Guaranty Bancshares Inc (GNTY) 2021 Q3 法說會逐字稿

Good morning. Welcome to Guaranty Bancshares' third quarter 2021 earnings call. My name is Nona Branch, and I will be your operator for today's call. I want to remind everyone that 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; Shalene Jacobson, Executive Vice President and Chief Risk Officer.

To begin our call, I will now turn it over to our CEO, Ty Abston.

Thank you, Nona. Good morning, everyone. I too want to welcome you to Guaranty Bancshares' third-quarter earnings call. As all of you, or some of you, I'm sure, probably read our press release, we had a good quarter, one we're very proud of. We continue to be very optimistic about the strength we're seeing in Texas economy and the strength we're seeing in our bank and our footprint and our business model.

We are starting to plan for 2022 and have had that same confidence as we go into next year and feel like that our state is set up to do really well in our bank, in particular, with our footprint throughout the state to set up to do really well.

I'll turn it over to Cappy, who's going to kind of go over some of the highlights, and then we'll go through some of the things we want to present to you and then do a Q&A at the end. Cappy?

Thank you, Ty. If you all joined us by Zoom, you'll see our quarterly highlights on the screen. Let me just recap some of the main points, both on the balance sheet and the income statement.

We did finish Q3 with total assets of $2.97 billion, a slight increase of about $35 million for the quarter. And then in comparing where we were a year ago, assets were up about $306 million year over year. So that's about 11.5% increase.

Our average cash and cash equivalents, which mainly is Fed funds did decline this quarter, approximately $15 million. Cash continues to remain elevated. We've talked about this in prior quarters. And as compared to, I guess, our historic normal levels, it still remains elevated and probably a drag on our NIM, our net interest margin of approximately 20 basis points, 22 basis points. So I think that will continue to stay elevated for a while and then probably return something closer to our historic levels.

Gross loans then a net of PPP and our loans held for sale increased $132.8 million for the quarter, a really nice increase. And that's also $168.6 million year to date. So for three quarters, that's a 10% increase. If you annualize all those three quarters, about a 13%, 14% increase, with really Q3 being a big driver of that with that $133 million increase.

Shalene will talk about some of the PPP activity. Of course, all of this is net of PPP when you look at the total loans outstanding. Our loan growth, and I think we've talked about this in the earnings release, our loan growth is internally generated. It's coming mainly from our Central Texas market, as well as our Houston MSA, and even some of the markets in the DFW are really showing nice increases. But actually, if you look at it, and we've talked about this in prior quarters, we do break down our markets into four regions, and all four of our regions showed an increase in the loan balances for Q3.

We continue to have a strong pipeline, and we'll talk a little bit about that. And we did see the payoffs and pay downs, which have been pretty elevated over the last couple of quarters, decrease a little bit in Q3. So that was good to show that and part of that net growth that we're talking about.

We did have a shift in average earning assets, showed an increase in loans, obviously, with this growth, and even an increase in securities during the quarter. And then a correlating decrease in our Fed funds, which obviously helped maintain our net interest margin. As well as shown, and I think we'll talk about it in little bit, but we showed a decrease again in our cost of funds.

In the security section though, you'll see that we moved some of our securities into held for sale -- held to maturity out of available for sale. And that was due really just to capture some of that unrealized gain just to move for, I guess, for accounting purposes more than anything. Mainly, all those were our municipal securities.

Then on the liability side, our deposits showed another increase for the quarter, about $30 million. We're now showing year-to-date increase in deposits of just right at $277 million for the three quarters. About $195 million of that is in non-interest-bearing. So a good portion of that growth is really onboarding new relationship accounts in our DDAs. That's about 70% of our growth coming in the DDA non-interest-bearing checking account balances. And really, we continue to have an elevated balance of those in our total deposits. So year to date, they've averaged about 36% of our total deposits, that being in our non-interest-bearing section.

Then looking at the capital account, our shareholders' equity was $297 million at quarter end. That's a growth of about $9.7 million for the quarter and $24.8 million year to date. Again, we did not buy back any stock during the quarter, and we again paid a $0.20 dividend to shareholders. So annualize that, the dividend is $0.80, that's paying out about 24% of our earnings per share. And at current stock price, that's about a 2.2% yield.

