Q3 2022 Guaranty Bancshares Inc Earnings Call
Yeah.
B Payne senior Executive Vice President and Chief Financial Officer of the company.
Killing Jacobson executive Vice President and Chief Financial Officer of the Bank.
To begin our call I will now turn it over to our CEO tie ups then.
Thank you morning, everyone.
Welcome to our third quarter call.
As reported in our press release, we are our company did experienced strong growth in the quarter a good financial results.
We outlined that we like everyone are anticipating a downturn in the economy, starting in Q4 and into 'twenty three.
But we do think Texas will remain resilient.
In this downturn and our company. We think is also well positioned for us.
In the economic downturn, we say going forward, we do have several slides kind of walk through and then.
At a high level kind of detailed some some of them may.
In areas of the company and then we'll open it up to Q&A Cathy.
Okay I get that.
I'll hit some of the highlights of both the balance sheet and the income statement here pretty quickly.
Total assets at the end of Q3 were 339 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 a <unk>.
Of that on the on the asset side total loans were up $144 million at six 8% for the quarter.
And that's ex PPP in warehouse lending.
And for the year.
439 million increase or 24% year to date, and again SVP and warehouse lending.
But do you have a chart in the earnings release, you can tell of that 400 plus million about 200 million came in increase in CRE and.
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.
In 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 two Q2 and Q1.
And then looking at our payoffs and pay downs, they were pretty steady in Q3 versus Q2.
Pipelines are beginning to slow down as <unk> already talked about and we'll talk a little bit more about that in detail next latitude.
And looking at the Securities portfolio. The main event was the decrease in <unk>.
Treasury's short term treasuries that matured during the quarter.
Again $80 million, we've got about $120 million that will mature before year end and the treasury category, we're still have about 2% yield on that remaining $830 million.
Bond portfolio and the duration still is right at three five.
Along those lines, we do have some federal home loan bank advances maturing that will kind of match some of those.
Deposit some of those treasuries that are maturing I've got $140 million in federal home loan bank advances.
It will that will mature, we'll roll some of those into 2023, but not all of them.
And then looking at our deposits they were up $11 million for the quarter.
Up $120 million year to date at four 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 are all other deposits are actually up about $20 million for the quarter.
Our shareholder equity did increase about $6 million for the portal.
Linked 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 22 cents. So that's $2 2 million and then we did buy back a little bit of stock about $700000 work.
We repurchased a little over 19000 shares during the quarter.
Our cash dividend is on track to pay out 88 cents for the year, which is a which is right at a 25% payout of earnings.
Based on current price that's about a two 5% yield and it's a 10% increase over our dividends we paid in 2021.
Okay.
And looking at the income statement. Our Q3 net earnings were 10, 9% as I said that was 92 cents per share very similar but actually a little bit better than Q2, and Q1 of this year.
Basic earnings per share year to date, our Rad at $2 seven one to $2 71 compared to last year's.
$2 55, again that is for the first first three quarters of year to date.
As in prior quarters. We do include a table in the earnings release that describes our net core earnings.
Was $13 8 million in Q3 and has shown an increase in each of the last five quarters and again, we define core earnings is.
Pre tax pre.
Pre provision and pre PPP effects.
Our return on average assets on those net earnings was one 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 359% that's down two basis points from leaked linked quarter.
With the results of it were 361% and it's up from same quarter last year 19 basis points.
Since PPP activity is 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 increased 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 from four this quarter compared to.
Linked quarter of 38 basis points.
But.
As I said, we have 40% of our deposits in DDA, so that that does bring down our total cost of deposits.
It is 35 has shown is 35 basis points from the quarter and that's up from Q2 of 23 basis points.
We have had a higher interest bearing deposit beta is right at 15%, we are projecting that to increase on future rate hikes.
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 <unk> talks about the ACL.
Then looking at our non interest income.
It did decrease 278000 from linked quarter really three main reasons the biggest being gain on sale of loans decreased 544000 that 60%. Obviously volumes are down we know because of 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 and leadership our SBA department. So both of those departments should have higher volumes going forward certainly than we saw in Q.
Three.
The second reason our debit card income was down we did record an annual bonus payment in Q2 of 274000, so that made the quarter quarter on quarter non comparable year over year, though we are showing an increase in our debit card income of about 7% that's going to be.
400 to 500000 increase in.
