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spk00: Good morning. Welcome to the Guaranteed Bank Shares 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 hosts for today's call will be Ty Abston, Chairman and Chief Executive Officer of Shalane Jacobson, Executive Vice President and Chief Financial Officer. To begin our call, I will now turn it over to our CEO, Ty Amston.
spk07: Thank you, Nona. Good morning, everyone. Welcome to Guaranteed Bank Shares' 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 the state of Texas. Our asset quality remains strong. Our net interest margin continues to build. And our local economies appear to 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 it over to Shalene to go through. And then after that, we'll answer any questions you have. Shalene?
spk01: 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 to 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 sale 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 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. for 24 cents per share, which is an increase from 23 cents 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 58 cents per basic share, which is up from 51 cents per basic share in Q4 and down a bit from 69 cents 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 six 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 as rates have remained constant. Non-interest 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. Non-interest expense was $700,000 lower in the first quarter, primarily due to the retirement accrual of $600,000 that we booked earlier. 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 non-interest 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 also are 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, foreclose 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 non-interest 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. Non-accrual 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. 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, on to 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 non-interest bearing to interest bearing deposits during the quarter. Non-interest bearing deposits decreased $27.1 million, while savings and 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 non-interest 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 20s as we continue moving later into 2024 and early 2025. With respect to overall deposit risk, Guarantee 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 guarantee-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. for 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 Homeland 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 within other comprehensive income. Finally, capital is also strong. We used some of our excess capital in the first quarter to repurchase shares of guaranteed 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 23 cents a share previously. So that concludes our prepared remarks for today. I'll turn it back over to Nona for Q&A.
spk00: Thank you, Shalane. It's now time for our Q&A. Our first question will be from Woody Lake with KBW. I forget my mouse there. Woody, can you unmute your line?
spk05: Hey, good morning, guys. Sorry about that.
spk07: Good morning, Woody.
spk05: I 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 and the rate that those treasuries had?
spk01: 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.
spk05: Got it. So with that in mind, I think last call, you sort of said internal expectations were for the margin to improve two to three basis points a month. Does that still seem like a realistic target going forward?
spk07: Woody, this is Ty. I think so, yes. If we can, you know, are able to continue to hold our cost of funds relatively stable as far as 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 two to three basis points a month is a good run rate. And that's our goal as far as to continue to increase our margin.
spk05: Yeah. And then the 350 longer term sort of internal target, I mean, is that a is that a 2025 target? And is there any, you know, do you think we need rate cuts to see y'all hit the 350 level?
spk07: 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. And, 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, We're repricing. We still have a pretty short duration loan portfolio, and we're repricing that. And that's catching up with the significant increase in rates on the deposit side.
spk05: Yeah. All right. That's all for me. I'll hop back in the queue. Thanks for taking my questions. Thanks, Woody.
spk00: Thank you. Our next question will be from Matt Olney with Stevens.
spk03: Hey, thanks. Good morning, guys. Good morning, Matt. I wanted 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? Yeah.
spk07: Matt, the property is kind of a mixed use. The park 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 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 four percent. We're actually yielding around four and a half percent 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 that's managing it for us. And 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, then it'll be 100% occupied. It'll be yielding 6.5%, between 6.5% and 7%. And our plan is to market the property and sell it. We do think there's, you know, we have it marked appropriately based on the praise value we have. And we're going to market the property above where we're carrying it. And we're very patient. 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.
spk03: 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?
spk07: 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, you know, the only noise would be, you know, if we sold it for less than we're carrying it. And based on the, you know, just the valuation that we back into based on the NOI and the appraised value and comps, we think we've got it below fair market value. So shouldn't have anything in there really, even from an earning standpoint, just based on the yield on the property.
spk01: Matt, we will be recording the earnings, the rental earnings in non-interest income and any related expenses and non-interest expense. So if those are material numbers, we'll certainly point that out in our next earnings release.
spk07: Yeah, that piece would actually not be an interest income and be a non-interest income. Yes. So we'll have a component there that's moved from one account to the other. We will highlight for sure.
