Guaranty Bancshares Inc (GNTY) 2022 Q3 法說會逐字稿

Good morning, and welcome to Guaranty Bancshares' third-quarter 2022 earnings call. My name is [Nona Branch], and I will be your operator for today's call. This call is being recorded. (Operator Instructions)

Our host for today's call will be Ty Abston, Chairman and Chief Executive Officer of the company; Cappy Payne, Senior Executive Vice President and Chief Financial Officer 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 Abston.

Thank you, Nona. Good morning, everyone. Welcome to our third-quarter call. As reported in our press release, we -- our company did experience strong growth for the quarter and good financial results. We outlined that we, like everyone is, are anticipating a downturn in the economy starting in Q4 and into 2023. But we do think Texas will remain resilient in this downturn. And our company, we think, is also well positioned for any economic downturn we see going forward.

We do have several slides to kind of walk through. And then at a high level, we'll kind of detail some of the main areas of the company, and then we'll open it up to Q&A. Cappy?

Okay. Thank you, Ty. I'll hit some of the highlights of both the balance sheet and the income statement here pretty quickly.

Total assets for -- at the end of Q3 were $3.39 billion. That's up $109 million or 3% for the quarter, and it's up $304 million or 10% year to date. Then diving into a little bit of that on the asset side, total loans were up $144 million at 6.8% for the quarter, and that's ex PPP and warehouse lending. And for the year, there were $439 million increase or 24% year to date and, again, ex-PPP and warehouse lending.

We do have a chart in earnings release. You can tell of that $400 million-plus, about $200 million came in increase in CRE and about $85 million was an increase in the C&D bucket, construction and development. Those are the bigger drivers of our growth for this year.

Each of our four regions are seeing growth this year. And our Central Texas region was leading that growth with about 50% -- almost 50% of the year-to-date growth.

And looking at our new loan originations, they were again strong for the quarter. They were higher in Q3 than they were in Q2 and Q1. And then looking at our payoffs and paydowns, they were pretty steady in Q3 versus Q2.

Pipelines are beginning to slow down, as Ty has already talked about, and we'll talk a little bit more about that in detail in the next slide or two.

And looking at the securities portfolio, the main event was decrease in our treasuries, short-term treasuries that matured during the quarter, again, $80 million. We've got about $120 million that will mature before year-end in the treasury category. We're still have about 2% yield on that remaining $830 million bond portfolio, and the duration still is right at 3.5.

Along those lines, we do have some Federal Home Loan Bank advances maturing that will kind of match some of those deposits -- some of those treasuries that are maturing. We've got $140 million in Federal Home Loan Bank advances that will mature. We'll roll some of those into 2023, but not all of them.

Then looking at our deposits, they were up $11 million for the quarter and up $120 million year to date; that's 4.5%. And as you can see, most of that -- almost all of that increase was in the DDA, which continues to represent 40% of our total deposits, which they pretty well have averaged all this year.

Public fund money is just 10% of our deposits. They were actually down during the quarter about $9 million. So our retail and our all other deposits were actually up about $20 million for the quarter. Our shareholder equity did increase about $6 million from the linked quarter. Earnings were $10.9 million, offset by a decrease in our OCI of $2.4 million from linked quarter.

We did pay dividends of $0.22. So that's $2.2 million. And then we did buy back a little bit of stock; about $700,000 were repurchased, a little over 19,000 shares during the quarter. Our cash dividend is on track to pay out $0.88 for the year, which is right at a 25% payout of earnings. Based on current price, that's about a 2.5% yield, and it's a 10% increase over our dividends we paid in 2021.

And looking at the income statement, our Q3 net earnings were 10.9%. As I said, that was $0.92 per share, very similar but actually a little bit better than Q2 and Q1 of this year. Basic earnings per share year to date are right at $2.71 compared to last year's $2.55. Again, that is for the first three quarters or year to date.

As in prior quarters, we do include a table in the earnings release that describes our net core earnings. It was $13.8 million in Q3 and has shown an increase in each of the last five quarters. And again, we define core earnings as pre-tax, pre-provision, and pre-PPP effects. Our return on average assets on those net earnings was 1.3%, and return on average equity was 14.87%. Both strong results for the quarter and very comparable to each of the first two quarters of this year.