And income topline revenue debit card and Thats due to increased volume.
Then to offset those two our first two reasons, we did have a gain on sale of an airplane asset for a gain of just under 900000 recorded this quarter.
So then looking at our expenses noninterest expense that did show an increase of 543000 as two 8% from linked quarter, primarily due to a write down that we.
Did during the quarter of 487000, and an SBA receivable that we described in the earnings release that.
We discovered that.
During the quarter.
So guidance.
On our on our noninterest expense for 2022, we'll probably have totaled.
<unk> expense was $78 5 million, that's still within our two 5% of asset metric probably going to be about $2 four 3%.
Nine 5% increase over 2021 expenses and then projecting 23.
We're looking at anywhere from around $83 million to $84 million, which again will be in within our two 5% of average assets and a show about a 7% increase over 2022 expenses.
So I'll turn it over to Shalane and show.
Talk about the next slide.
Alright, Thanks Cathy.
Next I'll cover some of the highlights of our loan portfolio credit quality and the allowance for credit losses.
As Kathy 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 from as we move into the fourth quarter.
And the slowdown was partially due to the higher interest rate, partially because we're tapping the brakes.
Rapid growth is being prepared.
Unlike me recession in the near future.
As I mentioned and if are you already know the Texas economy is still doing relatively well, but we believe that higher rates seen in part.
Borrowers capacity to repay therefore, we're tightening underwriting standards and really being pretty conservative with balance sheet growth going into 2023.
I'll provide more thoughts on the online outlet subsequent quarter in 2023 on our next slide.
Overall, our loan yields are trending upwards, our weighted average loan yield increased this quarter to $4 nine ex crystal.
Four 7% in the second quarter and from.
9% and price point.
Thank you.
Our weighted average rate of new loan originations in the third quarter was 565%, which is a whole percentage point more than the weighted average rate up one 6% that was originated during the second quarter.
Yeah.
The next bullet.
A bit about rate sensitivity for our loans, we have one.
$60 billion.
Len.
They are either fully adjustable are fully floating or adjustable at various rates.
I think in the future 206.
$64 4 million and the one.
6 billion fully sling 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 and $354 5 million, which was about 15, 7% of ice metal loan portfolio will reprice by year end.
Nonperforming assets continues to remain relatively low.
Two 8% compared to 3% in the prior quarter.
A large portion of our nonperforming assets, which are primarily non accrual loan.
Just a boiler.
Nathan accumulated pardon pardon me borrowers into were acquired from westbound bank back in 2018.
These four loans are 75% SBA guaranteed.
Our lives by two hotels in Houston.
They have total balances currently on our backs of $6 7 million of which are non guaranteed exposure at $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 immaterial allowance if any as we work through resolving problem loans and we believe that these are that 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.
Net charge offs to average loan ratio continued to be low.
Next up is the allowance for credit losses.
It had a $600000 provision for credit losses during Q3.
We had no provision during Q2, and we had a $1 million to $5 million provision release in Q1, So we're still in a $650000.
We leased situations there for year to date in 2022, but we do expect that to change going forward.
We adjusted many of our key factors earlier this year in the second quarter, especially those related to economic factors and forecast that we believe we are still mostly appropriate at the end of third quarter. So key factor adjustments. During this quarter were pretty minimal and then provision was due mostly to the loan growth that Kathy talked about.
We believe it's likely that we'll continue to make upward adjustments to our key factors as we continue to evaluate the expectations for future rate hikes. So probability then and possible impacts to our borrowers have a recession in the future.
And then continued uncertainty around the war in Ukraine, and its economic impact from the world and our nation.
ACL coverage was 129% of total loans for the quarter.
2136 in the prior quarter and 159% at year end 2021.
So next I will turn it over to Ty or unimportant.
'twenty 'twenty three outlets and asset liability management.
Thanks, Helane, so like we've been saying kind of the same for us in 'twenty three is slower growth we're anticipating that.
Part of Thats by design, and how we're going to manage the balance sheet, but part of that just the 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.
We do have a core deposit base and we have from our.
Since our founding and Thats kind of a key to our to our business model, we think will be a real advantage for us.
On the standpoint of just core funding going forward.
We do think our LCI.
OCI is very manageable we went into went into this rate increase with a very strong liquidity position and we're actually adding some duration now the portfolio, but our <unk> and our market risk to the bond portfolio is very manageable and will be even with additional rate increases and like Charlie said with.
