Guaranty Bancshares, Inc.

Good morning. Welcome to Guaranteed Bank Share's second quarter of 2023 earnings call. My name is Nona Branch, and I will be your operator for today's call. This call is being recorded. After our prepared remarks, there will be a Q&A session. For our host today, 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 Adston.

Thank you, Nona. Good morning, everyone. Again, welcome to our earnings call for the second quarter. We have a presentation. I'm going to have Cappy and Shalene go through, and then when we're done, we'll answer any questions anyone has. Cappy?

Thank you, Ty. Good morning, everyone. Let's take a quick look at the balance sheet first. If you're joining us on your computer, you see a PowerPoint presentation where we have some bullet points. Our total assets for the quarter were down about $150 million. That's about 4.5% to the total balance at June 30 of $3.21 billion. The biggest drivers of that on the liability side, we show... The Federal Home Loan Bank advances were down $145 million, and deposits were down about $20 million. Then on the asset side, according to you'll see in the press release, the decreases were mainly driven by Fed funds were down about $50 million. Our securities portfolio was down about $46 million, and then the loans were down about $44 million for the quarter. To give a little of securities detail, the securities portfolio detail, we did have $25 million in short-term treasuries mature during the quarter, and then the rest of that decrease was pretty much from normal paydowns and a few maturities of municipal bonds in the portfolio. Municipal bonds were down for the quarter about $8 million and about $24 million year-to-date. And then our total securities portfolio is down about 90 million since December 31, 2022, since last year. As I said, loans decreased for the quarter about 44 million. That's 1.8%. That's period to period. Total loans are now 2.3 billion. Our new loan originations have slowed and pay downs and payoffs have picked up a little bit. Chalene is going to give us a little more detail on that in the next couple of slides. Looking at the deposit side, as I said, total deposits decreased slightly by 20 million. We did see, we saw customer deposit migration slowing compared to Q1 where deposits were down about 58 million. We did see a decrease of our non-interest bearing deposits of 77 million during the quarter. I think this is pretty much a trend we've been talking about where our non-interest bearing deposits still represent 35% of total deposits at period end. We also had a $28 million decrease in public fund money, which represents about 10% of our public fund money. And it's It has shown to be very typical in recent past years for second quarter trends to show a pretty good decrease. Then looking at our total equity, it did decrease $3 million. The income earned for the quarter was offset by some stock purchases. We bought back about $8.1 million in stock. That's 322,600 shares bought back. That's about 2.7% of shares outstanding. We also continued to pay a dividend, paid a dividend of 23 cents per share. That was 2.7 million of the decrease. And that's 33 years now of paying an increasing dividend. And that dividend equates to about a 3.4% dividend yield currently. Then looking over at the income statement, the earnings section, our reported earnings were $9.6 million. And as indicated in the earnings release, we did record a one-time gain net of tax of $2.2 million on a sale of some correspondent bank stock. And that coupled with the realized loss of $322,000 that we incurred on restructuring some of, I think it's about $14 million of our securities portfolio, that would get us to core or operating earnings for the quarter of $7.7 million, which represents an earnings per share of $0.65 compared to the reported earnings per share of $0.82 per person. Then the reported ROA is 1.17% and ROE is 12.87%. So looking at our margin a little closer, our net interest income was 24.7 million for the quarter. That equates to a fully tax equivalent net interest margin of 3.19%. That's down five basis points linked quarter. And then looking at some of the major components of that, our loan yield did increase 24 basis points. And that's on that 2.4 billion average balance of loans outstanding. And our securities yield increased approximately 16 basis points. And that's on the average balance of 631 million. Remember, we did have those... Short-term lower yielding treasuries roll off, actually for the first six months, totaled about $45 million so far this year. So our total earning assets yield increased 24 basis points, and that's on the 3.1 billion in average earning assets for the quarter. Then looking on the liability or the costing side, we saw increases in our interest-bearing liabilities in order to remain competitive and to defend our customer deposit base, our total cost of deposits, which includes non-interest-bearing, increased 35 basis points to 1.53%, which represents a beta on our total costing deposits of about 74% for the quarter. Been looking at the non-interest income section. I've already discussed the one-time gain of $2.8 million gross before tax effect. And then that coupled with the realized loss of $322,000 makes our core non-interest income total for a quarter to be $5.4 million. Pretty much in line with that. with what our guidance is, which guidance is now about 20, between 20 million and 21 million. In the non-interest expense category, we did increase expenses 504,000 linked quarter. We detailed in the press release some increases, FDIC insurance increase in software cost increasing, which will be ongoing probably, and then Then some professional fees that were really related to one-time charges, mainly related to our annual meeting. So our expenses are pretty much in line with our expense budget for the first six months. And our efficiency ratio, as reported in the press release, was 62.84%. So I'll turn it over to Shalene, and she'll continue on.

