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spk00: Good morning. Welcome to the Guaranteed Bank Share second quarter 2024 earnings call. My name is Nona Branch and I will be your operator for today's call. I want to remind everyone that today's call is being recorded. After the prepared remarks, there will be a Q&A session. Our host for today's call will be Ty Abston, Chairman, and Chief Executive Officer, Shalene Jacobson, Executive Vice President and Chief Financial Officer. To begin our call, I will now turn it over to our CEO, Ty Abston.
spk05: Thank you, Nona. Good morning and welcome to our second quarter earnings call. Before we turn it over to Shalene and go through our investor deck, I wanted to make a few comments. First, I wanted to say how proud I am of our team. and the results we've produced, not only for this quarter, but for the full year. Our team continues to do a great job of serving our customers and maintaining strong relationships in all of our markets and to continue to look for opportunities to build our franchise. The Texas economy remains resilient, and I really see 2025 as the year that we're going to start seeing additional growth and continued growth in our markets. Our strategy has been and continues to be to maintain a well-positioned bank for an uptick in economic growth. This requires us to maintain strong asset quality, strong capital position, good liquidity, and really to have lending capacity in all of our key sectors, which we currently have and plan to maintain so we are positioned for growth in the coming quarters. With these comments, after this, I'll turn it over to Shalane. She's going to go through our investor deck, and then we'll open it up to Q&A.
spk01: Great. Thanks, Ty. I'll kick it off with the balance sheet first. As Ty mentioned, we're continuing with our strategy to shrink the balance sheet. You know, we believe there's still some economic and political uncertainties out there right now that require heightened risk management around loan growth. But hopefully those will start to improve in 25, as he mentioned earlier. However, because of our strong core earning stream and our customer base, our net income remains good, and we're on target to keep earnings similar to what they were in 2023. Our total assets decreased $45.8 million during the quarter, while total liabilities decreased about $48.5 million. Those decreases are primarily from loans, which were down gross about $50.3 million from and also on the liability side from a $30 million decrease in federal home loan bank advances that we repaid during the quarter, and some lower customer repurchase account balances. Cash was up somewhat, and we also purchased about $18.6 million in new available for sale securities during the quarter, which had an average yield of about 5.3%. On the liability side, deposits were fairly flat. As I mentioned, we repaid some federal home loan bank advances, and then customer repo balances were down about 13.9 million. Total equity increased 2.7 million during the quarter, which was a result of net income of 7.4 million and an improvement in unrealized losses on the AFS portfolio of 1.45 million. That was offset by dividends that we paid of 2.7 million or 24 cents per share. That quarterly dividend is up from 23 cents per share back in 2023. We've paid 24 cents now for the first quarter and the second quarter. And also we repurchased 138,427 shares of guaranteed stock during the quarter. On the income statement, the bank earned 7.4 million as I mentioned in net income which equates to 65 cents per basic share in the second quarter, which is up from 58 cents per share in the first quarter and down from 82 cents in the second quarter of 23. But in the second quarter of 23, you'll recall we had a large one-time gain from the sale of TIB stock of 2.8 million, which of course we didn't have this year and helps explain some of that change from the prior year quarter. Our return on average assets was 0.95% for the quarter compared to 0.85% in Q1. And our return on average equity was 9.91% for the quarter compared to 8.93% in Q1. Our net interest margin continues to increase, which we're proud of. It was 3.26% in the second quarter. up from 3.16 percent in the first quarter and 3.19 percent during this quarter last year. The increase from prior quarter and prior year quarter results from improvements in our interest earning assets in both loans and securities that are higher than the costing liabilities during the same period. And of course, from a lower denominator in that ratio, the average interest earning assets are lower as well overall. Non-interest income decreased by $659,000 during the quarter, which resulted primarily from a $900,000 ORE valuation allowance, which I'll talk about in a second. That was offset by higher debit card income in the current quarter from an annual MasterCard bonus payment that we received. And then in the first quarter, we also had a $499,000 receivable recovery that we did not have this quarter, which also contributed to the linked quarter change. For the ORE valuation allowance, we mentioned last quarter that we foreclosed on a nice mixed use property in a good area in South Austin. The appraisal we had from March of 2023 had a pretty aggressive capitalization rate. And as we dug into the cap rate trends in South Austin, along with getting a better understanding of the property and the income stream from that property, we felt it was prudent to apply a more aggressive cap rate. So that resulted in the $900,000 valuation allowance that we recorded. But of course, you know, there's factors that could allow us to reverse that if cap rates go back down or hopefully not, but conversely go the other way as well. But we believe that with that valuation allowance, we have the property conservatively valued on our books right now and appropriately valued. Ty, do you have any further comments on that? right now?
