Q4 2022 Guaranty Bancshares Inc Earnings Call
Speaker 1: investment rates on other investments. Public fund money is most of its contracted at a certain rate and a lot of what they're seeing was a lot higher than what our contractor rate is so some of that money went elsewhere. Again our public fund money is not a large part of our deposits about 11 percent.
Speaker 2: 300 million over on our 2.7 billion in total deposits, but I think that's just kind of just to show you what we're all seeing in the banking world as far as competition. Our year-to-date, our deposits were up about 10 million, and our DDA balances actually were up 38 million in total year-over-year. So our non-interest-bearing balances still account for 39% of our total deposits, which, again, helps in that funding cost.
Speaker 3: Our Federal Home Loan Bank borrowings did increase for the quarter. That's going to be driven mainly by that loan growth and some deposit decrease during fourth quarter. At year end they were $290 million in total funding from Federal Home Loan Bank.
Speaker 4: Our shareholder equity increased obviously in the quarter due to earnings, offset by the dividend that we did pay. We paid another 22 cent cash dividend.
Speaker 5: We also did have a slight improvement in our accumulated other comprehensive income, which is the unrealized loss in our bond portfolio.
Speaker 6: So our tangible common equity ended the year at a ratio of 7.87%, down a little bit during the year due to that significant increase in the unrealized loss in our bond portfolio.... accumulated over comprehensive income.
Speaker 7: That 22-cent dividend that we paid during the quarter made a total of 88 cents for the year. That's up 10% year over year. And looking back at our history, we've got about a 30-plus year history of increasing annual dividends. I think all but two years of those 30-plus years we...
Speaker 8: We did not increase it. Every other year we increase it. Those two years, we just left them flat. We did not decrease them, but we didn't increase them. And that 88 cent dividend based on current yield is about, based on current price, is about a 2.5% yield.
Speaker 9: on that return.
Speaker 10: Then looking over at the income statement, you can see our fourth quarter net earnings were $8 million, which was down from the previous three quarters. And $8 million is 67 cents per share.
Speaker 11: The decrease or the significant event during the quarter was related to a provision that we made of 2.8 million due to our CECL modeling. Cheline will give you a little more detail on that in just a minute, so I'll not talk the detail on it. But because of that event, if you look at our...
Speaker 12: pre-provision, pre-tax, pre-PPP activity, which is our net core earnings. We've been putting this chart in there each quarter for the last two years.
Speaker 13: And you see that our quarterly earnings pre-provision, pre-tax were $12.6 million for a quarter. Our year to date was $50.2 million, and that compares from previous year, fourth quarter, $10 million and previous year 2021 of $39 million.
Speaker 14: So year over year, that's about $11.2 million increase, which is 29%.
Speaker 15: So then looking at our year to date return on average assets and again on net earnings were 1.24 stated earnings 1.24% for 2022 for the year compared to 1.36% for 2021.
Speaker 16: Again, a significant factor in that change would be the difference in the 2022 provision that we made versus the 2021 release that we did, which those two components were a swing of about 3.9 million.
Speaker 17: Return on average equity for the year was 13.76% compared to 13.72% in 2021.
Speaker 18: Again, we had really good earnings. As Ty said, we're proud of the year we did. And both these two years, 2022 and 2021, the net earnings were significantly higher than previous years.
Speaker 19: So then looking at the components, I think what everyone's focused on is our net interest margin. In Q4, it was it did show a decrease of 2 basis points. It was 3.57%.
Speaker 20: down from 3.59 in length quarter.
Speaker 21: but up from the same quarter last year of 18 basis points. Loan yields are increasing nicely as rates are rising, and we talk about that in the earnings release. Charlene will again talk some more detail on that and what rates are currently doing.
Speaker 22: But I think probably more of the focused attention is on our cost of interest-bearing deposits, probably. Something we look at all the time and made some decisions on this quarter that were not exactly what we had projected. I think as many banks, though, saw.