Our stated net interest margin, fully tax-equivalent, was 3.59%. That's down 2 basis points from linked quarter. The results of it were 3.61%, and it's up from same quarter last year 19 basis points. Since PPP activity has pretty well wound down, especially, in Q3, it did not have any effect of our -- on our net interest margin in this quarter.

Our loan yield on that $2.2 billion loan book did increase 26 basis points linked quarter and is now 4.96%. That was somewhat offset though by the same period, the cost of our interest-bearing deposits increasing 21 basis points to a total of 59 basis points for this quarter compared to linked quarter of 38 basis points.

But our -- as I said, we have 40% of our deposits in DDA. So that does bring down our total cost of deposits. It is 35 -- as showed, is 35 basis points from the quarter, and that's up from Q2 of 23 basis points. We have had our interest-bearing deposit beta -- is right at 15%. We are projecting that to increase on future rate hikes, and we're projecting that to be closer to 25% near term. Because of loan growth, we did do a provision for the quarter. We'll talk a little bit more about that when Shalene talks about the ACL.

Then looking at our non-interest income, it did decrease $278,000 from linked quarter. Really three main reasons, the biggest being gain on sale of loans decreased $544,000; that's 60%. Obviously, volumes are down. We know because of higher mortgage rates.

I did talk in last earnings release; we're basically restructuring the leadership of our mortgage department. That's been going on and is now getting geared back up. And we also restructured, in leadership, our SBA department. So both of those departments should have higher volumes going forward, certainly, than we saw in Q3.

The second reason our debit card income was down, we did record an annual bonus payment in Q2 of $274,000. So that made the quarter on quarter noncomparable. Year over year, though, we are showing an increase in our debit card income of about 7%. That's going to be $400,000 to $500,000 increase in income, topline revenue debit card. And that's due to increased volume.

Then to offset those two -- first two reasons, we did have a gain on sale of an airplane asset for a gain of just under $900,000 recorded this quarter.

So then looking at our expenses, non-interest expense, that did show an increase of $543,000; that's 2.8% from linked quarter, primarily due to a write-down that we did during the quarter of $487,000 in an SBA receivable that we described in the earnings release that we discovered during the quarter. So guidance for our -- on our non-interest expense for 2022, we'll probably have a total expenses of $78.5 million. That's still within our 2.5% of asset metric, probably going to be about 2.43%; that's a 9.5% increase over 2021 expenses.

And then projecting 2023, we're looking at anywhere from around $83 million to $84 million, which again will be in -- within our 2.5% of average assets and a show about a 7% increase over 2022 expenses. So I'll turn it over to Shalene, and she'll talk about the next slide.

Great. Thanks, Cappy. Next, I'll cover some of the highlights of our loan portfolio, credit quality, and the allowance for credit losses.

As Cappy mentioned, our loan demand continued to be strong in the third quarter, actually stronger than we expected it to be. But the pipeline is beginning to slow down some as we move into the fourth quarter. And the slowdown is partially due to the higher interest rates and partially, because we're tapping the brakes on rapid growth, as we prepare for a likely recession in the near future.

As Ty mentioned and as all you -- all of you know, the Texas economy is still doing relatively well, but we believe that higher rates will soon impact borrowers' capacity to repay. Therefore, we're tightening underwriting standards and really being pretty conservative with balance sheet growth going into 2023. Ty will provide more thoughts on the loan outlook for fourth quarter and 2023 on our next slide.

Overall, our loan yields are trending upwards. Our weighted average loan yields increased this quarter to 4.96% from 4.7% in the second quarter and from 4.59% in the first quarter of 2022. And our weighted average rate of new loan originations in the third quarter was 5.65%, which is a whole percentage point more than the weighted average rate of 4.65% that was originated during the second quarter.

The next bullet talks a bit about rate sensitivity for our loans. We have $1.46 billion of loans that are either fully adjustable or fully floating or adjustable at various rates -- various dates in the future. $264.4 million of the $1.46 billion are fully floating, and the remaining $1.2 billion are adjustable at various dates in the future. So if rates continue to increase as we expect in the fourth quarter, $354.5 million, which is about 15.7% of our total loan portfolio, will reprice by year-end.

Nonperforming assets continue to remain relatively low at 0.28% compared to 0.3% in the prior quarter. A large portion of our nonperforming assets, which are primarily non-accrual loans, consist of four loans made to two related party borrowers and were acquired from Westbound Bank back in 2018. These four loans are 75% SBA-guaranteed and are collateralized by two hotels in Houston.