spk05: No, we have a team that's marketing the property. They're going to start marketing the property in the next couple of weeks. We have had some indication of interest. We do think we have it fairly valued and we're going to recognize full value on the property. It's a good property, has a good yield on it, and it just comes down to where the cap rates are and ultimately where we're able to sell it and what cap rate. But we just felt like Instead of taking, you know, we felt like it was prudent to take this provision and reserve against it, given that we had some extraordinary income during the quarter.
spk01: All right. Thank you. Before we move on, non-interest expense was down slightly by about $90,000, and that was due to lower employee-related costs, but then offset by some higher occupancy, debit card, and other non-interest expenses. Our efficiency ratio was 72.34% for the quarter, which was driven higher by the decrease in non-interest income. All right, on to our credit portfolio and allowance for loan losses. As I mentioned, gross loans decreased by 50.3 million in the first quarter and have decreased by about 108 million year to date. That was primarily in our construction and development and our CRE segments. We did originate $73.5 million in new loans during the second quarter at an average rate of 8.26%, so new loan yields remained strong. Non-performing assets continue to remain at historically low levels. They were profitable. 0.71% of total assets for the quarter compared to 0.68% in the prior quarter. So still well below 1%. Those percentages include both the ORE and non-accrual loans. But if we exclude the ORE, non-performing loans as a percentage of total loans is only 0.28%. And non-performing loans as a percentage of total assets is only 0.2%. So still pretty good percentages there. Net charge-offs also remain low. We had $78,000 in net charge-offs during the quarter and a net charge-off to average loans ratio of 0.01% for the second quarter. In early July, we did foreclose on a single-family property in our DFW market that has a book value of $1.2 million. That property is for sale, and we expect minimal losses in disposing of that asset. Commercial real estate and office-related loans continue to be a hot topic, as you all know. However, as we've mentioned in prior calls, we manage those concentrations very well. We've got a diverse portfolio and really don't have any significant concerns in those areas. CRE represents about 40.6% of our total loan portfolio, and of that percentage, only 5.5% is office-related loans. with relatively low average loan balances of only 551,000 as of June 30th. Our substandard loans were 23 and a half million at quarter end, which is up from 17 and a half million at the end of Q1. That increases the results primarily of two loan relationships totaling 7.9 million that were downgraded to substandard this quarter. However, those loans are on, Current on payments, we're well collateralized on those, and we really don't expect any significant losses, if any, as we work through those. But we believe those loans are reserved appropriately as a result of their substandard risk rating now. Overall, we have 131 substandard loans with an average balance of only about $179,000. So most of those credits are smaller consumer or small business-related customers. that we're working with to get those loans current or hopefully paid. We did have a reverse provision for credit losses of $1.2 million during the quarter, and that's almost entirely due to the lower loan balances of 108 million so far year to date that I described earlier, as well as our just stable overall credit trends. We, like everyone else, I think have some one-offs, but overall, Our past due percentages, our non-accrual percentages, those non-performing loan trends are still looking really good. We've made minimal adjustments to applicable Q factors so far in 2024 because we think that the adjustments that we made during 23 remain relevant today. The reverse provision, again, is almost entirely due to lower loan balances, but it was offset somewhat in Q2 by that increase in the substandard loan pool that I mentioned. The quarter end ACL coverage is 1.32% of total loans, which is similar to the ratios we had at the end of the first quarter and year end, which were 1.35% and 1.33% respectively. All right, on to deposits, liquidity, and capital. As I mentioned previously, total deposits were relatively flat during the quarter, while customer repo balances were down about 14 million. We continue to see a shift from non-interest bearing to interest bearing deposits, although it is slowing down. Non-interest bearing deposits