Speaker 23: We did see that outflow of deposits, and to remain competitive, we increased our cost of interest-bearing deposits for the quarter more than we had projected that we thought we were going to do prior to the quarter. The cost of interest-bearing deposits for the quarter were 108 basis points.
Speaker 24: In Q4, that's up from 59 basis points in Q3. Significant increase, but those are some decisions we made to remain competitive in the various markets that we're in, and we're seeing all sorts of competition, both in small bank and larger banks.
Speaker 25: then to protect our existing core deposit base. I think we put in the press release our interest bearing
Speaker 26: The cost of deposits beta increased 40% during the quarter, which is significantly higher because we made those decisions both in increasing some CD rates and our money market rates more than what we had projected.
Speaker 27: I guess a note to point out when using our non-interest bearing balances, the total cost of funds
Speaker 28: is 64 basis points. Again, we put that in the earnings release. That's up from 35 basis points linked quarter. So I'd make a total deposit data increase of 23%.
Speaker 29: And looking at non-interest income, it still remains lower than what we saw in 2021 and the first half of 2022. If you take out the extraordinary items, Q3 and Q4 were very consistent with each other.
Speaker 30: I think we're going to continue to have challenges in our non-interest income category. Back certainly last year when the mortgage rates were lower, we had a lot more gain on sale. If we look at year over year, our gain on sale in 2022 was...
Speaker 31: 55% lower than it was in 21 as about a $3 million swing. So we're projecting the lower volume going forward in mortgage activity and related fee income as we look at 2023.
Speaker 32: We did have some positive trends other than that on a non-interest income though. The debit card volume continues to increase and show good volumes. And our fiduciary income is pretty stable even in an unsteady stock market that we've experienced. As well as have a happy birthday and hope you're having fun.
in the last half of 2022.
On the expense side, we did have a little bit of elevated expenses in Q4, which sometimes traditionally we do. Each year we give raises in the fourth quarter, starting in the first part of the fourth quarter in October , as we did this year when they're warranted.
They were generally higher, the raises were generally higher this year than what we've seen in prior years, obviously due to inflation and really just the competitive pressures that we're seeing in some staff positions.
Our healthcare costs this year, as we've told you in prior quarters, up a little bit this year over last year. So we had a little bit of a catch up in Q4 to be properly funded for it.
And then the other category that you'll notice in there is our software, our technology. We're constantly looking at our software providers and opportunity, and we did make some upgrades in our core and other systems that added some cost.
in that category.
So that's a recap of the income statement, so I'll turn it over to Shaleen.
Thank you, Kathy. 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 continues to be strong in the fourth quarter because loans in the pipeline from earlier in 2022 continue to close and fund up during the quarter. But our pipeline is certainly slowing down now, partially because of the higher rates, but also because we're... Good—food market
really tapping the brakes on growth as we prepare for a likely downturn in the near future.
As you all know, the Texas economy is still doing relatively well, but we aren't totally immune to downturns either. Therefore, we're...
tightening our underwriting standards and really being conservative with balance sheet growth for 2023. And Ty will provide a few more thoughts on the loan outlook for 2023 on the next slide in a few minutes.
Overall, our loan yields are trending upwards. Our weighted average loan yield increased this quarter to 5.2% on the total portfolio, which is up from 4.96% in the third quarter. But the weighted average rate of new loan originations in the fourth quarter was 6.53%, which is 88 basis points higher than the previous quarter.
of our loans. We have around 1.5 billion of loans that are fully floating or that are adjustable at various states in the future.
Of the 1.5 billion, 256 million is fully floating, and the rest is adjustable at future dates.
Of the 1.3, this adjustable future date, about 213 of that is contractually set to adjust during 2023 along again with the 256 fully floating loans.
Non-performing assets continue to remain relatively low at 0.32% compared to 0.28% in the prior quarter.
