusual environment, one that I truly haven't seen in over 30 years of doing this. There's a uncertainty with our depositors that I didn't even see in 2008 that I think is gonna have some consequences that ultimately will require our leaders in Washington to address. And we probably will see those the second half of the year. We did add a level of deposit granularity and portfolio, loan portfolio detail to this earnings release that we had in the past, given the messaging and everything that we're hearing the last few weeks. So to give a little more color on our balance sheet and our company. Also, our bond portfolio exposure, we added more detail on that. And related to credit, we're just not seeing credit deterioration in our markets. The Texas economy remains very strong and vibrant our sense is that our economy in Texas will slow down second half of the year like other economies, but we do think credit issues are probably going to be more related to the geography of the credits, at least in our view. I'm going to turn it over to Kathy and Shalane, let them walk through everything, and then we'll open up to Q&A and answer questions you have.

All right. Thank you, Ty. Let's hit the balance sheet highlights first, and then we'll go over some of the earnings metrics. On our balance sheet, our total assets did end the quarter with $3,356,000,000. That's pretty comparative to beginning of the year, which we started the quarter at $3,351,000,000. So basically no change in footings. We did see a decrease early on during the quarter, January and February had a decrease. And then in March had an increase in assets, which were partly driven by an increase in our deposits. And we'll discuss that here in a little bit too. So our quarterly average assets though, were down a little bit lower than from linked quarter. They were 3,325,000,000. So you'll see that in one of the tables. In the bond portfolio, it was down about 48 million. That's pretty evenly dispersed among treasuries, agencies, and munis. We have pretty good cash flow in there. We got another about 45 million in Q2 and another 45 million in the second half of the year. So as a general rule, basically we're taking those and we'll be paying down some of our advances, more so probably than getting back into the bond portfolio going forward. Looking at the loans, not much change there at all. We ended the quarter at $2,380,000,000. Average for the quarter was $2,388,000,000. So it's pretty steady in loan volume throughout the quarter. Looking at the liability side, deposits did decrease $57.8 million. That's 2.2% during the quarter. Pretty comparable when you look at the average table, quarter to quarter, it was down about 3.5%. Again, we saw a big dip early on and then increase in March. Of that 57.8 million decrease, non-interest bearing decreased about 59.6 million and interest bearing increased almost 2 million. So we did see a little remix and deposit, a little shift in deposits. I think that's just customers going after yield, where in the past its rates have been so low it really hadn't mattered as much. So I think we'll continue to see some of that remix going forward, too, in 2023 as rates continue to be higher on the higher end. Non-interest-bearing balances did still average for the quarter and at quarter end 38% of total deposits. That compared to all of last year, they averaged about 39%, so still relatively high compared to total deposits. We did see a shift within our interest-bearing deposits too from non-maturing interest-bearing to time deposits. We can discuss a little bit about the effect of that on the income statement here in just a minute. Federal home loan bank advances, you saw they did increase 50 million. They ended the quarter at 340 million. Most all of those are short-term advances and can be paid down as securities mature and or deposits increase. Again, you'll see some of that breakdown in the press release about the federal home loan bank advances. Equity did increase $4.7 million. Of course, that's obviously had earnings for the quarter. We'll discuss that $8.3 million. We did repurchase some stock, about 25,700 shares for a total of $744 million. And we also paid a dividend of $0.23 per share. That's a 4.5% increase and about 32% of income for the quarter. Our AOCI did decrease slightly, about 450,000, and is now at 24.7 million. That's about 7.6% of equity. Shalene will go over a little more detail of that here in just a minute. Our tangible common equity ratio at quarter end was 8%. That's up slightly from 7.87% at year end. That's kind of the highlights of the balance sheet. Now turning to the income statement details, I said our first quarter net earnings were $8.3 million. That's a return on average assets of 1.01% and a return on average equity of 11.18%. It's also earnings per share of 69 cents. These numbers are a little higher than they were last quarter, but last quarter we did record a $2.8 million provision in Q4. And we did not do a provision or a reverse provision in this quarter. And then as we've done now for a couple of years, we've included a table of quarterly core earnings. And this quarter, because of those changes I just discussed, it's going to be a little lower than last quarter. And that's driven also by lower net interest income. You can see we put some discussion in there. Our net interest margin was 3.24%. That's down 33 basis points from the linked quarter. Although top line revenue and our average yield on earning assets was higher, it was outpaced by growth and interest expense on our costing liabilities. And most of that's going to be mainly driven by our cost of interest bearing deposits. As I said, we did see a shift in our deposits from non-interest bearing to interest bearing, and we increased the rate on all of our deposit products, not necessarily to lead the market, but to be very competitive in the communities we serve. So we made that decision during the quarter, and that obviously increased our cost of funds. The average Rate on our interest-bearing deposits was 1.91% of the quarter. That's up 83 basis points from linked quarter. And then our total cost of deposits was 1.18%, which is up 54 basis points from linked quarter. Again, that's a pretty high interest-bearing beta factor for the quarter. But if you look year to year, it's probably pretty much in line. I think it's about 25%. 25% on interest-bearing deposit data for the year. Non-interest income was down about 4%. That's 217,000, the details in the press release. Again, our mortgage volume for the last two quarters continues to be lower than we experienced in most of 2022. So that's some of the driving factor of non-interest income being a little bit lower. Non-interest expense was also down. It was down about $930,000. That's 4.5%. Again, a lot of details in the press release, and a lot of our expense categories saw some lower levels quarter over quarter. If you'll look then over the next page and look at some of our loan and credit quality, As I said earlier, loan volume was pretty stable for the quarter, but with rising yields, as you would expect. And we talk a little bit about there's, I think the new yields, new loan origination yield 7.27 compared to 6.5% in Q4. So our total loan yield was up about 27 basis points from the last quarter. Credit quality, as Ty talked about, remains very strong. Our non-performing assets to total assets were 0.4%. And again, in the press release, we talked about the five loans. I think that's three relationships within this category. And we do not expect much loss, if any, in this group of loans. Charge-offs were very low. As I said, we did not do a provision. And our allowance for credit loss coverage is 1.34% at quarter end, which is similar to what it was last quarter. We have added some risk management bullets that Ty mentioned too. So I'm going to turn it over to Shaleen and let her go over some of those. Shaleen.