decreased 8.4 million in the second quarter, while interest bearing accounts increased 6.8 million, primarily driven by new CDs. We've got a few markets that are that have some specials and are doing a good job getting new CDs. Despite the shift, non-interest-bearing deposits still represent 31.2% of total deposits at quarter end. And as I've mentioned in previous quarters, we expect that ratio to be closer to our historical average of mid to high 20s at some point as we continue to move later into 24, early 25, but we're happy to see it continuing to be above 30%. With respect to overall deposit risk, Guaranty has a very granular and historically stable core deposit base. At quarter end, we had over 89,000 deposit accounts with an average account balance of just over 29,000. Our uninsured deposits also remain relatively low, excluding public funds and Guaranty-owned accounts. Uninsured deposits were 25.7% of our total deposits at quarter end. Liquidity is good. We ended the quarter with a liquidity ratio of 13.6% despite using some cash flows from matured securities and loan repayments to investments in new higher yielding AFS securities and to pay down federal home loan bank advances by 30 million during the quarter. We've actually repaid 150 million in FHLB advances during the last 12 months. We also have total contingent liquidity of about 1.3 billion available through either Federal Homeland Bank advances, the Federal Reserve Bank, or correspondent bank Fed funds lines and revolving lines of credit. Our total net unrealized losses on investment securities remains reasonable at about 50.8 million, of which 19.1 million is attributable to our AFS securities and included within the equity in AOCI. Our capital also remains strong. We used a portion of our excess capital in the second quarter to pay the $0.24 per share dividend that I mentioned earlier and also to repurchase those 138,427 shares of guaranteed common stock at an average price of $29.50 per share. And this, of course, continues to add intrinsic value for our shareholders, we believe. Our total equity to average assets as of June 30th was nine point nine percent. That concludes our prepared remarks, so I will turn it back over to Nona for Q&A.
spk00: Thank you, Shalane. It is now time for our Q&A session. Our first question will be from Matt Olney with Stevens. And I will unmute Matt's line.
spk04: Hey, good morning. Can you hear me?
spk05: Yes.
spk04: Okay, great. Thanks for taking my question. On the balance sheet, we saw the loan balances contract again the second quarter. Just trying to get a better idea of when we could see loan balances stabilize. And Ty, I think you mentioned you expect 2025 to be the year of growth in footprint. Just trying to appreciate if we should agree into this that there could be additional loan pressure in the back half of the year?
spk05: Matt, I would say that's possible second half of the year. I mean, we could have the loan book overall pay down. I mean, it could be another $100 million. It just depends on kind of how things go. I mean, I am seeing and what I think everyone else is seeing is the possibility of rate decreases in the coming quarters. And the economy seems like it's continuing to be very resilient. So once we get maybe a rate decrease or two and get past this election, it's just starting to feel like things are going to kind of strengthen across the board. And that would give us more growth opportunities. And that's probably going to happen in 25. At least that's my current thoughts.
spk04: Okay. Thanks for that, Ty. And then On the funding side, any more color on the FHLB advances that you paid down in the quarter as far as when that was, what the rate was, and then on the remaining FHLB advances still in the books as of June 30th, any more color on the duration of those and the rate on those?
spk01: Yeah, so we paid down a majority of those towards the end of the quarter. The rate was around 5.38%, 5.4%. The remaining advances are short-term, and the rate is about that same amount, 5.4%. We'll just see where we are. If we've got good opportunities to invest in some more available-for-sale securities, Matt, we'll do that. If not, we'll likely take some of our excess cash and continue to pay those down. We're just going to play that by year. But the The remaining amount is due within this quarter and 5.4% is about the rate.
spk04: Okay. Thanks for that, Chalene. And then on the Austin property that you guys discussed, sounds like you're putting a more conservative cap rate assumption on that. Just remind me of the most recent appraisal on that property and then any more color on just the existing leases on that property.