They have total balances currently on our books of $6.7 million, of which our nonguaranteed exposure is $1.7 million. And we've got reserves of about $1 million associated with those right now. We don't really expect there to be a material loss, if any, as we work through resolving these problem loans. And we believe that these are the last of that problem loans that we identified when we acquired Westbound and reserve for them back in 2018.

And finally, our net charge-offs and our net-charge-offs-to-average-loan ratios continue to be low.

Next up is the allowance for credit losses. We did have a $600,000 provision for credit losses during Q3. We had no provision during Q2, and we had a $1.25 million provision release in Q1. So we're still in a $650,000 release situation for year-to-date 2022, but we do expect that to change going forward.

We adjusted many of our Q factors earlier this year in the second quarter, especially those related to economic factors and forecasts, that we believe were still mostly appropriate at the end of third quarter. So Q factor adjustments during this quarter were pretty minimal, and the provision was due mostly to the loan growth that Cappy spoke about.

We believe it's likely that we'll continue to make upward adjustments to our Q factors as we continue to evaluate the expectations for future rate hikes, the probabilities and possible impacts to our borrowers of a recession in the near future, and then continued uncertainty around the war in Ukraine and its economic impacts on the world and our nation.

ACL coverage was 1.29% of total loans for the quarter compared to 1.36% in the prior quarter and 1.59% at year-end 2021.

So next, I will turn it over to Ty for other comments on 2023 outlook and asset liability management.

Thanks, Shalene. So like we've been saying, kind of the theme for us in 2023 is slower growth. We're anticipating that. Just -- part of that is, by design, how we're going to manage the balance sheet, but part of that is just economic forecast that we have and everyone else has, I think, going into the coming year.

We do think we're well positioned for a downturn and -- with a strong balance sheet. And we do have a core deposit base and we have -- from our -- since our founding and that's kind of key to our business model -- we think, will be a real advantage for us from the standpoint of just core funding going forward.

We do think our AOCI is very manageable. We went into -- well into this rate increase with a very strong liquidity position. And we're actually adding some duration now of the portfolio, but our AOCI and our market risk, the bond portfolio is very manageable and will be even with additional rate increases. And like Shalene said, with CECL, I mean, we're anticipating and plan to budget additional reserves above and beyond what we anticipate actual losses to be. But that's just the way CECL works.

We didn't see or anticipate significant losses with COVID. We actually ended up having no losses during COVID, but we still did $13 million in reserves just the way that CECL works in front-end loading those -- the impacts of those factors. So we're -- like every bank, I'm assuming, that's on CECL, we're anticipating significant increases in our reserves, just given the factors of going into this slowdown and the velocity of rate increase that we've seen this last year has been unprecedented. And all that's going to have an impact.

Obviously, nobody knows the severity, but it's very clear. It's going to have an impact on the economy, even here in Texas. And so we think it's prudent to anticipate that, and that's what we're planning to do as we start planning for 2023.

I'll open it up to questions now and try to answer your questions anyone has.

Thank you, Ty. It is now time for our Q&A portion of our call. (Operator Instructions) Brad Milsaps, Piper Sandler.

Hey, am I coming through?

Yes, hey, Brad.

Hey, Ty. Hey, Cappy. Hey, Shalene. How are you all doing?

Good.

Maybe I just wanted to start on fee income. Appreciate all the detail that you guys have given. I know, obviously, the mortgage kind of piece of it speaks to itself of what's going on. But just curious if you could talk a little about the SBA market and should you have any gains this quarter. I know premiums have come down. Are you also retaining some of that production on the balance sheet? Is that what's driving the -- maybe some of the better loan growth? Just kind of curious if any of that's correlated, and just kind of your general outlook for fees in general.

Well, specific to SBA, no, we haven't retained any material pieces of SBA that we've originated. It's just originations have been soft and that may improve as -- let's say, as things get tougher, that SBA department may actually have a little more opportunity. But we have not retained a significant piece of that. I mean, we're budgeting and planning for fee income to be soft in 2023, just giving the different components of mortgage and warehouse and SBA and other areas that just have significant headwinds.

