Q3 2021 Guaranty Bancshares Inc Earnings Call
At this point, so I think that will continue to stay elevated for a while and then.
Probably return to something closer to our historic levels.
Gross loans then.
Our net of PPP.
In our loans held for sale increased to $132 8 million for the quarter, a really nice increase.
That's also a $168 6 million year to date.
So far for three quarters, that's a that's a 10% increase annualized if you annualize all of those three quarters about a 13, 14% increase.
With really Q3 being a big driver of that with that $133 million increase.
Julian will talk about some of the PPP activity of course all of this is net of PPP.
When you look at the total loan loans outstanding.
Our loan growth.
I think we've talked about this in the earnings release are growing 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 area are really showing nice increases, but actually if you look at 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 loan balances for Q3.
Yeah.
We continue to have a strong pipeline and we will talk a little bit about that.
Did see the.
Payoffs and Paydowns, which had been pretty elevated over the last couple of quarters decrease a little bit in Q3. So that was a good to show that and part of that the 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 show and I think we're still talking about live and learn a little bit, but we showed a decrease again in our in our cost of funds.
And the security section, though you do you'll see that.
<unk> moved some of our securities into held for sale at.
Held to maturity.
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.
Although all of those were our municipal securities.
Then on the liability side, our deposit 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 that's a portion of that the growth is.
Is really.
Onboarding new relationship accounts in our DDA.
That's about 70% of our growth coming in the DDA noninterest bearing checking account balances.
And really we continue to have an elevated.
Balance of those and our total deposit so year to date, they've averaged about 36% of our total deposits that being in our non.
Noninterest bearing.
<unk>.
Then looking at the capital account.
<unk>.
Shareholders equity was $297 million at quarter end at the growth of about $9 7 million for the quarter and $24.8 million year to date.
Again, we did not buyback any stock during the quarter.
And we again paid a <unk> 20 dividend to shareholders. So annualized that the dividend is 80 cents.
And out of about 24% of our earnings per share.
And at current stock price, that's the amount of two 2% yield.
And looking at the income statement, we as Pat has already mentioned we added we had another really good quarter in our earnings.
Our net earnings for Q3 were $9 3 million, that's 77 cents per earnings per basic share or.
76 cents earnings per share fully diluted.
And as compared to linked quarter net earnings were $10 4 million or <unk> 87 per basic share.
For Q3 that gets us to a return on average assets of 124%.
And our return on average equity 12, 44%.
So again this quarter is up as I think we've done in the past I don't know five or six quarters, we will provide some additional tables in our earnings release. So you can see how we highlight our net core earnings.
Which we define in our press release as being our earnings before any credit provision or release, which we've done 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 Thats 87 cents earnings per basic share.
And thats compared to linked quarter and $9 8 million, which is also 81 cents per basic share.
Our margin was very steady for the quarter.
<unk> came in at 341% for Q3.
Compared to $3 four 4% for Q2, and if you ex out PPP, which again, we provide a table in the <unk>.
<unk> earnings release, our NIM was 339% for.
For Q3 compared to 338% for Q2, so really just very steady in the NIM.
Our loan yields when you ex out PPP.
Did decline.
They were showing 473% in Q3 compared to $4 eight 2% in Q2, I guess, the offset to that or the positive note is the increase in our loan balances at.
Loan balance increased.
Obviously, our interest income having come out of.
Fed funds at 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 four basis points.
From Q2, and when we add back or add an or include our non interest bearing balances are.
Total cost of deposits was 22 basis points for Q3.
<unk> 224 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.
To maintain a.
Level of cost of deposits that are appropriate in and pretty.
Post appear.
Looking at our noninterest income.
We did show an increase in Q3 of 479000, that's 8% biggest part of that driver was the gain on sale of loans was up 515000 and that was both the increase in mortgage volume and SBA activity.
From the linked quarter.
SBA did add about.
Two thirds of that increase in mortgage was what was the other third.
Mortgage activity, which was significantly higher in 2020.
Is down some about 12% year over year so.