Thank you, Kathy. I'm going to cover the loan portfolio and credit quality, as well as the allowance for credit losses next. As Kathy mentioned, our gross loans did decrease by about $44 million this quarter. That was primarily in our construction and development and our CRE portfolios. We had had some construction loans that have been on the books for a while now that are wrapping up, and also CRE has been paying down and paying off. Ty's mentioned several times in the past that we have a fairly short portfolio that turns over quickly. So a lot of it is resulting from that. Although lending has slowed as underwriting is tightened and interest rates have increased, we still originated about 65 million in new loans during the quarter at an average rate of 8.14%. And that compares to the first quarter where we originated about 93 million in an average yield of 7.27%. So we are now able to start getting those loan yields up on new originations. Our non-performing assets are historically very low this quarter at 0.11% of total assets. We were finally able to resolve the two SBA guaranteed hotel relationships in Houston that we acquired as part of Westbound Bank in 2018, and that had book balances of around $6.7 million. Charge-offs related to those two relationships were really minimal at about $90,000 that we hope to recover some, if not all, of that charge-off. And then we also resolved another one-to-four family construction loan that had a book balance of about $1.4 million last quarter, also with a very minimal charge-off. CRE and office-related loans have been a hot topic recently, but we really don't have any concerning concentrations in either of those areas. As we mentioned last quarter during the risk management topics, concentrations are something that we monitor really closely and really make sure that we don't have anything significant in those areas. CRE represents about 38.2% of our total loan portfolio. and office related loans represent only about 4.4% of that and have an average balance of about $541,000. During the quarter, we had no provision for credit losses. We adjusted a few of our qualitative factors to estimate for the industry level CRE and office concerns and for the hire for longer sentiment that's out there. If that plays out, caused some cash flow stress for some of our borrowers. So we adjusted the qualitative factors to account for that. However, with the decrease in our loan portfolio and the resolution of those non-performing loans that I mentioned previously, a provision wasn't necessary this quarter. Our quarter end ACL coverage was 1.36% of the portfolio. And overall, the quality of our loan portfolio remains strong. Although we do expect some potential challenges in the coming months, we believe that our overall credit metrics will continue to benefit from the good economic conditions and tailwinds that we have here in Texas right now. On to the next slide, we've got deposits, liquidity, and capital. As we mentioned last quarter and many times before, we have a very granular and historically stable core deposit base. At quarter end, we had nearly $86,000 deposit accounts with an average account balance of $29,693. And excluding public funds and the guaranteed bank-owned accounts, our level of uninsured deposits was 22.3% of total deposits at quarter end. We implemented both entrophized CDARs and ICS networks during the quarter, which provide additional FDIC insurance security to our CD and money market depositors if they choose. And we've actually had several of our customers sign up for that already. And we're using the reciprocal feature with Intrify right now. So we're able to retain those deposits while still providing our customers with the additional FDIC insurance to cover their entire deposit balances. Cappy mentioned the decrease in our deposits during the quarter. so I won't cover that, but that was offset by an increase of about $50 million in brokered CDs, which we obtained primarily to test those types of deposits as a contingent liquidity source for us. We haven't done that in many, many years, certainly not since I've been at the bank, and I don't even know if Ty's ever used brokered CDs in his career, but we wanted to make sure that We tested that as a source of contingent liability for us, but we don't really expect to rely on that going forward. And speaking of liquidity, our liquidity is good. Our liquidity ratio was 12.9% as of quarter end, and we were able to pay down some of those federal home loan bank advances that Kathy mentioned by about 145 million during the quarter. We've got contingent liquidity of about 1.5 billion that's available to us through either federal home loan bank advances, federal reserve bank programs, and then we have a couple of correspondent bank fed funds lines and a revolving line of credit as well. Our total net unrealized losses on investment securities is still reasonable at about 56 million of which 21.4 million is attributable to our available for sale portfolio and included within AOCI. Onto capital, our capital ratios remain strong. We're using some of the excess capital now, like Kathy mentioned, to repurchase shares of guaranteed stock at good prices and add intrinsic value for our shareholders. We also wanted to note with respect to capital that our total equity to average assets is currently 9.1%. And even if we had to realize all of the losses in our portfolio, for whatever reason, we don't expect to, our capital would still be good at a ratio of 8.3%. So we're in a pretty good position there. That's the end of our prepared remarks. I'm going to turn it back over to Nona for Q&A.

Thank you, Shalane. Our first questions today for our Q&A session is going to be Matt Olney with Stevens. Matt, can you unmute your line?

Yeah, thanks, Donna. Good morning, everybody. Morning, Matt. Morning, Matt. On the loan balance front, I see that the loan balance has contracted this quarter, and I guess the commentary suggests that it was a lot of the paydowns in the construction portfolio. I guess just taking a step back, any broad commentary on borrower appetite for loan growth in recent weeks and months, especially at these current rates? Thanks.