And looking at the income statement, as Ty has already mentioned, we had another really good quarter in our earnings. Our net earnings for Q3 were $9.3 million, that's $0.77 earnings per basic share, or $0.76 earnings per share fully diluted. And as compared to linked quarter, net earnings were $10.4 million, or $0.87 per basic share. For Q3, that gets us to a return on average assets of 1.24% and our return on average equity, 12.44%.

So again, this quarter, as I think we've done in the past, I don't know, five quarters or six quarters, we provide some additional tables in our earnings release. So you can see how we highlight our net core earnings, which we defined in our press release as being our earnings before any credit provision or release, which we've done in the last couple of quarters and before income tax and then also before PPP effects.

So our net core earnings for the quarter were $9.7 million, that's $0.87 earnings per basic share. And that's compared to linked quarter of $9.8 million, which is also $0.81 per basic share. Our margin was very steady for the quarter, it came in at 3.40% for Q3 compared to 3.44% for Q2. And if you ex out PPP, which, again, we provide a table in the earnings release, our NIM was 3.39% for Q3 compared to 3.38% for Q2. So really just very steady in the NIM.

Our loan yields, when you ex out PPP, did decline. They're showing 4.73% in Q3 compared to 4.82% in Q2. I guess the offset to that, or the positive note is the increase in our loan balance increased, obviously, our interest income having come out of Fed funds at earning a much lower yield.

Then our cost of interest-bearing deposits decreased again this quarter. They were 33 basis points in Q3, that's down 4 basis points from Q2. Then when we add back or add-in or include our non-interest-bearing balances, our total cost of deposits was 22 basis points for Q3 compared to 24 basis points in Q2. And if you look back a year ago in Q3 of 2020, that figure was 41 basis points. So we've had a good opportunity to maintain a level of cost of deposits that are appropriate and pretty cost up here.

Looking at our non-interest income, we did show an increase in Q3 of $479,000, that's 8%. Biggest part of that driver was a gain on sale of loans that was up $515,000, and that was both increase in mortgage volume and SBA activity from the linked quarter. SBA did add about two-thirds of that increase, and mortgage was the other third. So mortgage activity, which was significantly higher in 2020, is down some about 12% year over year. So we obviously did project the decrease in mortgage activity and it's been -- 12% is -- I think we had about a 15% decrease projection. So we're in line with about what we thought.

And our service charge income volume, you'll see and there is really kind of return to a pre-pandemic level. And with adding the accounts and the relationships I talked about on our DDA, I think that trend will certainly be maintained and probably increasing from here.

You'll notice in the release the detail our debit card income was less. Actually, our debit card volume did increase during the quarter slightly. But in Q2, we had an extraordinary annual bonus paid from our Visa, MasterCard contract of $250,000. So it did show a decrease in total income for our Q3 compared to Q2, but that was the reason.

Then on our non-interest expenses, they did increase $1.6 million. We detailed in the press release, just under $800,000 of that came in salary and benefits. I think we will see an increase in salary or this level increase in salary over the future quarters, no doubt as pay scales are being adjusted somewhat. We did increase, and we talked about in the press release some of our benefits, health insurance payments due to some higher claims than we had projected, and then also benefits, payroll tax, and 401(k) payments related to our [ICOMP] that we paid this quarter that was related to the first half of the year.

We did make a note in there. We did have a non-recurring transaction of a termination fee on payment of $434,000 to unwind two swaps that we had on our trust preferred. This termination fee actually charges about $0.03 per share to the quarter earnings, and it will save us interest immediately going forward right at $200,000 a year and decreased earnings on those trust preferred, or the swaps related to those trust preferred for the next 2.5 years.

So I do think our annual expense run rate will be up some probably in the $74 million or $75 million per year annual expense run rate. And then our efficiency ratio showing 64%, the ex out PPP is 66.5%. We do maintain our '22 efficiency ratio goal right in the 62% range.

