GNTY (2021 - Q2)

Good morning. Welcome to the Guaranty Bancshares’ Second Quarter 2021 Earnings Call. My name is Nona Branch, and I will be your operator for today’s call. This call is being recorded. After our prepared remarks, there will be a Q&A session. 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. Ty Absto

Thank you, Nona. I too want to welcome everyone to our call this morning. It’s our second quarter earnings call and investor presentation for our company. We are very pleased and proud of the results for our company for the second quarter and for the year today and also encouraged with what we’re seeing in the Texas economy and the economy overall and opening up after COVID. So we continue to be pretty optimistic about what we’re seeing out there. That being said, we’re also continuing to be cautious in how we underwriting, look at credit and other opportunities we see in the company as we always are in every part of the economic cycle. I’ll turn it over to Cappy first. Let him start going through the numbers and we’ll kind of go through this presentation. Cappy?

Thank you, Ty. Good morning, everyone. Let me recap the balance sheet, then we’ll talk about the income statement and just basically hit the highlights. We did finish Q2 with 2.93 billion in total assets, pretty comparable to linked quarter when we had total assets of 2.89 billion. And comparing one year ago, assets are up about 266 million or 10% year-over-year. You'll notice on the balance sheet, our cash and cash equivalents, that been mainly Fed funds, increased again this quarter. We've talked about that in the past quarters. It continues to remain elevated, close to 3x our historic level. And this additional excess liquidity accounts for approximately 25 basis points decrease in our NIM, and I'll talk about that in just a minute, but just wanted to highlight that. Looking at our gross loans, they were down linked quarter by 22 million. They totaled 1.89 billion. But looking at loans, net of our PPP and warehouse lending, this quarter shows an increase in loans of 23 million. We had a pretty sizable decrease in our PPP loans, which is understandable because of the forgiveness. They were down right at 31 million. And then our warehouse lending lines were down another 14.2 million. Our year-to-date loan growth net of these two factors of PPP and warehouse lending is 51.7 million. And that's annualized for the full year via 6.3%. So that's a little bit of detail in our core loan products. We did fund more loans in Q2 than we funded in Q1. But again, I think the wild card here is the payoffs, they were elevated also in Q2. We had two significant loan or pretty big loans payoff right at the end of Q2 that totaled right at 30 million. So even with that, we still had pretty good loan growth, ex PPP and warehouse lending. Our Q3 pipeline remained strong. So we're optimistic that we'll be able to book new loans going forward. Again, I think the wild card would be the payoffs that either come from a sale or from a refinance at yields or terms that are just not attractive for us. I think Ty's going to speak more of this here in just a little bit. Looking at the deposit side, deposit showed another increase, having increased 58 million linked quarter and that's 247 million year-to-date. So that's about a 22% annualized increase for 2021 so far. Again, back to the high liquidity impact, our deposits have shown nice increases. We're adding new deposit customers no doubt. But some of this increase we know is due to the government stimulus programs, the PPP funding and even consumer savings pattern. So we'll see how that plays out in the second half of 2021. Our non-interest bearing deposits currently are 36% of our total deposits. They increased 50 million linked quarter and 149 million year-to-date. So that's 60% of our year-to-date loan growth being in non-interest bearing deposits. Then looking at our shareholders’ equity, it grew 7.7 million linked quarter and 15.1 million year-to-date. Again, this quarter, we did not buy back any stock and we paid a $0.20 dividend actually for each of the two quarters in 2021. Looking at the income statement, as Ty alluded to, we're very pleased with our net earnings performance for the quarter and year-to-date. And if you look back, our trailing 12-month earnings are at historic highs, reflecting an earnings per share of $3.44. We've had four really strong quarters, so we see that