A large portion of our non-performing assets, which are primarily non-accrual loans, consist of the four loans I've mentioned in prior quarters that were acquired from Westbound Bank back in 2018. Those four loans are 75% SBA-guaranteed, and they're collateralized by QLons or QHills Health in Houston.
The loans have total balances of 6.7 million, of which our non-guaranteed exposure is 1.7 million, and we've got about a million dollars reserved on those. We don't really expect there to be any material loss if there is any loss on those as we continue to work through those problem lines.
And then we also have a new $1.4 million land loan that was downgraded to non-accrual during the fourth quarter. The loan has...
Low LTV, and we expect that guarantee we believe are pretty strong to pay off that loan in the very near future. So we don't expect any losses on that 1 either.
Our net charge offs and our net charge offs to average loans ratio also continue to be very low this quarter.
Next up is the allowance for credit losses. As Kathy mentioned, we had a $2.8 million provision for credit losses during the fourth quarter. We also had a $600,000 provision in Q3. We didn't have any provision in Q2, and we had a $1.25 million release in the first quarter. So are the other things that
Interesting how much can change in a year, but the total provision expense for 2022 ended up being 2.15 million for the year.
So in addition to the loan growth during the quarter, we adjusted our SEASOL model to incorporate economic forecasts for a recession during 2023.
In the fourth quarter, there appeared to be consensus among economists that a recession would occur. And there was even a survey that was published by the Wall Street Journal back in October that cited 65% of the economists that they surveyed who expected a recession. So that consensus in the fourth quarter, among other factors that we looked at, provided that the market was not going to be able to move forward.
Our ACL coverage was 1.34% of total loans at the end of the quarter compared to 1.29% in the prior quarter.
Next, I will turn it over to Ty to talk about 2023 and asset liability management.
So thanks, Shaleen. So for the coming year, like we've been saying, we're anticipating slower growth. The long growth we had in fourth quarter, really was those are credits primarily that were approved in the first half of 22 that have been funding up their equity portion. So that's really the majority of that. We are seeing them.
slower pipeline in 23 as we would expect. Like Shaleen said, our state is overall doing well, but it's gonna slow here like every other part of the country. We are seeing deposit challenges. We do, a big part of our model is we do have a strong core deposit base, but.
like everyone else, we're having to compete with the market and we're in markets where banks are paying pretty aggressive rates. While we're not leading that, we're certainly defending our core deposits because a lot of depositors, quite frankly, have been earning next to nothing in the last few years and are ready to get some yield. And they're also looking at what the treasure market is all...
sense to us that we're going to continue to see that as we continue to reprice loans, but we also see our liabilities and deposits costing us more. We did have good earnings in 22, as we mentioned. Our goal when we started the year was to
try to improve on 21 because 21 had five or six million extraordinary income. Once we saw we looped that, then we thought it was prudent to go ahead and look at our factors in our CESA model going into 23 and so that's what we did in the last quarter. And like Shaleen said, we do think that it's a real strength that our
our AOCI is very manageable and not only where we are today but also even where we would look what we would look like and shock an additional 100, 150, 200 base points in increase in rates. Very manageable which means our capital is very continues to be very strong. I'll stop with that and then we'll open up for questions.
Thank you, Tara.
It is now time for our Q and a session of our call. Our first call will be from Michael Rose with Raymond James.
Michael, you can unmute.
Hi, thanks. Can you hear me?
Yes, hey Michael.
Good morning, thanks for taking my questions. Hope you're well and happy New Year. Just wanted to obviously dig into the deposit discussion. I understand that the cost of interest-bearing deposits were certainly up. Do you have a sense for what they were at the end of the year? Then as a corollary to that, what gives you confidence that you're going to be able to get to the end of the year?
you know, you can expect balances to kind of be stabilized to maybe, you know, have some slight pressure here. I mean, would you expect to fill with some higher cost funding sources just given?
kind of the pressure on betas and costs and things like that. And just wanted to get some context there. Thanks.