So with that, I'll turn it over to Shalene, and she'll talk about COVID response.

Thanks, Cappy. Thankfully, it appears that COVID and the Delta surge is slowing down quite a bit here in Texas with fewer hospitalizations and more and more people getting vaccination statewide. So we're happy to see that. All of our locations are open, and our employees are back in their offices and branches. Although we have rolled out a remote work policy for positions that are conducive to that type of arrangement, so that we can provide certain of our employees with some more flexibility when needed.

At the end of last quarter, we had seven hospitality loans that remained on an interest-only deferral. Because of COVID, all seven of those have returned to their contractual payment schedules and are current. We also had a good quarter for loan forgiveness under both PPP round 1 and 2.

With PPP round 1, those loans that originated back in 2020, we've only got about $4 million to 109 borrowers left under that round. And then PPP round 2, which originated earlier this year, we've got $71.4 million to 664 borrowers left. So as a percent of total dollars, we've had 98.1% of PPP round 1 forgiven, and we've had just under 30% of PPP round 2 forgiven so far.

We have a little over $1.8 million in deferred origination income that's left to be recognized. And we think that about half of that will be recognized during the fourth quarter and then hopefully, the remainder in 2022.

In terms of PPP success in new customers, several of you have asked some questions about this, and we'll have some information about it in our 10-Q. But we had a little over 880 brand-new relationships as a result of PPP. We asked our loan officers to go through those and really try engaging how many of those 880 will result in a more long-term banking relationship. And they felt like about half of those, or maybe a little less than half, will actually -- have already opened other types of banking relationships or will have the potential to do so in the near future. So we're excited about that growth as a result of the PPP program as well.

So now, I will turn it over to Ty to talk about the loan portfolio.

Thanks, Shalene. So as we've outlined and mentioned, our loan portfolio remains strong. The asset quality of the bank remains strong. Our non-performing asset ratio is, I believe, 12 basis points, which is pretty nominal.

We continue to have about two-thirds of our loans that have rate floors, which has helped us kind of defend the rate. Like all banks, our bank will benefit with more normalized rate environment, which we're expecting to see. But in the interim, we think we've been able to defend our NIM, and our yields are pretty well through this cycle.

Our asset quality not only strong today, but we look at down the road in the future and different parts of the economic credit cycle. And so, with that, we continue to maintain strong underwriting discipline. We continue to look at a lot of credit opportunities that either we pass on or we miss because of either pricing and/or structure that we wanted to have in place.

So while we're seeing good growth in all four of our regions, as we've mentioned, we're doing that with continued strong credit underwriting and plan to continue that. As Cappy mentioned, while we've had growth in all four of our regions, which we're very proud of and feel optimistic about, the majority of that this quarter was in the Austin, Houston regions.

The DFW region had good growth. We had some paydowns in DFW region in Q3, that kind of net the number down where it wasn't a strong growth. But in East Texas region, we had growth. And I've mentioned in prior quarters, we continue to see a lot of strong growth in the East Texas region from companies and individuals that are relocating in some of the smaller markets that they may not have necessarily relocated prior to COVID. So we remain pretty optimistic about that.

Our state, as I've said, is strong. The business environment is strong. It's a very strong business climate, and we continue to see not only current businesses doing well, but businesses moving into the Texas market from different parts of the country, which is very encouraging.

Shalene, I think, is going to outline a little bit of ACL provisioning for the quarter.

Yes. We did have a $700,000 reverse provision during the quarter, which was primarily due to continuing to unwind our COVID specific Q-factor, which I've mentioned before on prior calls. Although we're being very cautious and fully unwinding that and the timing of that as we continue to watch the economy now that many of the economic stimulus programs are coming to an end for consumers and small businesses, we want to make sure we are fully reserved for those types of risks.

In the third quarter, our allowance for credit losses as a percentage of total loans was 1.55%, and excluding the PPP loans was 1.62%. So we still have a pretty strong reserve in place that we feel comfortable with going forward.

So that's all we have in our prepared remarks today. I'll turn it over to Nona for some Q&A.