Thank you, Cappy. Yes. So in light of all of the recent events in the first quarter of 2023, you've noticed that we included several risk management topics around deposits, investments, loans, liquidity, and capital. We included these disclosures to really illustrate the granular and lower risk nature of our balance sheet and the overall stability of our banking model, which is a very traditional model that has allowed us to better navigate economic cycles historically. And we believe and hope that it will continue to do so going forward. As we've mentioned many times before, we have a historically stable core deposit base. Excluding time deposits, nearly 57% of our depositors have been customers of our bank for more than five years. We've currently got over 84,000 total deposit accounts that have an average balance of $31,000, so well below the FDIC insurance levels. And speaking of which, levels of uninsured deposits have been a very hot topic since mid-March. So we included a table in the earnings release with additional details there. Excluding public funds, which are fully collateralized by Pledge Securities, our uninsured deposits were 30.8% at quarter end. And then if you exclude deposits to directors and bank officers, uninsured deposits were closer to 30%. That percentage doesn't take into account any PODs or beneficiary information because we don't track that in our core. So it's actually probably a bit lower than that. And we did immediately after the situation in mid-March retrain personal bankers and others on how to help customers use the FDIC insurance calculator. So we feel pretty good. Pretty good there. Although deposits decreased for the quarter, they actually increased nearly $8.5 million in March, like Kathy mentioned. We also joined the Intrify CDARS network the first week in April, and we already have our first several reciprocal CDARS accounts there. We'll also expand to their ICS product as soon as we're able to integrate that with our core, which we expect to do in late May or early June. Our loan to deposit ratio increased slightly for the quarter, but remains reasonable at 90.6%. The next area that we talked about was our investment policies and strategies, which are very conservative. We typically invest in plain vanilla government agency securities with little to no credit risk. We also have municipal bonds that we monitor very closely in communities that we know and understand. The average life of our portfolio is currently five years with an average duration of four years. And we generally try to keep the portfolio life in that four to five year range so that we can better manage the interest rate risk. We've mentioned this in prior calls too, but we were also late to deploy our high levels of cash that we had in 2020 and 2021 into investments because we felt the yields and duration just weren't good at that time. So when we finally did deploy our excess cash, treasury yields had gone up some, and we invested in short-term treasuries that were providing decent yields with little duration risk. And as a result of that, the unrealized losses in our portfolio have been very reasonable despite the fast and high level of interest rate increases by the Fed. Net of tax, our current unrealized losses on all securities, both AFS and HTM, are $40.4 million. which is 12.8% of total equity before including those losses. And to illustrate sensitivity a little bit as well, we also included that if rates increase an additional 100 basis points, which we don't expect them to, we've got 25 basis points modeled, the total unrealized loss net of tax would increase to about $60.4 million. With respect to loans, we've also got many policies and procedures to help manage risk there, especially around concentrations, loan size and underwriting policies, some of which we highlighted for you in the earnings release. Our legal lending limit is currently $54.2 million, but our board has established an internal lending limit of only $30 million. However, we very rarely approach even the internal limit. We currently only got two loans in the bank with total commitments greater than 20 million, and each of those are just barely over 20 million. And we've only got 10 loans in the entire bank with commitments over 10 million. So we believe in that and keeping those large loan concentration amounts pretty low. Our loan portfolio is also fairly granular. We've got almost 13,000 loans with an average balance of $197,000. And like most community banks, we do have a larger percentage of commercial real estate loans. The CRE portfolio, including the real estate construction and development is about 53.6% of our total portfolio. Now, office related loans have also been quite the hot topic since COVID. So we included some more information there. Our total office related CRE is about 4% of our loan portfolio. But 46.5% of office-related CRE is owner-occupied, and only 21 of the 189 office-related loans that we have have a loan balance of greater than $1 million, with an average balance of $504,000. Now, finally, if we look at liquidity and capital, although earnings and metrics may be lower currently and hopefully temporarily, Our liquidity and capital ratios are solid. Our liquidity ratio, which we calculate as cash, Fed funds sold and unpledged securities, divided by our total liabilities is 14.7% at quarter end. And we also have over $1.3 billion in contingent liability sources available to us if we need it. Our capital is also good. We illustrated for you in the earnings release what our capital would be if we actually had to sell all of our securities and realize those losses. If that were the case, total capital would decrease to about $275 million, but total capital to average assets would remain a little over 8%, which is well above regulatory minimums. And then Kathy, I think, mentioned this earlier, but to wrap up, we also repurchased 25,709 shares of Guarantee stock in the first quarter at an average price of $28.95 per share, which we believe is a great deal, and hopefully more people will take advantage of that. So that's all I have for prepared remarks. I'll turn it back over to Nona for Q&A. Nona? Thank you, Shalane.