spk05: Yeah, I think we have one remaining space that is under an LOI and we're negotiating to get the lease signed. It'll be 100% occupied. The appraisal we have, I believe, is $17 million. Depends on the cap rates you use. We did receive an LOI on the property that's 90% of what we're originally booked it at that we passed on. We did take this reserve because, again, it depends on the the cap rates you use. And we just felt it was prudent to take the reserve we took because we had available, you know, earnings to do it. And, but we think it's a good property, good assets and a strong part of Austin. And we're going to, you know, we don't have the pressure to, you know, offload it immediately. So we're going to get it leased up. We have one of the, you know, the best management firms in Austin managing it for us and also marketing it for us. And they're rolling out the marketing. I think that's starting actually this week. And we're going to dispose of the property, sell it, but we're going to get full value for it. And we think it's a good asset for the bank while we're getting to that point. The property we foreclosed on the home, I mean, that's a million eight appraisal on a million two home in the DFW market. We think we'll actually sell it probably as is, where it is. And we don't see any exposure on that property. It's kind of an unusual situation that we foreclosed on it, but we don't see any exposure on that property.
spk04: Okay, guys. Thanks for taking my questions. Thanks, Matt.
spk00: Thanks. Our next call will be from Michael Rose with Raymond James.
spk03: Hey, good morning, everyone. Can you hear me? Sure.
spk05: Good morning, Michael. Good morning.
spk03: Hey, good morning. Thanks for taking my questions. Just following up on a similar line to Matt, just as it relates to some of the on-balance sheet liquidity and FHOB borrowings, I think your liquidity ratio was up about 300 basis points, Q on Q. I know there's been a push for by regulators, particularly for the banks over 10 billion in size to have more on balance sheet liquidity. Was that some of the rationale there? And then just separately related to that, if I look at cash to assets, which I've heard from an increasing number of banks that regulators may want that number or percentage higher. I think you guys are about 1.5%. Would you take some of those maturing cash flows, understanding that you would look to buy some additional AFS securities, but just given what we saw with the total liquidity ratio this quarter, would you expect that to continue to build as we move forward? Thanks.
spk05: Yeah, Michael, I would say that it's likely to build. I mean, our strategy, like I said in my opening comments, is to really maintain a strong position so we're ready to grow the balance sheet as we see the economy improve and opportunities improve. And that's very similar to how we approached the 2008 financial crisis. And we want to be positioned with liquidity, with capital, and also with capacity, lending capacity in all of our buckets to grow the company as we see growth opportunities open back up. So we're going to grow liquidity. And as we see that it makes sense for us, we are adding to the bond portfolio. We think adding that portfolio now is a good time to do that. And we have the ability to do it, which is great. which is a good place to be. We have the excess capital buyback stock at advantageous prices. Again, trying to make sure we're positioned to take advantage of opportunities we see not only currently, but also in front of us. So we'll build liquidity. And more than likely, we're not seeing strong loan demand, although we're seeing, again, very resilient economy across Texas. But things just aren't as attractive for our customers as we're looking at opportunities that you know, seven and a half, eight and a half percent borrowings versus what they've been. So we're not going to, we're not going to fight against that reality. But, but we plan to be well positioned as things improve because we don't want to be in a position where we either don't have capacity to lend. We don't have the capital. We don't have liquidity. And when things open up, we can't go back on offense. So that's, that's been our strategy really the last two years. And we plan to continue that more than likely throughout the remainder of this year until we, see the environment improve.
spk03: Very helpful. And then just as we think about maybe potential for more on-balance sheet liquidity, juxtaposed with the declining loan balances, you guys have done pretty well on the margin, particularly this quarter up 10 basis points. Q on Q, you previously talked about, you know, two to three basis points a month with some of the fixed asset repricing. Can you just help us appreciate, you know, some of the puts and takes and if that two to three basis points a month is the way we should still think about it with all that in context? Thanks.
spk05: Yes. I mean, that's still kind of the run rate with our NAM. It's still improving two to three basis points a month as we're catching up on the asset side of the balance sheet repricing. And so that's what we anticipate to continue seeing as we go forward. And I think that's a pretty good assumption.
spk03: Okay. And then I know previously you talked about kind of a three 50 level by the end of next year, but just given that dynamic and then, you know, what I'm hearing, I think is just a, you know, an inflection in the balance sheet, you know, as we get into next year and maybe, uh, maybe pushing on the accelerator a little bit in terms of growth. Um, it seems like that number could actually end up being the three 50 could, could actually end up being a little bit lower. Um, So just how should we kind of think about that number? Is that number actually closer to 360? Just if I do two to three basis points a month and add in some growth?