So, Matt, this is Todd. The loan demand is definitely softer with current rates, which we kind of expected, I think makes sense. So we're seeing softer demand, but we still see activity. But it is absolutely softer than it was last year.

Okay, thanks for that.

And then on the funding side, it looks like you brought down the FHLB balances. on average basis, but also even more in the period down to, I think, around $200 million. What's the current thoughts around FHLB as you move into the back half year in terms of the balance?

This can't be. I think we're going to keep them pretty steady. I don't see those spiking up at all. Probably, I would say around that $200 million mark would be a pretty good target.

Any color on those brokered CDs that you brought on as far as the rate and the overall duration of those CDs?

Yeah, this is Chalene. One of them is a six-month maturity, and one of them is a nine-month maturity, and they're both just over 5% on rate.

Okay.

25 million each, sorry.

Okay, thanks for that, Chalene. And then on the non-interest-bearing deposit side, I think the average balances were down around $55 million versus the average balance in the first quarter. Any notable trends that you saw during the quarter as far as the pressure there? Was there any specific month in 2Q? Just trying to get a feel for where this could land over the next few quarters.

Really looking back, especially in Q2, it was pretty steady, about a third, a third, and a third for each month. So there wasn't anything notable there, any difference. But we do think, and we said earlier, I think, we think we're going to be probably near the 30% or high 20% when it's all said and done as people start putting their money back to use.

Okay. Thanks for that, Kathy. And just lastly, I guess, Taking a step back on the net interest margin, there was some pressure in 2Q, but quite a bit less than I was expecting. Assuming rates stay in this higher for longer range, any color or commentary on where you think that margin will bottom out and any predictions on the timing? Thanks.

Well, I think we've said in the past and will continue to defend it, we think we can stay above the 3%. I think rates are going to continue to go up, but we're seeing we're being able to reprice some of the asset side pretty quickly to offset the increase in the cost to defend our customer deposits, as I said, which we'll continue to do. We'll balance defending the NIM where we think it needs to be while at the same time defending our customer deposits. So our goal is, and the way we see it, we can keep it above the 3%.

level. Okay, thanks. Off I have the queue. Thank you, Matt.

Our next call will be from Michael Rose with Raymond James. Michael, can you unmute your line?

I did. Thanks for taking my questions. You know, you guys had talked previously about non-interest expense to asset ratio, kind of around two and a half percent, ticked a little higher this quarter on a core basis. Just wanted to get any updated expectations and, you know, just broadly how we should think about expenses moving forward, just balancing, you know, growth opportunities and, you know, potential additions to staff with cost containment efforts. Thanks.

Yeah, Michael, that continues to be our goal, 2.5%. We're right at it. I know we're just a tad over it, but not much. But that should get us in the $82 to $83 million, the way we see it, range for the expenses for the year. And I think we can certainly be in that area. Yeah.

Great. Thanks. And just with capital building a little bit this quarter, just because of the balance sheet shrinkage, I think you guys have kind of around 450,000 shares left to repurchase stocks, still at around one, two of tangible. Just remind us how you guys, again, think about intrinsic value. And if you were to fully utilize that program before it expires next February or next, excuse me, next April, would you look to potentially re-up? Thanks.

Michael, this is Ty. Yes, we would re-up the program, and it's very likely we'll extinguish that program prior to next, whenever it is. I think it's February when it expires, so we would re-up the program and plan to.

Great. Maybe just finally for me, so obviously some of those credits that you guys have previously talked about kind of got resolved. Can you just give us a kind of lay of the land and what you're seeing from borrowers? Obviously, I know you highlighted the CRE, but Is there any broad strokes in terms of credit that investors should be concerned about at this point, just given that credit quality continues to be really, really good outside of those credits that you had previously identified? Thanks.

Yeah, Michael. I think without a doubt, like I said, the demand is down. Credit demand is down. Our borrowers are more cautious with rates where they are. That being said, the economy overall in Texas continues to be strong. And we're still seeing a lot of activity. There's not a specific area. I think office gets talked about a lot. I think that's a concern probably in every markets, but it's certainly less concern in Texas as I think it is in East and West Coast markets. And obviously retail has been an area that we've been cautious on for years. I think most banks have as well. But overall, I mean, we're very pleased with the strength of the economy and the strength of our markets. But that being said, there is a slowdown and a pullback in activity, certainly on the commercial side. And so we're being cautious with that. But there's not a specific area that I see at this point that's a significant concern. I think banks are being pretty thoughtful and how they're looking at risk and have been even going up into this point. So I think we're pretty hopeful that the remainder of the year is going to be pretty stable, at least at this point.

Great. Thanks for taking my questions.

Sure, Michael.

Our next question is from Graham Dick with Piper Sandler. Graham, can you unmute your line?