While we obviously, we did projected decrease in mortgage activity in <unk> and <unk>.
Been 12%.
We had about a 15% decrease projections, so where we are in line with that what we thought.
And our service charge income volume, you'll see in there is really kind of a return to pre pandemic level.
And with adding the accounts and the relationships without the battle in our DDA I think that trend will certainly be maintained and probably increase in premier.
You'll notice in the release the detail or debit card.
Income was last 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 250000. So it did show a decrease in total income for Q3 compared to Q2, but that was the reason.
Then on our noninterest expenses, they did increase $1 6 million.
With detail in the press release, just under 800000 that came in salary and benefits I think we will see an increase in salary or this level of increase in salary over.
For.
Future quarters no doubt.
As a pay scales or being adjusted somewhat.
We did we did increase them, we've talked about in the press release or some of our benefits health insurance payments due to some higher claims than we had than we had projected and then also.
Benefits payroll taxes, and four one K payments related to our I comp that we paid this quarter there was related to the first half of the year.
We did make a note in there we did have a nonrecurring transaction of a termination fee on paint.
Payment.
434000 to unwind two of the two swaps that we had on our trust preferred.
This termination fee actually charges about <unk> <unk> per share to the quarter earnings and it will save us interest immediately going forward.
Right at $200000, a year and decreased earnings on those trust preferreds are the swaps related those trust preferreds for the next two and a half years.
So I do think our annual expense run rate will be up some probably in the $74 million or $75 million per year.
Our annual expense run rate.
And then our efficiency ratio showing 64% Dx out PPP is 66, 5%.
We do maintain our 22 efficiency ratio goal of REIT and a 62% range.
So with that I'll turn it over to Shane.
She'll talk about.
Covid response.
Thanks Kathy.
Yes.
Thankfully it appears that permitted in the telco side.
<unk> down quite a bit here in Texas fewer hospitalizations.
One where people are getting vaccination statewide so we're happy to see that all of our locations our ethane and our employees are back in their office physical branch, although we have rolled out every network policy if I could.
Professionals that are conducive to that type of arrangement. So that we can provide certainty of bond placements you more flexibility.
<unk>.
Yes.
At the end of last quarter, we had southern hospitality loans that remains on an intra salary deferral.
Because of Covid and all seven of them have returned to that contractual payment schedules and our correct.
We also had a good quarter for loan forgiveness.
PPP round one kiln.
With P. P. P round one of our friends that originated back in 2020, we've only got about $40 million to 109 borrowers left under that.
Round, and then PPP around care, which originated earlier this year, we've got 71 4 million to 664 borrowers left.
So as a percent of total dollar we've had 98, 1% of PPP round, one forgiven and we've had just under 30% at PPP round to forget them so far.
We have a little over one 8 million of deferred origination income look left to be recognized.
We think that about half of that will be recognized during the fourth quarter and then the remainder in 2022.
In terms of the <unk> key success and new customers are in you did ask two questions about that so we'll have some information about it in our 10-Q.
We had a little over 880 brand new relationships.
As a result of PPP, we ask our line officers you guys do that.
Really try and gauge how many of that 880, well Huawei telecom and more long term banking relationship and they felt like.
About half of that maybe a little less than half will actually had already asked and other types of banking relationships or well has the potential that you sell in the near future. So we're excited about that.
Of that growth as a result of the PPP program as well.
So now I will turn it over to Paul to talk about the ramp up plan.
Thanks, Julian so as we've outlined in mentioned our loan portfolio.
It remains strong asset quality the bank remained strong.
Non performing.
Asset ratio I believe 12 basis points, which is pretty nominal.
We continue to have about two thirds of our loans that have great floors, which has helped us kind of defend the rate like all banks are 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 is strong today, but we look at.
Down the road in the future in 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 we pass on or we masked because of either pricing <unk>.
Structure of that.
We work with that 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 in.
Plan to continue that as Kathy mentioned.
While we've had growth in all four core.
All four of our regions, which where we are.
Very proud of and feel optimistic about the majority of that this quarter was in the Austin Houston regions.