So that's kind of how we're looking at it. We'd obviously be -- enjoy being pleasantly surprised, but we're anticipating a slowdown in fee income across the board.

But Brad, I would say, our guidance for 2023 would be in the $23 million to $24 million.

Okay. Great. Thank you, guys, for that color. And then just as a follow-up maybe on the margin. I think you guys noted in the deck that you maybe -- expected to maybe peak or plateau kind of early, mid next year. Just curious if you can kind of talk about maybe a level at which you expected to peak?

And then, Cappy, can you just maybe repeat what you said about maybe the timing of some of those FHLB advances being paid off and rolling off the balance sheet. I know there's a lot of moving parts there, but just kind of wanted to touch on those two items.

Yeah, I said that, Brad, just because we do have a lot of treasuries that are rolling off, as I said, about $120 million in treasuries. And we timed our Federal Home Loan Bank maturities to line up with that somewhat, I guess, $140 million in Federal Home Loan Bank advances that will mature in Q4. Some of those, we will -- some of that, we're going to roll over into 2023. Some of that will be paid down with the treasuries that are maturing.

On the margin, we think there's still opportunity to increase what we're seeing -- loans being booked at. I said, I do think our cost of funds will continue to increase, no doubt, just to stay in the market where we need to be to take care of our customers. But I think our margin, as we said in early 2023, probably should peak in around the -- probably 3.65% to 3.7% range.

Great. Thank you, guys. I appreciate it.

Matt Olney, Stephens.

Hey, thanks. Good morning, guys.

Good morning.

Cappy, with your commentary on the FHLB maturing securities portfolio, some of the securities maturing there, it seems like the overall asset size should see some contraction of the overall balance sheet in the fourth quarter and perhaps, even in early 2023. Am I thinking about that right?

From that standpoint, yeah, Matt. That's correct. I'm not -- I think, as Ty has already said, we're looking at pretty flat growth for very -- for multiple reasons but, in part, due to some of these treasuries, no doubt, in addition to the low -- the pipeline drying up some and then slowing down.

Okay. That's helpful. And then I guess, taking a step back, you talked about expectations for the ACL ratio to build in 2023 and certainly appreciate that, given the uncertainty in the economy. Can you talk more about -- if you still think you can grow EPS in 2023 versus 2022, if the ACL ratio does build next year? Thanks.

Well -- go ahead, Cappy. I lost Cappy. If we build the ACL ratio like we think we are, then earnings per share will not grow. But I think we will have somewhat of a less earnings in 2023 due to ACL build.

But, Matt, the reality is we don't see actual exposure to loss as we said here today for our company in a downturn. But like you know, I mean, we're just -- with CECL, we're going to have to front-end load that. So we're going to be putting more reserves in, just given the environment we'll be in. Again, as anticipated, any bank will be that has -- using CECL.

Yeah. No. I understand that's how the CECL works. So I definitely appreciate that.

And just lastly, I guess, the commentary in the slide deck, it reminds us that the bank has experienced very low levels of charge-offs in the prior downturns. Any color on how the loan portfolio has changed since the 2008 time frame and specifically, I guess, it seems like back then, it was much more heavily weighted towards East Texas and not as much in metro Texas? Just any of kind of big picture thoughts you can give us on how it's changed over the last 15 years. Thanks.

Yeah, Matt, it -- the portfolio has changed without a doubt. I would say that, in a good way, it's much more diversified geographically. And we've been in the metro markets now for seven, going on eight years. So we've actually -- half of that period you're referring to, we've been in some of the growth markets, metro markets.

And the key is our underwriting philosophy, and individuals that are actually directing credit in our company are the same individuals. So our core credit philosophies have remained the same. We think we're very conservative in how we underwrite, and that's why we think we'll weather any downturn well.

But the portfolio has changed, but I would argue that in a lot of positive ways just from its standpoint, not only geographic diversification but even sector diversification, and how we look at the portfolio just being a little more resilient in different -- downturn impacts different areas of different sectors and different parts of the State.

Thanks, guys.

Thanks, Matt.

Michael Rose, Raymond James.

Hey, good morning, everyone. Just a couple -- good morning. Just a couple of follow-up questions here. So certainly understand the pipeline slowing a little bit, but you guys are kind of ex PPP, ex warehouse, up 24% year to date. I know you're talking about slowing next year.