Our first call today, or... First caller to ask questions will be Brady Gailey with KBW.

Hey, thanks. Good morning, guys. Good morning, Brady. So I wanted to start just with the dynamic of higher deposit costs pulling the margin down a little bit in the first quarter. How do you expect this to trend throughout the rest of the year? I know I think previously we, you know, you guys had considered a flat net interest margin kind of year over year. 23 over 22, but I know that seems probably less likely now. So just thoughts on kind of the margin outlook from here.

Well, I'll address that, Ms. Cappy, Brady. I think we'll continue, as I said, see a remix of deposits as customers go after a little more yield. I think we can defend the NIM. I'm not really comfortable giving guidance on our NIM. So we're looking at a range of outcomes, but I think we can certainly keep it above 3%. And we do have some, our loans, some assets repricing. We've modeled that through the end of the year and then some continued shifting of deposits and obviously at a higher yield than it has been in the past with with the time deposits and even our money market rates, which we increase just to take care of our core customers. But I do think we're not going to see a large dip. We're not going to see much dip in the NEM going forward for 2023. Okay.

All right. And then maybe on deposit balances, I think if you look at the link quarter annualized, they were down about 9% this quarter, about 16% last quarter. Should we expect to continue to see some deposit outflows here?

I think we could see some more deposit outflows. Yes, I don't think it'd be significant. I think our rates, as I said a while ago, they're not leading the market. And there are customers, obviously, that are looking at what's out in the market. But we're very competitive. And we're doing that to maintain our stable core deposit base. So we're not projecting a lot of outflow. And if we can keep it level, I think we'll be very comfortable with that. But there could be some migration out. I just don't think it'll be much.

All right. And then finally, for me, I know you guys have talked about keeping expenses at about 2.5% of assets. If you look in the first quarter, it was about 2.45%. It's kind of right at that mark. But is that 2.5% level still the right way to think about the expense base?

Yeah, Brady, I think so. That would get us roughly in that $83 to $84 million range as we're projecting out, and we're under that starting off, so I think we can meet that, yes. Okay, great. Thanks, guys. Thanks, Brady. Thanks, Brady.

Our next caller to ask questions is Brad Millsaps of Piper Sandler.