spk03: 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?
spk07: I mean, the appraisal we have, we feel like it's good. We'll talk to examiners about it, but just given where we're carrying the property and the appraised value we have and the time period in it and the And the return on the property itself, that's a performing property. I don't anticipate they're going to ask us to update it, but we certainly can.
spk03: Okay. That's helpful, Ty. Thanks for that. And then I guess sticking with credit, but moving beyond this credit, this single Austin credit, I think you mentioned there were some inflows into substandard list this quarter. Any color on some of the larger additions into that list?
spk07: So we have a $7 million credit in the Dallas market that has a 40% SBA junior lien in front of us. So it has a very low LTV. It's just they're stressed in the cash flows. We went ahead and substandard the loan. We have a couple of loans around a million, between a million and a million four that have low LTVs. the remaining, the remaining loans are below a million. So, uh, other than those, those, those three credits represent the significant portion of the, of the substandard loans we have. And again, we're comfortable where we are with those with, with, um, our position in them. And we think they'll actually work themselves out. We did foreclose on a, on a single family residence, uh, that, uh, that I don't think is in the Q3. Actually, it's in April. It's a million-dollar single-family residence, million-aid appraisal. We'll get the house sold, I anticipate, probably before the end of this quarter. And that's pretty much the larger credits that we have. Like I mentioned earlier, probably a year ago. I mean, I anticipate one-off credits with the rate increases we've seen. I don't see anything systemic in the portfolio, but I do continue to expect to see one-off credits that come up for various reasons. And we'll deal with those one at a time and clear them out and just address them as they come up.
spk03: Okay, perfect. And then on the loan growth this year, I think the goal for... at the beginning of the year was to keep loan balances flat for the year. And obviously there was some shrinkage here in the first quarter. What's the updated view on loan balances? Should we hold those flat next few quarters or could there be additional contraction?
spk07: There could be additional contraction. I mean, we're we're obviously we're continuing to lend. And but the reality is with current rates, I mean, you know, the demand is softer and opportunities just don't make it make sense at the current rates that like they did at lower rates. And so there could be, you know, we could continue to shrink the portfolio. We could see a 5 percent shrinkage in the portfolio. It's just not something that we're not focused on growing a portfolio, but we certainly will as we see opportunities that make sense to us.
spk02: Okay, guys, thanks for taking my questions. I'll hop back in the queue. All right, thanks, Matt.
spk00: Thanks, Matt. Our next question is from Michael Rose with Raymond James.
spk06: Hey, everyone, can you hear me? Sure, yeah. All right, great. Good morning. Hope everything's going well. Just following up on Matt's last question there, just on the size of the balance sheet, certainly understand that loans could be under some pressure. But as we think about maybe the liability side, I know you guys have paid down some of the borrowings. You've paid down essentially all the brokered, you know, deposits, how much more is there on the FHLB side that you'd want to kind of bring down and not renew? And, you know, could we see a balance sheet inflection, you know, hopefully in the back half of the year? Is that the way we should be thinking about it?
spk07: Michael, I think that's fair. I mean, we have the federal home loan balance pretty low now. Obviously, we have excess funds. and we're not deploying them in the bond portfolio or the loan book, then we'll pay that down further. We continue and always have today in every cycle and every part of our history focused on core deposit relationships. and retail banking and commercial banking, treasury management. So our team remains focused on building core relationships, and that focus has not been more intense this year or last year versus five years ago, put it that way. I mean, we've always felt like core deposits were the key to franchise value in a bank, and we're continuing to focus on that.
spk06: Very helpful. And then maybe just going back to the margin question at the beginning of Q&A, just, you know, I know you guys are liability sensitive. You have pulled some levers and reduced some costs as, you know, it was kind of discussed, but the new loan production yield was lower Q on Q. Growth is, you know, the balance is probably going to, kind of shrink here. So maybe you can certainly, you know, I'm just kind of looking for, you know, what are the puts and the takes to that kind of two to three basis point a month in NII upward progression, if we are in a higher for longer, you know, type environment, and then how does it kind of reconcile with you know, the thought process that, you know, non-sparing deposits could, you know, continue to decline. I think you guys have talked about a more normalized range somewhere in the mid to high 20%, just trying to get a sense of what the, what the puts and takes are, where you could, where you could do better and maybe where you could do a bit worse. Thanks.