continuing and even in the back half of '21. As we look at our net earnings trends, do keep in mind that all prior periods have been adjusted as if the 10% stock dividend we issued in Q1 of this year was in effect for each full period. So those have been adjusted accordingly. Our net earnings for Q2 were 10.4 million. That's $0.87 per share compared to linked quarter of 11.0 million or $0.91 per share. That's an annualized ROA and ROE for Q2 of 1.42% and 14.64%, respectively. And again, this quarter, as we have I guess now for the last five quarters, we have provided additional tables in these releases that highlight our net core earnings, which is earnings before credit provisions or releases and before income taxes and before PPP effects. So we ex out PPP. So in the table in this release, we do have our net core earnings. Let me -- I guess give you a parenthetical note here. There is an error in these tables. This is non-GAAP and its supplemental information only. I think that error is really immaterial. But in full disclosure to everyone, we're going to issue an 8-K revision on these numbers. Again, it does not affect our income statement, does not affect the balance sheet. But to give you a full disclosure on trend analysis, I think we need to restate this and again, year-to-date is correct. But in Q2, we're going to show our net core earnings of 9.8 million and in Q1 is going to be 9.4 million. Those really just reverse -- the two quarters reverse because we put all of our cost to book PPP loans in Q2 when it should have been spread out in two years. Again, year-to-date is correct. This is only supplemental information and it's non-GAAP, but full disclosure. So that will be coming out and we've talked to most of our analysts already about that. Okay. And continuing on, we still have headwinds and our margin just as I said driven mainly by our excess liquidity accounts. But as I guess some positive notes of that, I mentioned new loans booked in Q2 outpaced the dollar amount booked in Q1. But I guess even better, or certainly good news is the yield on these new loans did not drop. It’s very consistent quarter-to-quarter. And you'll notice in there we have a table where our loan yield ex PPP loans was 4.82% in Q2 and that compares to 4.79% in Q1. You also might have noticed our investment securities did increase during the quarter, about 40 million. We’re buying some mortgage back in treasuries, but really not adding significant duration risk. And don't foresee that going forward really, even with the excess liquidity. And then on the deposit side looking at our cost of deposits, which include non-interest bearing deposits, they decreased 3 basis points during the quarter to 24 basis points in Q2. And that compares to Q1 of 27 basis points. So there's about 3 basis point drop. And then a year ago, we were 54 basis points. So, we've dropped them quite a bit. And I think there will be a little bit more room for some decrease, but it's going to be just very few basis points as we look forward. Most of those deposits have been repriced now, be pretty consistent. After our margin, then you'll notice we did have a reverse of our allowance totaling $1 million. Shalene will give more detail on that here in just a minute. Looking at our non-interest income, we did have a slight decline linked quarter. That was driven mainly by an 11% decrease in our gain on sale of mortgage loans and in mortgage fee income. Our interchange debit card fee income you'll see was 1.9 million. That's up due to volume increase. And also our annual bonus for our MasterCard contract came in this quarter totaling 225,000. Looking at our expenses, our non-interest expense increased 391,000. That’s 2.3% linked quarter. About two-thirds of that is in our employee compensation costs. And due to continued improvement in earnings, we did accrue more bonus payable during Q2. We accrued about 300,000 more in Q2 than we did in Q1 in our bonus payables, and that's related to earnings. So that pretty well accounts for almost all of that increase. So I think our run rate looking forward on expenses is going to be in the 71 million to 72 million range, that should be achievable. Then our efficiency ratio as stated was 60.12%, pretty comparable to Q1. And then if you ex out the PPP and looking at it, it's about 64.7%. Both are slightly up from linked quarter. As a recap of the balance sheet and income statement, I'll turn it over to Shalene.