Well, I'll talk about the deposit balance, Michael.
Well, we're seeing and we're putting emphasis on our ICOMP with our production people is to focus more on deposits and loans. I think we're still out there trying to grow our deposits and gain a bigger customer base.
I think we'll continue to have challenges with the runoff, sure, that we talked about with either alternative investment or increased funding costs because they put the money into a CD or something that they hadn't been in the last year. But our emphasis will continue to be on our production people to go out there and...
It is still very, we still have a very stable deposit platform and we've been playing somewhat defensive with our rates but this fourth quarter we decided to be a little more aggressive and try to get in front of it so we think we we've slowed that down but we still have quite a you know quite a bit of our deposit base nearly 40% indeed.
looking for. And so even if you have a strong core funding base, you're going to have real headwinds when it comes to your funding cost with everything going on in the velocity of increase in rates that we've seen the last few months.
Okay, and then maybe kind of a follow up to that, you know, the margin was down a little bit, you know, Q on Q, but it seems like with maybe some of the other balance sheet actions.
even with the deposit pressure, that you would expect the margin to maybe move up a few basis points, because the slide reads, you know, plateau in the second quarter, and then maybe fall from there, just directionally, is that kind of the way we should probably be thinking about it?
That's generally what we're thinking, Michael. I think we'll hold off a little bit on some details on that going forward, just because we don't know the extent of how we're going to react with rate changes in the next few months, too.
Okay, and then maybe just one more for me. I think we can kind of figure out what the expenses are based on the expense to asset guide, but just on the fee income, obviously some greater headwinds. You guys had kind of talked about, I believe it was the range of 22 to...
23 to 24 million for fee income next quarter, but it sounds like it's gonna be a little bit less than that just given some of the market pressures and other things that you mentioned in your prepared remarks. Do you have kind of an updated range for what that could be for 2023? Thanks.
I think we're going to be in the 22 to 23 range on fee income. That is what we have budgeted going forward.
Okay, I'll step back. Thanks for taking my questions.
Sure, thanks Michael.
Our next questions will be from Brady Gailey with KDW.
Friday, you can unmute your line.
Hey, good morning, guys. I'm Brady.
I just wanted to start with the expense base. Your guidance of 2.5% of assets is basically where you were at in the fourth quarter. And you're not expecting much asset growth in 2023. So that—
that kind of backs in the flat expenses versus the 4Q run rate, which I don't know, maybe seems a little optimistic just given the inflation headwinds, but is that the right way to think about it? Maybe expenses will be flat from here in dollars?
From Q4, yeah Brady, I think that's what we're looking at in 2023 based on no or certainly a lot less growth in assets. So that 2.5, we're coupled with a 2.5% guidance.
But Brady, let me add this to that. I mean, across the board, we see headwinds with our expenses. We see headwinds with the income and with them. And I think that's pretty universal in my opinion with what banks are going to be faced with in 23. And it'll be up to us to go through that and create something.
create a good return, but you know you just there's there's there's headwinds really in all those key areas of our balance sheet income statement and so that's where we're a little less optimistic as far as just projecting that of where things are going to land in 23.
because of the unknowns with where these rates are going, how they're going to settle out. Okay. All right. And then I know you all made some changes in your restructured pieces of mortgage and SBA and fee income. Is there anything, you know, notably different that we'll see out of those two?
I know both are facing headwinds, but I know you've restructured both of those groups. Anything we should expect in that for this year?
Nothing specific. It's just going to be a tough year for both those areas.
All right, great. Thanks, guys. Sure, thanks, Brady.
Our next question will be from Matt Olney with Stevens.
Matt, you can unmute your line.
Hey, thanks more everybody.
Sorry, Matt.
Can you hear me now? Yes, we can hear you. Okay, great. Thanks.