spk07: Yes, Michael. So the main part of that is just repricing the loan portfolio. We're repricing a significant portion of the portfolio each month. And as those loans repriced and we're not having to move deposit rates as aggressively. and we really haven't moved those up in the last three months of any significance, then we're just able to reprice that side faster than the deposit side and liability side is repricing. So that's where we're seeing the increase. We're also, with our excess liquidity, we're able to buy bonds and increase the yield in the bond portfolio. So between the two, we've been able to net increase our margin, and we're mulling out being able to continue to do that just by simply repricing the asset side faster than the liability side.
spk06: Very helpful. And just to put a finer point on that, Everything you just said, Ty, do you guys actually think that you have a chance to grow NII year over year, just given some of the challenges, you know, most of which are conservative to your point, which I think is great, just given how low, you know, credit quality, how great credit quality is. But I mean, do you actually think you can grow NII this year?
spk07: I'd have to look at that and think about that a little bit from an NII standpoint. Our margin, yes. Our actual NII, I'm not sure. And that's the piece that we're still kind of getting a sense of based on where we see the balance sheet going for the year. But again, we're letting some of that kind of happen organically, and we're not forcing growth, but we're certainly not passing on growth opportunities. We're just, we're kind of keeping ourselves pretty flexible with the environment that we're in, just as we see kind of how things kind of unfold. So it's, I don't have a lot of clarity specifically on the balance sheet on where we're growing, you know, this year. We're more than likely going to see more contraction, which would obviously contract the NII. So-
spk06: I certainly can appreciate how challenging the environment is. So thanks for the color. Maybe just one more for me. I know you guys, IntraQuarter, increased or announced a new buyback program that's a little bit bigger than the prior one. You haven't been that active. I think maybe the earn back was a little bit higher. But can you just talk about the desire to buy back shares? And then just separately, would you take a portion of your excess capital and look at to do at least a partial balance sheet restructuring, maybe to, you know, just improve the NIM and NII trajectory. Thanks.
spk07: So the buyback, yes, we, I mean, we are, you know, very interested in buying back shares once it hits our valuation metric and our share price has been up this quarter versus last. So we bought back less shares, but whenever it gets down below that, it's a priority for us to buy shares. And, If it goes further below that, it's a larger priority. So we accelerate our interest as the price drops below kind of our threshold. As far as restructuring the bond portfolio, I'm not really looking to do that because I don't think two things. One is we're actually adding bonds to our portfolio now. And I don't know that everybody's doing that. We don't have a significant ALCI account. And that portfolio continues to, you know, we continue to increase the yield of the portfolio. I just don't know, you know, that that makes sense. Because as sure as we do that, then rates are down next year. And, you know, some of those projections are out the window. So that's not something I'm looking at. I think as long as we continue to reprice the portfolio, the loan portfolio, we continue to add additional new securities to the bond portfolio at higher yields, and the fact that our ALCI is really a nominal amount of our total capital, then the plan is at this point just to continue like we're doing and let time kind of cure a lot of that.
spk06: All right, great. Thanks for taking all my questions. Appreciate it. Thanks, Michael.
spk00: Our next call is... Graham Dick with Piper Sandler.
spk04: Hey, good morning, guys. Morning, Graham.
spk01: Morning.
spk04: Most of my stuff's been monastic answer, but I just wanted to follow back up on the new loan yield that was down a little bit this quarter. Is that more of a reflection of production mix, maybe being more weighted towards one to four family, or is our overall market rate starting to come in a little bit, I guess, this year so far?