With with space. So we are anticipating and planning our budget additional reserves.
Above and beyond what we anticipate actual losses debate, but that's just the way it seems to work well.
Didn't see or anticipate significant losses with Covid, we actually ended up having no losses during COVID-19, but we stood at $13 million of reserves just due to the way that things are worse and front end loading those.
Impacts of those factors. So we're blackerby bank I'm, assuming that's all seasonal we're anticipating.
Significant increases in our reserves just given the factors are going into this slowdown and.
The velocity of rate increase that we've seen this last year has been unprecedented and all of 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 'twenty three.
The overall bid it up to questions now and try to answer your questions anyone has.
Thank you Todd It is now time for our Q&A.
On our call. If you have any questions you can hit the raise your hand button at the bottom of the screen you are participating by telephone star nominal raise your hand star six for Amit Your line.
So our first call today, it's going to be from.
Brad Millsaps.
Just a moment.
Okay.
Brent.
Hey.
Mike coming through yes, Hey, Brett.
Hey, Tom Hey, Kathy sharing how are you all doing good.
Maybe just wanted to start on fee income I appreciate all the detail that you guys have given.
I know, obviously, the mortgage kind of piece of it speaks to.
What's going on but I'm just curious if you could talk a little about.
The SBA market issue to Abbvie 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.
Yes, so 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.
Yeah.
Well specific to SBA no. We havent retained any material pieces of SBA that we've originated it's just originations have been solved.
And that may improve as let's say as things get tougher.
SBA Department May actually have a little more opportunity but.
We have not retaining significant piece of that I mean, where.
We're budgeting and planning for fee income to be solved in 'twenty three just given the different components of mortgage warehouse in SBA and other areas that just have significant headwinds.
So that's kind of how we're looking at it with obviously.
Enjoy been presently surprised but we're anticipating.
Slowdown in fee income across the board.
But Brad I would say our guidance for 'twenty three would be in the $23 million to $24 million.
Okay. Great. Thanks. 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.
Maybe peak 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.
Kathy can you just maybe repeat what you said about maybe the timing of some of those <unk> advances.
Being paid off and rolling up the balance sheet and there was 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 Atlanta 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 were going to rollover into 2023.
Some of that will be paid down with the treasuries that are maturing.
On the on the margin, we think there's still opportunity to increase what we're seeing loans being booked at a setup 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.
I think our margin as we said in early.
2023, probably should peak in around the.
Probably $3 65 to three 7% range.
Great. Thank you guys I appreciate it.
Sure.
Our next call with you.
Matt Olney.
With statements.
Oh, Hey, Thanks, Good morning, guys, Hey, good morning, Matt.
Kathy with your commentary of the FHA being maturing securities portfolio.
Some of the.
Some of that's carried maturing there it feels like the overall asset size should see some contraction of the overall balance sheet in the fourth quarter and perhaps even in early 'twenty three am I thinking about that right.
From that standpoint, yes, Matt that's correct I'm not I think as Todd 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 an addition, too.
The pipeline.
<unk> and slowing down.
Okay. That's helpful and then I.
Taking a step back you talked about expectations for the ACL ratio to build in 'twenty three and certainly appreciate.
<unk> bag given the uncertainty in the economy can you talk more about if you still think you can grow EPS in 'twenty three versus 22, if the ACL ratio.
It does build next year. Thanks.
Well go ahead, Catherine Im going to say, if we build the.
ACL ratio like we think we are then earnings per share will not grow.
I think we will have somewhat of a less earnings and 23 due to ACL deal.
But Matt the reality is we don't see actual exposure to loss as we sit here today.
Our company in the downturn.
But like you know I mean, we're just we're seeing so we're going to have to front end load that so we're going to be we're going to be.
Putting more reserves and just given the environment will be and.
Again as anticipated any bank will be that.
That has viewed and seasonal.
Yes, no I understand.
That's how the system works 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 and the prior downturns.
Any color on how the loan portfolio has changed.
Since the 2008 timeframe.
Typically I guess it seems like back then it was much more heavily weighted towards the east, Texas and not as much in metro taxes, just any any.
Kind of Big picture thoughts you can give us on how it's changed over the last 15 years.
Matt at the portfolio has changed without a doubt I would say that.