Kathy, I think you mentioned previously there were some treasuries that matured in the fourth quarter. Any more color on...
When those matured, was it kind of throughout the quarter or was it weighted towards the front half or back half? What was the average yield on those treasuries that matured in the fourth quarter?
Shaleen, do you have that? I think you might have that in front of you. We had it.
$70 million mature on November 30th and another $20 million, I believe that matured on November .
24th. I don't have the yield in front of me but I can I can get that to you. They were pretty low.
They were really short term treasury bought in the first year. So yeah, they're gonna be a little.
Okay.
And I think in that deck, you also talked about more securities maturing in 2023. Is there any more color on that throughout the year consistently or is it weighted towards the front half or back half of the year?
The Treasury's
are weighted towards the front half of the year. I believe they're about 50 million. I'm pulling that up so I can let you guys know if you have another question.
In the meantime,
OK. The dollar amount she's referring to there, though, in the deck is throughout the year.
Got it. Got it. Okay. Okay.
Well, um.
I can shift over to to long growth, I guess, to buy showing some time here, but on the longer about the long. The I was able to pull it up real quick, so we've got 50Million in treasuries that are maturing in March, April and May.
and then another 20 million in September .
And
The ones that matured in November , the yield on one was.666 and the other was.880. Yeah, low yields.
Got it. OK.
Okay, that's helpful, Shorleen. Thank you for that. Welcome. And then the long growth that we talked about before, any more color.
Should we assume the long growth is going to be stronger in the front half of the year versus the back half versus what you see right now? You mentioned kind of intentional slowing of that from some of your borrowers. Do you see more color on kind of the pace of it throughout the year? I think that's fair to look at it that way, Matt. The long growth that we have would be probably the first half of the year and be...
slide to a possible decline in the second half of the year depending on how things play out.
second half of the year, depending on how things play out. Okay.
And then just, I'm also curious about your strategy around the FHLB advance. I think it's $290 million.
It sounds like you could kind of maintain that balance for a while, but would love to appreciate maybe the...
the puts and takes and kind of what's in the budget versus different options that you can see throughout the year on that.
Well, it'll depend on the timing of any type of loan or deposit change. But again, as we said in there, we got 100 plus million in bonds rolling off. The FHLB, we're just using a short-term catch-all and it's...
I think that dollar amount will stay pretty consistent to decreasing a little bit throughout the year. And we just keep it on a short term basis.
Yeah. Okay.
Okay. Thanks, guys. Appreciate your help. Thanks, man.
Our next question is from Brad Milsass with Piper Sandler.
All right, you can unmute your line.
Hey, good morning. Am I coming through?
Yeah, good morning.
You guys have addressed most everything. I apologize if I missed this, but just curious, Kathy, I know you didn't buy back any shares in the quarter. We're more active early in the year. Given kind of lack of balance sheet growth, what, any more appetite or is it still, you kind of kind of a waiting to get close there.
Well, pretty much we'll wait and see, Brad. We have a metric we're looking at, and we'll get in the market if we think it's prudent. But we were not there during Q4, so we didn't have any shares. But like I said, we bought back, was it 250,000 shares, I believe.
for the year. So we keep our same metrics out there, but we'll just have a wait and see attitude.
Got it. And then maybe sort of a bigger picture question for Ty. I know last year your goal was to earn basically a dollar more in 2022 than he did in 21. And you guys did that. I had a great year. I think everyone knows that 23 is going to be more challenging. Just kind of curious.
you know, what you would, you know, maybe not so much net income dollars, but, you know, kind of where do you want to see the bank, you know, 12 months from now? I know it's a pretty murky picture, but you know, kind of what would you classify as a, you know, successful year for guarantee of it? You know, just sort of getting to the other side of this with, you know, a bigger capital base.
a bigger reserve just ready to take whatever you can to close that. Just kind of curious if you could give us kind of a bigger picture outlook maybe similar to what you did in 22. 22
Yeah, Brad, I would say that, I mean, our main goal in 23 is to really, you know, have strong asset quality come through this cycle without any significant losses. We're going to be building reserves as we see it's prudent, have good earnings.