spk07: That's going to be more related to production mix, Graham. We're seeing some more in-house single family opportunities that we're doing. And we've also had some really high quality credits that we've booked in the sevens that probably average that down in the high sevens, mid to high sevens. So that's going to be just a question of the mix probably for the quarter.
spk04: Okay, would you assume that it maybe starts to expand a little bit more, I guess, through the balance of the year from here, assuming no major changes in the Fed path?
spk07: Say that one more time, Graham. Sorry, I'm not sure I caught the question.
spk04: Yeah, sorry. Do you think that we'll be able to see that new loan yield maybe expand, maybe back to where it was in 4Q over the next couple of quarters, or do you think it'll kind of sit around this level?
spk07: That's hard to project. I would say it's probably going to stay around this level. that's hard to project truly.
spk04: Okay. Understood. And then lastly, I just wanted to, I know you talked about capital with the buyback, but I'm just wanting to know if an M and a conversations are starting to pick up at all in your old markets, maybe with some of the smaller banks, you know, they're looking ahead to say maybe rate cuts aren't really coming. Are they, are they starting to look more to the market as maybe, you know, some of these smaller bank sellers out there?
spk07: So I'm hearing a lot of conversations for sure, and that may be something that becomes more active in 25. I mean, from our standpoint, we're certainly having conversations. We're interested in anything that we think would make strategic sense for our company and makes financial sense for our company. I mean, but... Currently, like a lot of banks, for our stock prices setting, we'd rather buy our own stock versus buy someone else at a higher multiple. We just think that makes more sense without the execution risk. So there are conversations, but right now our primary focus is buying our own stock back when we have the opportunity to, but continue to have conversations because those may develop into something more meaningful down the road. Okay. Understood. Thanks, guys.
spk00: Thanks, Graham. Okay, we have another question from Matt Walney with Stevens.
spk03: Hey, yeah, thanks for taking the follow-up. Sure. Going back to the deposit cost commentary, I think we said before that the first quarter was a pretty big quarter for repricing of the time deposits. Just curious if you have that, what the average time deposit cost was in the first quarter, and you could help us out thinking about how much more incremental pressure you can see there. I don't know if you have kind of what your promotional CD rate is or any commentary from that perspective.
spk07: I'm going to give that to Shalane. Yeah, go ahead, Shalane.
spk01: Yeah, Matt, I'm not sure where we said first quarter, because we actually, you know, they repriced pretty evenly throughout the year. We started our CD specials back in late 22, early 23. And those at the time were nine and 13 month, I believe. So a lot of those who bought CDs back in that time period have started to mature and are repricing. As far as our current rate specials, if it's a jumbo CD, I believe the highest one we have is a 13-month at 5% for the jumbo CDs. And other specials that we have are lower than that. I think 4.7 for a nine-month non-jumbo. Does that answer your question, Matt?
spk03: Yeah, that's perfect. Thanks for that, Chalene. And then I guess kind of a related topic on the non-interest-bearing deposits. I think you mentioned in prepared remarks some more pressure in the first quarter. Anything, any more commentary on that? I think you said in the prepared remarks that we could land in the mid to high 20% range later on this year or even next year. Just trying to appreciate kind of what your perspective is on that and kind of what you're seeing maybe so far early in the second quarter.
spk07: Matt, I'll take that. I mean, so obviously, like every bank, we've had historic non-interest-bearing deposit balances the last three years. I mean, but 20 years ago, and really for the last 20 years, we've averaged around 25%. So I continue to believe that ultimately we'll we'll kind of revert back to more of that average that we've had historically. And that makes sense that we would. So we think we'll continue to, as there's more yield opportunities and money markets and other products in the bank, as people move more money over to see that come down. But I don't see it going below 25 because, like I said, it's been 25 for a long time. But it just makes sense that it's going to continue to migrate down.
spk03: Okay, that's helpful, guys. Thank you. Thanks, Matt.
spk00: Welcome. Thank you for your questions. I would like to remind everyone that the recording will be available by 1 p.m. today at our investor relations page at gnty.com. We appreciate you attending today, and this concludes our call.
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