Yeah. Hey, good morning, everybody. Hi, Graham.

Morning, Graham.

Thanks for taking my questions. I just wanted to circle back onto the loan growth and maybe just the balance sheet growth front of things. I guess as you look towards the back half of this year, maybe even into 2024, are you guys thinking that loan growth might continue to be flattish to down, or do you think that you might be able to see some positive net growth, I guess, if paydowns were to subside a little bit here in the back half?

Graham, I think flat to down is a possibility, just given the short duration of our loan portfolio and the overall environment of borrowers being a little less, more risk adverse, and our underwriting being very strong and considering the environment. So there's a good chance where it'll be flat to down.

Okay, that's helpful. And then I guess the other piece, that I wanted to touch on there is I assume bonds will continue to run down a little bit. Liquidity balance is probably the same. Is there a level of of earning assets you guys would like to stay above? Is that three billion dollar number important to you guys or is it kind of just, you know, I guess a little more fluid than that?

It's more fluid than that. I mean, we're, we're more focused on intrinsic value, obviously the earning stream of the company where we can consider the opportunity to be able to buy our stock back like we're doing to be a really good opportunity for us. So we're doing that aggressively. We're going to create a good earning stream for the year, not a record year, but a good earning stream. And, uh, we're, we have a really strong balance sheet across the board. So those are kind of our three priorities. And, um, As far as where our total assets land, there's not – I mean, we don't look at it from the standpoint we want it above a certain number. It's going to stay above – it's going to stay above, you know, in an area that we're comfortable with. But it's not – there's not a magic number that we just – we feel like we have to stay above.

Okay. That's helpful. And then I just wanted to shift back to the NIM quickly. I think you had talked about in March that the NIM was 3.2% for that month. I was wondering – if you could share what the NIM was in June and then maybe how you're seeing it trend in the near term. I know you said above 3%, but I thought it was impressive that you guys were able to essentially keep it flat with that March number throughout the entire second quarter.

Do you have that, Shalene, in front of you?

I have it, but not in front of me, Cappy.

I can get it and I'll send it to the analysts on the call.

Okay.

Okay, great. That'd be, that'd be awesome. Um, and I guess one last thing for me is just sort of housekeeping, but the fee income side, I saw there was that the annual bonus this quarter, um, we expect, I guess, or you guys expect these kind of drop back to like 5.1 million and three Q and then, uh, maybe 5.2 million on, on a core basis. Once you back out that, you know, the annual service provider and, um, you know, the other one-time items that happened this quarter.

Yeah, Graham, that's just right on with what I had, just because a little bit less because of that bonus amount coming in, the debit card side, but everything else being pretty steady.

Okay, great. All right, that's it for me, guys. Thank you very much. Thanks, Graham.

Our next question is from Brady Gailey with KBW. Brady, can you unmute your line?

Hey, thanks. Good morning, guys. I'm ready. I'm just wondering how aggressive you guys will be with the share buyback going forward. I mean, you took a nice step up in activity this quarter. But, you know, do you think like the 2Q repurchase activity is kind of a good run rate for the next quarter or two? Or how do you think about kind of the cadence on buying back more stock here?

Brady, I mean, that's... Buying back our stock where it's currently valued is a capital priority for us. So I would say that the run rate in Q2 is a good run rate.

When you think about capital, is there one ratio that you focus more on? And if so, kind of what's the threshold on where you want to keep that ratio at or above?

Well, I mean, we obviously are looking at all aspects of our capital, but we're just, we're comfortable where our capital is given kind of where our asset qualities, you know, is in the company and the condition of our bond portfolio and our earning stream. So I would say, you know, 9% is kind of the new seven for banks. So we look at that just on pure leverage ratio as kind of a kind of a bogey for us. And we think that we're going to be able to stay above that and still buy back a significant amount of stock, just given the earning stream of the company and kind of what our total assets are doing. And again, the confidence in doing that is the asset quality of the company and the condition of our bond portfolio and our earning stream. Those three factors give us confidence to take this opportunity, which we consider to be a good opportunity to buy back stock at very attractive prices and not dissimilar to what we, the repurchases we made post COVID. We felt like that was a great opportunity for us to add real intrinsic value for our company. And we see this as the same opportunity.

Yeah. All right. And then lastly, for me, I think I heard Kathy say that you expect fee income to be around 20 to 21 million this year. Did I hear that correctly? And I'm guessing that excludes the $2.8 million one-time gain?

Yes, that's correct, Brady. What was said just earlier, I think about a 5.2, 5.2 quarter for the next two quarters and get us to about something under 21 million, excluding extraordinary for the year.

Okay, great. Thank you, guys. Thanks, Braden.

Thank you for your questions, and I will remind everyone the recording for this call will be available by 1 p.m. today on our investor relations page at gnty.com. Thank you for attending, and this concludes our conference call.