(Operator Instructions) Brad Milsaps, Piper Sandler. And Brad, you should be able to unmute your line.

Thanks, Nona. Am I coming through?

Yes, sir.

All right. Great. Hey, guys. Nice quarter. Just wanted to follow up on some of the new loan generation. Just kind of curious where new loans are coming on the books relative to the current book yield?

Hey, Brad. This is Ty. They're coming a little bit lower than the current book yield. I think Shalene probably has the exact rates. But within 25 basis points, 30 basis points, I believe, is kind of where we're trying to maintain them. And that's part of what I was saying with underwriting discipline. Part of that is a credit underwriting discipline, but also pricing discipline.

And while we're being competitive and aggressive certainly on very strong credits, we're not getting into rates that we don't think will be caught with long term. So we're managing that piece of it, and we also managed to grow the loan book.

Brad, they're coming in around 4%, 4.25%, which is very consistent with what the Q2 numbers were.

Okay, great. And Cappy, I appreciate the disclosure around the loan floors in the slide deck. Ty, I know you mentioned that you guys will benefit if we do get a change in the short end of the curve. I was curious if you might be able to quantify that a little bit more. It would seem, based on where your loan floors are, you might need at least 75 basis points or 100 basis points from the Fed to see a lot of the book move. But just curious if we do get, say, 50 basis points, what you would see the impact of that being on your net interest margin?

So Brad, you're right, it would be 75 basis points to 100 basis points before it would be material. In the 50 basis points, I think we see some improvement, just nothing else, just the rate sensitive side of the balance sheet. But it would be 75 basis points to 100 basis points to actually see a material improvement. But anything that moves us towards a more normalized rate environment is a net positive for us for sure.

Okay, great. I'll hop back in the queue. Thank you, guys.

Thanks, Brad.

Thanks, Brad.

Michael Rose, Raymond James. Michael, you should be able to unmute.

Great. Can you hear me?

Yes, sir.

Hi. Just wanted to delve into this quarter's loan growth. It was really strong. If I look ex-PPP, ex-warehouse, about 30% annualized. You guys are running about 11.5% year to date. You've previously talked about a mid-single digit with the potential for a high-single digit.

But based on good pipeline commentary, paydown slowing a little bit, is there any reason to think that on a go-forward basis -- I know this quarter was boosted a little bit by what appears to be retaining some one to four family mortgages on the books. But even ex that, really, really solid growth. Any reason to think that that low double-digit range isn't more appropriate as we move into next year? Thanks.

Yeah, Michael. I think you were saying low double digit, is that more appropriate or -- that's possibly I would still guide to high single-digit, possibly lower double digit. I'm remaining cautious with paydowns because they probably had lower paydowns this quarter. We're seeing a lot of paydowns just for various reasons in the portfolio.

Again, we're also continuing to be pretty cautious in [pooling] or underwriting. So it's very possible we could end up in the low double digit, but it's going to be very low double digit to high single digit more than likely be where I would guide you. We're comfortable saying it would be a good target.

Okay. That's helpful. And then maybe just going to the securities book. I understand the change from AFS to HTM this quarter. But as we think about just the continued growth in cash, which will likely continue maybe at a slower rate as we move forward, you guys generally feel good about the size of the securities portfolio. I think it's about 15.7% of earning assets for the quarter. Just any thoughts there just given that yields have moved a little bit higher. Thanks.

Well, Michael, this is Ty, again. As we've been doing, we've been buying securities each quarter. I think it's likely you'll see us net up our security portfolio each quarter. We're doing that pretty systematically. We still are maintaining a lot of cash on the balance sheet. But at the same token, we're not willing to stay totally in cash. And so, we're buying each quarter, and it's either going to be dollar cost averaging or to the good or the bad, but that's kind of what we've been doing.

The last couple of years has been just buying into the portfolio each quarter, but not moving significant dollars over at one time. So we're basically covering the pay down of the portfolio and trying to net up each quarter as we go along.