Thank you, Cappy. I'm going to cover COVID-19 response deferrals and PPP for the quarter. With respect to COVID-19, all of our locations are open, all of our employees are back in their offices and branches. However, we are continuing to monitor the developments of the new delta variant and other virus variants that are out there as well as increases in COVID hospitalizations unfortunately in Texas and really across the nation. If we need to take measures to increase social distancing or additional mask mandates, we'll certainly do what needs to be done to try and keep everyone safe and reduce the spread of the variants and the virus. As of June 30th , there are no remaining principal and interest deferrals related to COVID. There are seven loans totaling about 42 million that are primarily hotel and hospitality that remain on interest-only deferrals. But all seven of those are expected to return to contractual payments this quarter, the third quarter of 2021. All of those loans seem to be doing well, occupancy levels are improving and we don't expect really any issues with those returning to contractual payments. We did have a good quarter for loan forgiveness under PPP1 and we also originated quite a few additional loans under PPP2. As you can see here, for PPP1, we originated last year in 2020 about 210 million of loans. And as of June 30th, we've had 183 million of that 210 million forgiven, which is about 87%. We really were excited to see the SBI finally forgiving some of our largest SBA loans that we originated during that first round during the second quarter. So during the first and second quarter of this year, we also participated in PPP2. Some people call it 3, but I think technically it's PPP2. We originated about a little over 100 million of loans under PPP2 to about 1,350 borrowers. We're not yet taking forgiveness applications on those. We're still kind of monitoring the SBA’s developments and further guidance from them on that, but we hope to be able to start taking forgiveness applications on those soon. So now I will turn it over to Ty to talk about our loan portfolio and growth plans.

Thanks, Shalene. So the loan portfolio remains strong and asset quality bank remains strong. We still have right at 60% of our loan portfolio in rate floors, which has helped us kind of defend that net interest margin. As Cappy mentioned, we had brought up 1.5% growth in loans for the quarter. So I guess that's mid-single digit growth through kind of annualized. I'm going to continue to stay with that as kind of a goal of mid-single digit, maybe higher single digit and not say double digit, because we're seeing our portfolio has a pretty short duration. So it always has a lot of paydowns, which is the sign of a healthy portfolio. But we also saw in Q2 some paydowns that we really weren't anticipating to happen when they happened. But we are -- our pipeline is strong and our pipeline across our footprint is really strong. We continue to be very selective in the credits that we look at and are willing to bring into the bank, and so we're going to continue to hold our credit quality and credit standards to where they've been. But even with that, we're able to find really strong credits and good opportunities across our footprint. So we're encouraged by that. We do have two additional locations that are going to open up in Austin MSA and Georgetown Lakeway in Q3. We have strong lending teams there. So we're pretty optimistic about our continued growth in the Austin MSA as well. As far as asset quality, again, our non-performing assets are really low. Non-accruals are low. As you saw, Q1, we had some charge-offs, which were almost I think 90%, 95% related to two, three loans we acquired with Westbound Bank two and a half years ago that we actually had them reserved well in excess of what we actually experienced in losses. So we had some releases. But net of those acquired loans, our charge-offs have been pretty nil. And, again, overall, the asset quality company remains really strong. And that's always been a primary focus for our company. It's going to continue to be and we're going to continue to look for opportunities to grow the loan book, but also do it in a way that we're comfortable with as far as the risk profile of what we're looking at. We did have and not to step on Shalene’s CECL talk, but we did have a negative revision for the quarter. We put in right at 13 million and last year, if you'll remember, with COVID and with our asset quality, our intention is to hold as much as we can, which is where we are with the credit cycle with growth, it makes sense. But we're still -- we're going to have to release a little as we go along just to maintain the integrity of our models. And so we did have a small provision release. We may have some more in second half, but the intention and the goal is to be pretty conservative with that and try to hold as much as we can going into '22. Shalene, would you speak to a little more detail on CECL?