<unk> had good growth we had some pay downs in <unk> in Q3 kind of net number.
Down where it wasn't as 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 and some of the smaller markets that they may not have necessarily relocated prior to COVID-19. So we remain pretty optimistic about that our state as I've said is strong the business environment is strong we are.
It's a very strong business climate and we continuously not only current business is doing well, but business is moving into the.
The Texas market from different parts of the country, which is very encouraging.
I think it's gonna outlined a little bit of a sale.
A little bit of ACL provision.
For the quarter.
Yeah.
We did have a $700000 reverse Chris mentioned during the quarter, which was primarily due to continuing unwind COVID-19 specific key factor, which I mentioned before on prior calls.
There were being very cautious and fully unwinding that and the timing of that as we continue to watch.
We know that many of the economic stimulus programs are coming to an end by consumers.
And we want to make sure we are fully reserved for those types of risks.
Oh.
And three in the third quarter, our allowance for credit losses, as a percentage of total loans, 155% and excluding the PPP loans was 116%. So we still have.
A pretty strongly back in place.
Still comfortable with going forward.
So that's all we have in our prepared remarks today I will turn it over to Nana first on Q&A.
Thank you <unk>.
As you said is it time for our Q&A.
If you have a question you may hit the raise your hand button at the bottom of your screen, if you're participating by telephone star nominal raise your hand star six more on mute your line.
So our first call today will be from Brad Milsap with Piper Sandler.
And Brad you should be able to mute your line.
Thanks, known am I coming through.
Yes, Sir alright.
Alright, Great Hey, guys.
This quarter, just kind of want 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 time, they're coming.
A little bit lower than the current book yield I think <unk>, probably has an exact race rates but.
Within 25 30 basis points I believe is kind of where we're trying to maintain them.
And that's part of what I was saying was kind of underwriting discipline and part of that is a credit underwriting discipline, but also pricing discipline and while we're being competitive in and aggressive certainly on very strong credits we're not.
Not getting into rights that we don't think will be comfortable with long term. So.
We're managing that piece of it is we also managed to.
To grow the to grow the loan book.
But their cut Brad theyre coming in around four four in a quarter, which is very consistent with what the Q2 numbers were.
Okay great.
Kathy I appreciate the disclosure around the loan floors in the slide deck.
Hi, 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, or 100 basis points from the third to see a lot of a lot of the book move, but just kind of curious if we do get say 50.
Kind of what you would see the impact of that being on your net interest margin.
So so Brad you are right it would be 75 to 100 before it will be material.
50 basis points I think we see some improvement.
Nothing else just just.
The rate sensitive side of the balance sheet.
But it would be excited about the 100 to actually see material improvement, but any playing that.
Anything that moves us toward a more normalized rate environment as it is a net positive for us for sure.
Okay, Great I'll hop back into queue. Thank you guys. Thanks, Brett Brad.
Yeah.
Okay. Our next call will be from Michael Rose with Raymond James.
Michael you should be able to on mute.
Great can you hear me.
Yeah, Hi, Michael.
Hey, how are you.
Just wanted to delve into this quarters loan growth was really strong.
Kind of ex PPP ex warehouse about 30% annualized you guys are running about 11, 5% year to date you'd previously talked about.
Mid single digits with the potential for a high single digit but based on kind of a 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 in the res.
And to think that that low double digit range isn't more appropriate as we move.
Into next year. Thanks.
Yeah, Michael I think you're saying low double digits.
Is that more appropriate or.
Possibly I would still I would still guide to high single digits, possibly lower double digit I'm remaining cautious with paydowns because they are probably pad.
Lower Paydowns this quarter.
We're seeing a lot of pay downs.
Various reasons and the portfolio again, we're also continuing to be pretty cautious in and.
Thoughtful in our underwriting so.
It's very possible we could.
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.
St.
Good targets.
Okay. That's helpful. And then maybe just go into the Securities book I understand the change from <unk> to HTM this quarter, but as we think about just kind of a continued growth in cash which will likely continue maybe at a slower rate.