Okay. That's helpful. And maybe just one last one for me, just on capital deployment. Buyback, again, this quarter, you guys are trading around [1.7] of tangible, so pretty acceptable earn back on any sort of buyback. But maybe if you can just talk about your thoughts around the buyback dividend. And then maybe potential M&A, we saw a larger deal in Texas announced here recently. Thanks.

Yes. So we continue to look at buyback and analyze that and buy back opportunities on our stock. We have some metrics in place that we've had in place for a few years that we used to monitor that. And certainly, as we see advantageous price like we did during the middle of COVID, we're very aggressive in buying back shares. And our dividend stream has been a growing dividend for over 30 years. We have it modeled out to continue growing it because that's a big part of our total return story.

As far as M&A, there are a lot of discussions going on. We're in a lot of those discussions. It's hard to say how those pan out. I think the buyers have been very disciplined, and we certainly are. But at the same token, there's opportunities too. I think you're seeing banks really come to realize the value scale and/or succession management -- succession challenges that are out there and technology challenges. And those are probably three main themes, I think, you're seeing a lot of smaller banks look at and think about as they go forward.

And the reality is, either banks below $1 billion with those three main themes are going to have to look at strategic options of either getting bigger or joining a larger organization or get comfortable with lower returns more than likely. And I think as that realization is coming to life with a lot of boards, you're seeing more conversations happen. And like I said, we're in those talks a lot of times and having those conversations with banks.

Great. I'll hop back in the queue. Thanks for taking my questions.

Thanks, Michael.

Thanks, Michael.

Brady Gailey, KBW. (Operator Instructions)

Hey. Good morning, guys.

Hi, Brady.

Hi, Brady.

So I just want to start with a gain on sale and fee income. I know you guys mentioned some strength in SBA, but it had a nice step up here in the third quarter to $1.7 million. How do you think about what that fee the income line should be normalize longer term?

Well, this is Cappy. We did have increased volume in an SBA, as I talked about. What we're seeing happening in SBA is a lot more activity, so opportunity. So I think that level is probably going to maintain. It's about -- I think we did around $700,000 this year and $500,000 this quarter. So I think that we're going to see an increase there.

The challenge is in our mortgage activity. We still are trying to get more producers in the different regions and on the ground. So as I said earlier, we had projected about a 15% decrease from our higher volume in 2020. I think a 10% to 15% decrease is probably what we'll project out for -- what we'll end up having for 2021 and in 2022, keeping that relatively flat.

Okay. That's helpful. And then on expenses, I heard you guys talk about a $74 million to $75 million run rate. Were you talking about this year 2021 or is that next year 2022?

No. That's next year. That's looking forward. This year is going to be about $72 million to $ 73 million max probably. So the price is $72 million in that range. But what I was talking about was 2022.

Okay. And then finally for me, you look at credit quality and it's still pretty clean here, but your reserve is still -- ex-PPP, it's a little over 1.6%. Over time, assuming credit stays pretty healthy, where do you think that reserve land? Does it still feels like that's a pretty robust amount looking at a bank that just doesn't have that many problems up? How low do you feel like that reserve can go over time?

Brady, let me speak to that. So we continue to have factors in our CECL model related to COVID and obviously doing that to try to hold our reserves as long as we can. That being said, as COVID abates, it becomes a bigger challenge to do that. We're likely going to see some reserve release possibly in Q4, but certainly in '22.

The reality is, well, different methodologies you can grow into your reserve, and that's a pretty good strategy actually, but with CECL, it's truly more mark-to-market. And so, it is much harder to hold that reserve with our asset quality and with the metrics we have. So, very likely, we're going to see more releases in '22 as we come out of COVID. That's just going to be the reality of how we're going to have to account for with CECL.

Yeah. And our day one adjustment was around 125 basis points. And so, we certainly think that longer term, it'll probably be higher than that, but a bit lower than where it is now.

Okay, great. Thanks, guys.

Matt Olney, Stephens. Matt, you should be able to unmute your line.

Going back to the loan growth in the third quarter, you've mentioned a few times that slower payouts and paydowns were a pretty big driver of the third-quarter growth. What about overall production levels in the third quarter? Any color on how those compared to the previous quarters?