Hi, Brad. Hey, Kathy. Good morning. Am I coming through? Yes, Brad. Thanks for taking the question. Just to kind of follow up on the margin discussion, just kind of curious if you could provide some color on maybe how the margin trended throughout the quarter. Maybe give us a sense of where it was in January versus March. Did you see the bulk of your compression kind of late in the quarter when things really kind of heated up or kind of how did it trend as you went through the 90 days?

Well, Brad, it did trend down during the quarter. I think we started January more closer to in the 330 range. And then we ended about 320. So it averaged out 324, somewhere in that range. So yeah, we're seeing a little bit downward trend in that. But modeling it out, I still think we can stay near that level.

Okay. And then maybe just kind of some of the specific components. I know you mentioned using some of the bond portfolio cash flows, which I think you pegged around 90 million for the rest of the year, you know, to pay down borrowings. I did notice the yield on the available for sale securities book was down about 55 basis points, link quarter. Is that more of an accounting phenomenon and how you maybe account for the level of yield? Or is there something within the movement there that pushed that down more? Just trying to get a sense of kind of how that should trend going forward. It's kind of been, you know, kind of very volatile as I look back, you know, across the last, you know, four or five quarters.

Yeah, Brad, that's exactly it. We did some looking at some accounting factors we're using on the amortization and the accretions and made some adjustments. And that's what that's going to be going forward.

We also sold some of our available for sale securities that had higher yields during the first quarter because we didn't want to take losses. And so for liquidity purposes, and so that impacted the yield down slightly, about 25 million we sold.

Okay. And I apologize if you address this, but just final question for me. I mean, you guys, you know, did some, some heavier provisioning, you know, late in the year last year, you didn't take one this quarter, obviously no, no, charge off this quarter at all. But I know it's very model driven, but as you think about, you know, your conservative approach to asset quality and the provision, how should we kind of think about, you know, that as we move through the year?

I can take that, Brad. You know, with the CECL model, of course, you're supposed to not only take into account your losses in the portfolio today, but then project out into the future. And so, Basically, at the end of fourth quarter, the projections we had for 12 to 24 months out, we felt like we're a lot more solid and supportable for us to go ahead and make that provision going forward in the fourth quarter. And we didn't feel like a lot of those projections have materially changed. The risk ratings in our portfolio didn't change during the first quarter. And really our loan balances didn't change. So because of that, our model calculated a similar reserve to what it did at the end of the year.

Okay, great. Thank you.

Our next caller will be Matt Olney with Stevens.

Hey, thanks, and good morning, and I appreciate all the great disclosures you guys gave us in the release, all very helpful stuff that I hope other banks also provide the next few weeks. I want to circle back on the deposit discussion. Kathy, you mentioned the NIB deposits declined. I'm just curious on any color on how much additional NIB outflows we could see this year. Just didn't know if you looked at the average size of some of these depositors today versus where it was a few years ago, so we can maybe help appreciate where this could ultimately land later this year. Thanks.

Well, Matt, I do think we could, as I said a while ago, I think we'll see a remix, a continued shift of deposits somewhat. You can get a yield on a money market account now that's pretty good or certainly get into a short-term or 12-month CD that's a pretty good rate. So I think we'll see some of that, and we're modeling that throughout our budget for 2023 now. They're a little bit different than what we started the year at. But we don't – taking into consideration that's going to be a big number. I think we'll see a decrease in our non-interest-bearing deposits and some shifting to interest-bearing. And as I said earlier, probably it could be a slight decrease in total deposits throughout the year. We're working to maintain them, and we made the rates attractive enough to maintain our deposits like we think we should throughout our market. So we'll see how that plays out.

Yeah, Matt, this is Todd. Let me add a couple things to that. Our biggest competitor for deposits really in Q1 was the treasury market, and those rates have come back quite a bit. So actually what we're paying in the bank is comparable to a one-year treasury, and we do have a reciprocal program now for anyone who's wanting to keep the money insured. So we have a couple of different things working in our favor to defend our time and interest-bearing deposit base going forward.

Okay, thanks for that, Ty. And then on the lending side, and specifically on the C&I side, any change on utilization rates, anything you're seeing more notable on the commercial side over the last few months or a few weeks? It looks like the C&I balances were about 6% lower in the first quarter.

Nothing material as far as utilization rates, Matt. We haven't seen anything there.

And I think last time we talked about that low single digit loan growth for the year. Is that still your expectation?