spk05: I mean, more than likely, the answer to that is yes. I mean, that's certainly our goal is to get our NEM back to where we're, you know, our historical average. And that creates a much stronger earning stream. helps our efficiency ratio, helps all of our metrics. At this point, you know, like everyone else, you know, we've been trying to build it back. So we kind of targeted 350, but without a material change in rates, and I'm talking about, you know, two, 300 basis point change in rates over, you know, a short period of time, we should pick up two or three basis points on a four basis a month, you know, for the next, you know, several quarters. So we do go past that 350 as we're continuing to, you know, again, reprice the assets out of the balance sheet.
spk03: Very helpful. And then maybe just finally for me, just on the buyback, I think the earn back this quarter was around 3.6 years, certainly, you know, well within, you know, acceptable earn back. Should we expect, you know, continued, you know, just given where your capital levels are, you know, looks like more shrinkage of the balance sheet. potentially here in the next couple of quarters. You know, should we expect, you know, share repurchases to continue at or around this pace as we move forward and potentially finish out the program, you know, in the timeline? I think it expires in April of 2026. Should we expect full usage of that, assuming, you know, and earn back around, you know, these levels and, you know, just the capital levels? Thanks.
spk05: The answer is yes, Michael. If the earn back is kind of in that same range, which means our average price would be in the range we've purchased in this past quarter, then yes, that's a capital allocation priority for us. If the earn back pushes out, obviously we'd be less aggressive.
spk03: Totally understand. Thanks for taking all my questions.
spk05: Absolutely.
spk00: Thank you. Our next call will be from Woody Lay with KBW.
spk02: Hey, good morning, guys. Can you hear me?
spk05: Yes, yes.
spk02: Good morning. Yeah, I wanted to touch on the loan growth and the expectations that maybe we see it pick up in 2025. Just as you talk to your customers, do you think it's enough to just get one rate cut and that'll push loan growth higher? Or do you think your customers need to see two or three rate cuts to really engage on potential projects?
spk05: Woody, I would say it's more the latter. I would say that, you know, two or three cuts certainly would give more confidence, you know, in the overall marketplace. And, you know, getting past this election and the uncertainty of that and kind of where the policies are going to land, regulatory policies and the growth policies. And we're just hearing a lot of that kind of conversation that you know, everyone wants to get past that, you know, see some rate cuts because they see tremendous opportunities for growth in our state and opportunities, you know, going forward. There's just a lot of uncertainty right now. And so there's a lot of capital that's on the sidelines waiting for that environment to kind of improve. And we'll see how that plays out. But my best sense is that, you know, sometime in the first half of 25, we could see those events play out that would create opportunities
spk02: uh opportunities for us to get back into more of a growth mode in our markets uh and that would be you know that'd be obviously strong for our state and our bank and uh it'd be it'd be uh very welcome yeah and then i also just wanted to touch on uh the construction portfolio you know construction and development balances have been uh gradually falling over the past year can you just give some uh overarching comments on the segment and maybe what your appetite is for this segment you know, maybe be heading in closer to 2025?
spk05: I mean, our appetite is more constrained. Obviously, we're underwriting and have been for a couple of years with, you know, obviously higher rates and looking at more equity positions, stronger guarantor support and those things, as you would with higher rates that are, you know, that we're currently, you know, managing. So, I do think, again, we're seeing projects that are put on the shelf that are good projects that just the investors and borrowers are waiting for a more favorable environment. Not just rate, but the overall environment had a little less uncertainty to it. So we do see opportunities going forward, but it's going to be more muted like it has been the last decade. 12, 18 months with the current environment where rates are. And then certainly the bank's appetite for risk has tightened the last two years. And so we're underwriting a little closer and more stringent, just like every bank I'm sure is.
spk02: Yeah. And then lastly, just on expenses, you know, they were relatively flat quarter over quarter. I know the the Oreo project has a little bit of variability in there, but does it seem like second quarters rate is a pretty good run rate going forward?
spk01: Yes, Woody. I think it is a good run rate.
spk02: All right. Thanks for taking my questions.
spk05: Sure. Thanks, Woody.
spk00: Thank you for your questions. I would like to remind everyone the recording of this call will be available by 1 p.m. Central Time today on our Investor Relations page at gnty.com. Thank you for attending, and this concludes our call. Have a good day.
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