Can you give us a sense on magnitude in terms of what you mean? You're obviously in good markets, but I assume some of it is self-imposed, just given term and structure and pricing are under pressure. Just wanted to get -- I'm not trying to pin you down, but just trying to get some semblance for what kind of magnitude of slowdown are we expecting here?

Yeah. Michael, I would likely kind of put that, I would say, low single-digit growth would be appropriate. I mean, part of it is just the fact that we're going to be a little more cautious in how we're underwriting and looking at credits. And without a doubt, we're seeing a slower pipeline. A lot of what the growth we booked in Q2 and Q3 really were just about part of the momentum was in our pipeline starting first year.

So I just think I would be shocked if we're not -- if we don't see slower growth across the board with all banks. And certainly, we're going to be part of that. And even though Texas is doing well, it's going to slow here, too. And I think it's probably kind of a natural byproduct of just kind of, again, the velocity of rates that -- the rate moves we've seen this last six to nine months.

Appreciate that. One other thing I picked up on that you guys mentioned, restructuring the leadership in both SBA and mortgage. Can you just give a little color and context there as to what happened and maybe what that could mean as we move forward?

So we've brought in two new leaders both for mortgage and SBA. Just -- we think, probably, we're able to actually take advantage of this downturn to actually bring some talent on board. We don't -- the delta, what it's going to -- as far as operating expenses are minimal. But we do think that the strength we've added to the bench in both those areas will work well for us as things kind of improve and both those areas start seeing better prospects.

Okay. Perfect. And then I think you mentioned expenses, I think, in a range of $83 million to $84 million. How much of -- is that -- is kind of the inflationary impact versus new hiring versus just general growth of the business, if you can kind of break it down just roughly?

Well, I don't have detail on that, Michael, but -- per se -- but it's a 7% increase that we're projecting and obviously, that's going to be related to inflationary factors.

As far as new hires, we still have no new hire openings, but we're going to really monitor those into -- going into 2023, just because of slowdown in the economy. So I don't foresee a lot of new hires related to that.

Okay. So mostly inflation.

Okay. So most inflation.

Yeah.

Okay. Thanks for taking my questions.

Sure, Michael.

Brady Gailey, KBW.

Hey, good morning, guys.

Morning, Brady.

So we've asked a lot about the asset side, but I wanted to ask about the liability side. If you look at deposits, it's been pretty flat here for the last couple of quarters around that $2.8 billion level. How are you thinking about deposit flows going forward? It feels like the industry still has some excess deposits. So do you think you can hold that flat or do you think you could potentially see some shrinkage in 4Q and next year?

I think fourth quarter, we may see a little bit of increase. But we're really projecting flat, no growth, but maintaining the deposits, the level that we have, looking into 2023.

Okay. If you look, I mean, you guys are still earning money. You're going to have flat assets. So you're your capital should grow here, outside of changes of AOCI. I know buybacks were pretty limited in the third quarter. So do we think about buybacks ramping from here or -- since we're headed into a recession or do buybacks go away?

I think, I mean, we look at that, Brady, just based on valuation. Right now, our value has held up, I mean, fairly decent. So we haven't been as active in buyback. But if we saw significant drop in our valuation versus what we see the intrinsic value of the company be, then we would be more aggressive with buybacks like we were during the downturn with COVID.

So it's really dependent just on kind of where the market is relative to our view of intrinsic value of the company.

All right. And then finally, for me, you mentioned $120 million of treasuries rolling off. I mean, that's a decent size of your bond portfolio. Do you let that roll off and just go away or do you think about replacing some of that? I'm just wondering your bond book is around $900 million. How should we think about that balance end of next year?

So we're about -- we have right at $250 million in short-term treasuries. And so about 30% of portfolios in those short-term treasuries, we will use some of that to actually add some duration at this point. Because we still had a pretty short duration portfolio. And -- but then we also will pay down some advances, which we took out to actually buy some of those short treasuries.

So I would say you could probably take half those dollars and reinvest the portfolio to add duration, and probably, the other half, we would pay down some of the advances we have.

Okay. All right. Great. Thanks for the color, guys.

Thanks, Brady.

Thanks, Brady.

Thank you for your questions. I would like to remind everyone that the recordings of this call will be available by 1:00 PM on our Investor website relation -- our investor relationship page at gnty.com. This concludes our call for today. Thank you.