I don't know that that's I mean, obviously, we're in a pretty fluid environment. I think we're going to see credit contract around the country. And so I don't know how to really think about that right now until the messaging improves on the stability of the banking system. And I would say that it's low single digit to even no growth or even some decline. I mean, we could have some contraction in our balance sheet and use capital that's freed up in that to buy back stock because we're going to be pretty active in that space. So that's probably a better intrinsic strategy, honestly. And that's kind of where my head is really. But we're not really anticipating or projecting significant loan growth for sure, at least in this environment until things kind of settle out a little bit.

Yep, I appreciate that. Yeah, not much visibility out there on the loan growth front. And I guess just finally on the credit front, you gave us some great disclosures there around your office portfolio. Average loan size, really small looks like. Any color on just the typical profile of your down-the-middle, bread-and-butter office loan? And then as I think about your office portfolio by market, does it lean any way in terms of geography of your footprint?

It does. It's pretty much across our footprint. Obviously, our smaller office would be in our East Texas region, but primarily it's going to be owner-occupied. There are several of them that actually were the lead tenant. are actually in our office bucket so there's a loan lease transaction there but uh we just don't have a lot of significant office exposure uh that is out there that's really exposed to you know uh third-party leases and things going on in that space and certainly of any size but it's very spread out as far as our three different metro regions okay thanks guys

Our next caller is Michael Rose with Raymond James.

Hey guys, can you hear me?

Yeah, Michael.

All right. Yeah, just a couple of follow-up questions. Just first on the deposit remix, certainly I understand that's happening. If I go back to kind of pre-COVID, you guys were running NIB mix around 27%. You're at 38% now. Just as it relates to your margin guidance, where are you assuming that kind of goes and why wouldn't it necessarily get back there over the next couple of quarters?

I'm projecting it being the low to mid 30s, going down some for where it is, but still at a reasonable level.

Okay. Maybe just a few more. Just where did interest-bearing deposit costs end the quarter and same for kind of, you know, loan yields and kind of what are you, you know, what are new production loan yields kind of running out at this point just on average?

I'll have that, Michael. I mean, around eight to eight and a quarter is kind of where we're putting on new production.

Okay, and there's demand at those levels for that level of rate?

That's what we're putting it on at. I mean, there is demand, yes, but that's kind of where we're putting it on if we put a credit on.

Okay. Maybe just switching to capital. Obviously, a little bit of growth here and TBV up 2%. Just as we think about the AOCI, one of the larger banks that I cover, they put a neat stat in their slide deck where they project about 40% of AOCI will kind of come back into book value through the end of the next year. Have you guys done that sort of work? And do you have a sense for just based on kind of securities are going to mature, what kind of the earn back or the accretion would be on AOCI over the next year or so?

We haven't, Michael. We could put that together, though, through our ALCO modeling. It'd be pretty simple to not only project that, also project you know, change in rate environment, say a year from now.

Perfect. And maybe just, oh, go ahead. Sorry.

No, I was just going to say, I mean, I think the key is we've, the portfolio is structured where it just has a pretty moderate impact on our, on our AOCI, on our capital position, both in available for sale and held to maturity. And so that's, that's the piece we've paid attention to quite a bit the last two years.

Okay. Maybe just finally for me, just on the buyback, I think you mentioned that you actually expected to be relatively active. Can you just define what that means? Obviously, bank stocks have been under a lot of pressure, but I think our expectation generally has been that banks would be cautious in this environment. So I understand there's not a lot of loan growth opportunities out there at this point. I certainly understand that. But Can you just kind of talk about how active you plan to be with the buyback? Thanks.

Well, yeah. So we're going to be looking at that pretty much daily, and we have been. We've been pretty active the last two weeks. And so I would say that we could buy back anywhere from 1% up to 10% of the bank, and just depending on kind of where our balance sheet is in the environment. But we're very comfortable with our asset quality, our liquidity, kind of where we sit with our – our core deposit base and our core loan funding, the core loan portfolio we have, and our earnings stream, our ability to perpetuate earnings going forward, even at a decreased amount, but it's pretty consistent earnings that we're projecting going forward. So that, and if we allow some contraction or balance sheet, gives us an opportunity to buy back stock. And like we did during the middle of COVID, we think that is probably, from an intrinsic value standpoint, one of the better things we can do. So it wouldn't surprise me if we're pretty aggressive in that area, depending on kind of what valuations do the remainder of the year.

All right. That's all I had. Thanks for taking my questions. Thanks, Michael.

Thank you for your questions. I would like to remind everyone the recording of this call will be available by 1 p.m. today on our investor relations website at GNT.com. Thank you for attending. And this concludes our call.