They were increased also, Matt. We had an elevated origination and/or advance on existing lines for the quarter compared to quarter two.

Okay. Great. And then I think one line item that was strong in third-quarter growth was farmland. Any color on the sequential growth there?

So Matt, this is Ty. So farmland category, that is in Texas. I think most of you know that property that has an exemption stays in farmland, even though it's probably -- it could be development property long term. And the biggest dollar move there for us was in the Austin MSA.

We have different projects that are actually currently ag exempt, but more than likely, the plan is probably to be developed. So that isn't actually traditional farmland, but that's how it's categorized based on the exemption of the properties.

So Ty, you're saying those will eventually become construction or residential construction loans, it sounds like?

Yes. Yeah. They will be putting in some to sort of development project, it's the long-term plan for the property. Right now, though, they're ag exempt there in farmland category.

Okay. Got it. And then Cappy, you mentioned the termination of those swap agreements with respect to the trust preferred, and you mentioned there was a saving associated with that we should see. Where are we going to see that over the next few quarters? What line items, I guess?

It's going to be a decrease in our interest expense, Matt. The swaps that we're talking about, we have $10 million on the books. $5 million of those had a swap attached to it. That was unfavorable, so we just decided to unwind it. So that's going to be about a $50,000 a quarter decrease in interest expense related to that.

Okay. Got it. And then, I guess, lastly on deposit growth. I guess we cooled off quite a bit in the third quarter compared to the last few quarters. And it sounds like you're still running out some higher cost deposits. Any more color you can give on that? And what are the expectations for funding loan growth from here? Do you expect to bring down liquidity levels in the fourth quarter or grow deposits? Just any color. Thanks.

Well, I think we will spend some of our liquidity to fund loan growth. But I do anticipate, if you go back and look at our history, I do anticipate an increase in deposits in Q4. Some of that is seasonal deposits that will come in. But traditionally, will increase in Q4. So it all depends on loan growth for Q4, but my projection is that we will use our liquidity to fund it to the most part.

I'll add something to that, Matt. We still continue to see the main driver of franchise value in the bank is core deposits. So while we, obviously, like a lot of banks are very flushed with liquidity, we'll use that where we can. We're still very actively growing our core deposit base, mainly as Cappy said earlier in the DDA balance and checking account and relationships side of the -- transaction side of the bank, but we're still focused on core deposit development in the company as part of our strategy.

Okay. Great. Thank you.

Thank you, Matt.

Looks like we have another call. Looks like Brad Milsaps would like to ask another question. Brad?

Yeah. Thanks, Nona. Just a quick follow-up. Ty, I know you guys were really aggressive hiring new lenders into the last year and into the early part of this year. It seems like every bank in Texas is looking to hire new officers.

Can you talk about your appetite? Maybe how much capacity those lenders that you brought in still have? And then Cappy mentioned some wage inflation. What are you seeing in that regard in terms of what it takes to bring in new folks?

I'll start with that, Brad. So our lending team still has quite a bit of capacity. Like we mentioned before, we developed some real strength in our lending team during COVID, slowdown during COVID.

That being said, we're adding to our lending team, especially down the Austin market. We have some traction there and have some opportunities to continue to add to our lending team down there. We set expectations to our lenders. And when they're able to produce that, then it's a win-win. If not, then we look at bringing in a new lender.

So the overall environment though, I will say, just from the standpoint of staffing costs, you're going to see real wage increases in all companies. But certainly, banks a across the board, we've gotten in front of that this last couple of months and looking and really done a deep dive in our salary and compensation across the board and have made some adjustments, especially in our starting salaries in different markets. And so -- because, again, trying to just preemptively get in front of what we're seeing, there's some real wage pressure going forward.

Cappy, do you want to add anything to that?

No. I think that's exactly, you said well. That's what we're trying to get ahead of the curve on, just keep our staff properly compensated.

Great. Thank you.

Thanks, Brad.

Okay. We have no more questions in queue. I would like to remind everyone, there will be a recording of this call available by 1:00 PM today on our Investor Relations page at gnty.com. Thank you for attending. This concludes our call today.