We'll see what that actually turns into because like I said, there's headwinds across the board. But the other side of this have stronger capital, stronger reserves, and maintain strong asset quality to be positioned to go back on offense when things start going in another direction. But it's going to be very much a defensive year.
for us at least, and I think probably a lot of banks, as we're really trying to defend our core funding base, really defending asset quality, and trying to defend earnings, and from just the different expense structures that have been under pressure the last couple years.
and obviously the income. So across the board it's a year, it's going to be a year that our goal will be to you know be in a better place than we are today and and that's saying a lot going through a you know what could be an economic downturn in the storm.
That's helpful. Thank you guys appreciate all the color.
Thank you guys, appreciate all the color. Sure, babe.
We have another question from Matt Olney.
Thanks for the follow up. Just sticking with this bigger picture theme, Ty, I guess the bank has been able to maintain this return on assets above 1% now for a number of years. You mentioned all the headwinds from off the direction.
Just curious about your expectations if you think you can continue to maintain this ROA north of 1% with all the headwinds out there.
So Matt, I don't think we would go below 1%, but now that being said, there's a lot of unknowns and so depending on the reserves, we feel prudent that we need to put into our reserve account during the year. We'll obviously be looking at expenses very closely.
we're going to manage those aggressively. And the rest of it is just the market side of, from mortgage to SBA, different income departments. You know, there's just not a lot of opportunity out there right now. So I don't see us dropping below 1% because we're going to be pulling a lot of levers to avoid that, but I can't say it wouldn't happen either.
Again, it's not the lack of clarity that we obviously had during COVID, but there is a lot of unknowns out there with everything going on. Until we see where the Fed's going to land with rates and kind of how hard or soft this landing is, we're just being pretty cautious in how we think about things going forward.
I will say during COVID we set aside 13 million in reserves and we didn't actually have any losses. So the fact that we set the reserves aside in 23 are just part of the CECL modeling and I can see a setting aside for more reserves if we see further deterioration in the economy. Whether that turns into actual credit loss or not will be our primary focus to see that it doesn't.
But, so there's, that's a long way of saying I really don't know the answer to that question. But certainly that would be a goal that we would try to defend would be a 1% our way.
Thanks for that commentary, Ty. I kind of just followed up on that around CEASL and the allowance.
You mentioned in 2020 kind of the big, the big build there. I think you got the ACL ratio up to that that 180% level in 2020 I know people's kind of always always evolving, but just just curious you think that's still is you know it's a 180 number still.
the realm of possibility here this year? Or do you think you see the models kind of evolve over the last few years which would make that less likely? I think it's less likely. I think the worldwide pandemic was a black swan event that...
deserved a lot of, you know, real conservative assumptions with where things were going. I think this is as dire as that. That being said, again, we're looking at a lot of unknowns from the economic standpoint. We keep coming back to the fact that we're proud, you know, glad we're in Texas, because the Texas economy overall is strong. So
I'm hopeful that on the other side of this, we fare better than most parts of the country, but this, you know, there's just a lot of things, you know, a lot of uncertainty out there that creates some uncertainty on our part, but I don't think it's near as dire as something that we were dealing with in 2020, which was COVID. And
But we're just we're being cautious with how we look at it because there's a lot of unknowns and again the velocity of these rate increases and and how the feds pulling liquidity out of the system and with such, you know, such scale that's somewhat unprecedented and that's the part that makes me a little cautious.
Understood. Okay. Thanks guys. Appreciate your help. Thanks Matt. Absolutely Matt.
Thank you for your questions and I would like to remind everyone that a recording of this call will be available by 1 PM today.
today on our investor relations page at gnty.com.
Thank you for attending and this concludes our call.