As we move forward do you guys generally feel good about the size of the securities portfolio I think it's about.
57% of earning assets.
For the quarter, just any thoughts there just given that yields have moved a little bit higher.
Well, Michael as Tiger than we are.
As we've been down we've been buying securities each quarter.
I think its likely youll see us net efforts our security portfolio.
Each quarter, we are doing that for a 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 we're buying each quarter and kind of.
Just kind of buying into the portfolio each quarter, but not moving significant dollars over one time. So we are basically covering the pay down of the portfolio and try 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.
No no buyback again this quarter you guys are trading around $1 seven.
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 larger deal in Texas out here recently.
Yes, so we continue to look at buyback and analyze that buyback opportunities on our stock we have some metrics in place that we've had in place for a few years that we used kind of monitor that and certainly as we see of advantageous price like we did during the middle of Covid.
Very aggressive in buying back shares and our dividend stream is as.
That's been a growing dividend for over 30 years, we havent modeled out to continue growing it because thats a big part of our total return story as far as M&A. I mean, there are a lot of discussions going on we're in a lot of those discussions.
It's hard to say, how those kind of pan out I think the buyers are being very disciplined and.
We certainly are but at the same token there is opportunities to I think you are seeing banks.
Really come to realize the value of scale <unk> session management assertion challenges that are out there that are in technology challenges and those are probably the three main themes I think youre seeing a lot of smaller banks look at it and think about as they go forward and the reality is either.
<unk> four $1 billion.
With those three main themes are going to have to look at strategic options I believe.
They're getting bigger or joining a larger organization or get comfortable with with lower returns more than likely I.
I think as that realization.
Coming to life with a lot of boards.
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.
Our next question is from Brady Gailey with <unk>.
Friday, you can hit Star six.
Your line.
Okay.
Hey, good morning, guys.
Hi, Barry.
So I just wanted to start with a gain on sale and fee income I know you guys mentioned some strength in SBA.
But you know it had a nice step up here in the third quarter to $1 7 million. How do you think about what that fee income line should be kind of normalized longer term.
Well this Cathy we did have a.
Increased volume and 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 seven.
700000, this year 500000 this quarter.
So I.
I think that.
We're going to see an increase there the challenges is in our mortgage activity, we still trying to get more producers on the 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, but I think I think Ah Ah.
10% to 15% decrease is probably what will project out for.
But what will end up having for 2021, and then 2022 keeping that relatively flat.
Okay, Alright thats helpful.
And then on expenses I heard you guys talk about kind of a 74% to $75 million run rate, where you're talking about this year 2021 or is that next year not only to no. Thats next yes. Looking forward. This year is going to be about 72 to 73, Max probably said probably 72.
And that in that range, but that what I was talking about was 2022.
Okay and then finally for me I mean, you look at credit quality assets.
Still pretty clean here, but your reserve is still ex PPP, that's a little over one 6%.
Over time, assuming credits today, it's pretty healthy what do you think that reserve land, but it still feels like that's a pretty robust ml.
Looking at your bank that just doesn't have that many problems how low do you feel like that reserve can go over time.
Brian Let me speak to that so we continue to.
Half factors are seasonal model related to Covid, and obviously doing that to try to hold our reserves as long as we can that being said as COVID-19.
As it becomes a bigger challenge to do that we're likely going to see some reserve release.
Possibly in Q4 was certainly in 'twenty two the reality is while you know.
Different methodologies you could grow into your reserve and that's a pretty good strategy actually that was seasonal its 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 'twenty two as we come out of Covid, that's just going to be the reality of how we're going to have to account for seasonal.
Yeah.
One adjustment was around 125 basis points.
We think that longer term, it will probably be higher than that but that lower than where it is now.
Okay, great. Thanks, guys.
Great.
Our next call is with Matt Olney with Stephens.
Matt you should never on mute your line.
Great. Thanks, Good morning, guys, Hey, Matt Good morning.
Going back to the loan growth in the third quarter, you mentioned, a few times that slower payoffs and pay downs were a pretty big driver of the third quarter growth what about overall production levels in the third quarter and any color on how those compare to the previous quarters.