And a good way, it's much more diversified geographically.
And.
We've been in the Metro markets now for seven eight years or so we've actually half of that period, you're referring to we've been in the some.
Some of the growth markets Metro markets and the key is our underwriting philosophy and individuals that are actually direct and credit and our company are the same individuals. So our core credit philosophies have remained the same we think are very conservative in how we underwrite and that's why we think we will.
Weathering, the downturn well, but the portfolio has changed but I would argue that.
A lot of positive way just from a standpoint, not only geographic diversification, but even sector diversification and how we look at the portfolio of just being little more resilient than different.
Different downturn downturn impacts different areas of different sectors in different parts of the state.
Okay.
Thanks, guys.
Hey, Matt.
Okay.
Our next questions are from Michael Rose with Raymond James.
Hey, good morning, everyone.
A couple of 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 of 24% year to date, I know youre talking about slowing.
Next year can you give us a sense on magnitude in terms of what you mean youre, obviously in good markets, but I assume some of it is self imposed.
Given term structure and pricing or are under pressure I just wanted to get it and not trying to pin you down, but just trying to get some semblance for.
What kind of magnitude of slowdown are we expecting there yes.
Yes, Michael I would like we've kind of put up 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 just we're seeing a slower pipeline a lot of water broke we booked.
In Q2, and three really were just part of the momentum was in our pipeline starting first of the year. So I just think.
Are they shocked if we're not if we don't see slower growth across the board.
With all banks.
Certainly we're going to be part of that and even though Texas is doing well, it's kind of a slow here too and I think thats, probably a kind of a natural byproduct and just kind of again the velocity of rates.
The rate moves we've seen this last.
This last six to nine months.
I appreciate that.
One other thing I picked up on it you guys mentioned some restructuring of 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 brought in two new leaders by both for mortgage and SBA, just we think probably.
We're able to actually take advantage of this downturn to actually bring some talent onboard.
We don't the Delta what it is going to be as far as operating expenses are minimal, but we do think that the strength, we've added to the bench and both of those areas will work well for us as things kind of improve in both those areas start seeing better prospects.
Okay perfect.
And then I think you mentioned.
Expenses.
I think in a range of 83 to kind of 84, how much of it is.
That is kind of the inflationary impact versus new hiring versus just general growth of the business. If you. If you can kind of break it down just roughly.
Well I don't have detail on that the macro but per se, but it's that's a 7% increase that were projecting and obviously that's going to be related to inflationary factors as far as.
New hires we still have new hire openings, but we're going to really monitor those into going into 2023, just because of the slowdown in the economy. So I don't foresee a lot of new hires related to that.
Okay. So most claim inflation okay. Thanks.
Thanks for thanks for taking my questions here Michael.
Our next caller will be Brady gailey with <unk>.
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 you have to 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 as it feels like the industry still has some excess deposits. So you think you can hold that flat or do you think you could potentially see some shrinkage in <unk>.
<unk> and next year.
I'd say 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 youre going to have flat assets. So you're you're capital should grow here.
Outside of changes with the OCI.
Buybacks, we're pretty limited in the third quarter. So do we think about buybacks ramping from here or since we're headed into a recession do buybacks go away.
I think I mean, we look at that Brady just based on valuation is right now our value has held up.
<unk> fairly decent so we haven't been as active in buyback, but if we saw a significant.
Drop in our valuation versus what we see the intrinsic value of the company being that we would be more aggressive with buybacks like word during the downturn with COVID-19.
So it's really dependent just on kind of where the market is relative to our view of intrinsic value the company.
Alright, and then finally for me you mentioned, a $120 million of Treasury's rolling off.
Thats a decent size of your bond portfolio do you, let that roll off and just go away or or do you think about replacing some of that I'm. Just wondering your bond books around $900. How should we think about that balance end of next year. So that we have right at $250 million in short term.
Treasuries and so about 30% of the portfolio is in those short term treasuries.
We will use some of that to actually add some duration at this point.
Because we still have 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 of those dollars and reinvest the portfolio to add duration and probably the other half that we would.
Pay down some of the best we have.
Okay, alright, great. Thanks for the color guys.
Thanks, Brian .
Thank you for your questions I would like to remind everyone that a recording of this call will be available by one P. M on our investor website relation our investor relationship page at <unk> Dot Com. This concludes our call for today. Thank you.