They were increased also Matt I mean there.
We had.
And elevated origination <unk> advance on existing lines for the quarter compared to quarter two.
Okay, Great and then I think one of items that was strong in third quarter growth with farmland any color on the sequential growth there.
So Matt this task so farmland category that is in Texas I think most of you know that.
Property that has an AG <unk> stays in farm land, even though it's probably it could be development property long term and the biggest dollar move there for us with in the Austin MSA, we have different projects that are actually.
Currently agonies amps, but more than likely and the plan is probably to be developed so that there is no.
That hasn't actually traditional farmland, but thats has categorized based.
Based on that exemption on the properties.
So tiger Sandoz will eventually become <unk>.
Construction of residential construction loans it sounds like yes, yes, they will they will be put into some store development project as well.
Long term plan for the property.
Right now, though they are exempt and theyre in farmland category.
Okay got it.
And then Kathy you mentioned the termination of the swap agreements with respect to the trust preferred and you mentioned there was a savings associated with that we should see.
Where are we going to see that over the next few quarters.
What line items I guess.
Going to be a decrease in our interest expense.
Matt that the swaps that were talking about we had about 10 million $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.
That's going to be is going to be about a $50000 a quarter decrease in interest expense related to that.
Okay.
Got it.
And then I guess lastly on on deposit growth I guess, it cooled off quite a bit in the third quarter.
Compared to.
The last few quarters and it sounds like you're still running off some higher cost deposits.
Any more color you can give on that and what are the expectations for for funding.
<unk> growth from here.
To bring down liquidity levels in the fourth quarter or grow deposits just any color. Thanks.
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.
There is some of that is season seasonal.
Deposits that will come in but traditionally will increase in Q4 so.
It all depends on loan growth for Q4, but my my my <unk>.
Projection is that we will use our liquidity to.
Funded to the most part.
I'll add I'll add something to that Matt I mean, we still continue to see the main driver of franchise value in a bank is core deposits. So while we obviously like a lot of banks are very flush with liquidity will use that where we can we're still very actively growing our deposit core deposit base, mainly as Kathy said earlier in the DDA balances.
Checking account relationships.
Side of the transactions have to Bang on but we're still focused on core deposit development. The company as part of our part of our strategy.
Okay, great. Thank you.
Thank you Matt.
It looks like we have another call with Brad Millsaps, we'd like to ask another question.
Ian.
Yeah. Thanks note I just a quick follow up.
I know you guys were really aggressive.
Hiring new lenders in the last year and into the early part of this year. It seems like every bank in Texas is looking to hire new new officers can you talk about your appetite maybe how much capacity.
Those lenders that you brought in it's still have and then Kathy mentioned some wage inflation you know kind of 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 we are lending teams still has quite a bit of capacity like we mentioned before we developed.
Some real strength, our lending team during COVID-19.
Slow down during Covid.
<unk> said, we're adding to our lending team, especially down the Austin market, we have some traction there as some opportunities to continue to add to our lending team down there.
Seth.
Yeah.
Expectations are lenders and.
When they are able to produce that and it's a win win if not then we look at bringing on new lenders. So.
The overall environment, though I will say just from the standpoint of staffing costs.
Youre going to see real wage increases and all companies, but certainly banks that really across the board, we've kind of gotten in front of that this last.
A couple of months and look and really done a deep dive in our our.
Our salary and compensation across the board and have made some adjustments.
Especially in our starting salaries in different markets and so again.
Again trying to just preemptively get in front of what we're seeing is some real wage pressure going forward.
Okay.
Kathy you want anything to that.
No.
Exactly.
You said well that's that's what we're trying to get ahead of the curve on just keep keep our staff properly compensated.
Great. Thank you. Thanks, Thanks, Brett.
Okay.
Okay, we have no more questions in the queue I would like to remind everyone bear with me a recording of this call available not one P. M. Today on our Investor Relations page at <unk> Dot com. Thank.
Thank you for attending this concludes our call today.
No.
Okay.