Sure, yes. Thank you, Ty. So our $1 million reverse provision during the quarter was primarily due to reduction in our COVID specific Q factor, which I've talked about, in several of our prior calls. But basically, what we did back in March and April of 2020 is our CECL model has standard Q factors that we've got built into it. But when everything really started going bad in March in April of 2020, and it was really all related to COVID, rather than try and make adjustments to our standard nine key factors, we created some benchmarks and some baselines based on macroeconomic factors in the Texas economy that added about 55 basis points to our reserves that were specifically resulting from COVID. So as the Texas economy is starting to show some positive trends from that baseline that we had back in March and April of 2020 and it's really showing some improvement, we've been cautiously unwinding that COVID specific factor and then while still making some adjustments to our regular standard key factors. So during the quarter, we reduced that COVID specific Q factor by about 14 basis points. And we're anticipating during the second half of the year continuing to unwind that, assuming that the economy continues to improve and we're able to not see really any major negative effects of these variants and other COVID issues going on. So that's still a big unknown, we're not sure, but we've modeled out CECL through the end of the year. If our growth meets that expectation of around 6% to 7% and we do slowly unwind those COVID specific factors throughout the year, we'll have a reverse provision of approximately 3 million. But again, that's assuming that COVID continues to improve and not decline or not make the economy and other factors worse. So as of the end of the second quarter, our allowance for credit losses as a percentage of total loans was 1.67%. And excluding PPP loans, it's at 1.79%. I will now turn it back over to Nona for some Q&A.

Thank you, Shalene. It's time for our Q&A session. Our first question today will be from Michael Rose from Raymond James. Michael, you should be able to unmute your line and speak to the panel.

Can you hear me?

Yes, we can. Hi, Michael.

Hi. How are you guys? Thanks for taking my question. Just wanted to dig into the pipeline a little bit. I know you guys have hired some lenders. How much of the pipeline is coming from some of those lender hires and how much more of it is just generally coming from the market and just general business growth? I was down there to visit with you guys and a couple other banks last month and it did seem like there's a lot of activity in and around the Dallas market. But if you can just give us an update on what's going on there and maybe some of the other markets just to get a little better handle around what the pipeline looks like today, because it seems like it continues to grow? Thanks.

Yes, Michael, so the pipeline has been growing. It's probably a stronger pipeline as we've had in our history really. It's primarily coming from the DFW and Austin market. And then also, we're seeing some strength in Houston. The East Texas region, like I've mentioned before, has had some real strong activity after COVID. And that's been really encouraging. But as far as overall dollars, I would say it's probably 50% -- 60% of Dallas, Austin and then 30% Houston, the balance being in East Texas region. As far as the breakdown of that, I would say probably a third of that is new producers we brought on the last 18 months. The rest is just kind of our normal and ongoing business development efforts.

Okay, great. And maybe just one follow up. I wanted to talk about the commentary in the press release around the margin and the ability to hold it here. Should we take that to imply that kind of ex the remaining PPP fees that you guys think that there's enough in place even with the yield curve flattening here for you guys to actually maintain and potentially expand the core margin? I know you grew securities this quarter. And maybe if you can just give us an update on if purchasing more securities and growing that as a percentage of assets is part of the plan to help stabilize the margin and hopefully grow NII? Thanks.

Yes. Go ahead, Cappy.

Well, I don’t think that. I did say we do continue to have headwinds. We were encouraged that the new loans booked were pretty steady. They're still a little bit less than what we said the total loan book is, which was right at 4.82%. I think we'll still have headwinds. I just don't -- I think we could drop a few basis points, but nothing -- I think we can defend it and nothing significant. But I don't see us growing our net interest margin from here in the near future.

Yes, let me add a little bit, Michael. That's kind of what I was going to say too is that we think we can defend the margin with the floors we have with kind of our cost of funds. We think we can defend the margin, but it's not going to -- we don't see it growing until yields start growing. With our bond portfolio, we remain pretty conservative with how we're looking at that. We could move $200 million in securities tomorrow and it would improve our short-term income. We just think that that's probably not with rates where they are and like a lot of people, we're seeing real inflation. We'll see whether that's long term or not, but we just don't think it makes sense long term for us to move significant dollars into securities. But at the same time, we're not willing to make the bet on the other side either, just stay in cash. So what we've been doing is there's strength in the bond market with the yields and we're starting to buy in tranches if we go along each quarter. We’ll see the bond portfolio grow each quarter likely, but it will not be significant. So that is costing us NIM. But we just think longer term, it makes sense if our rates are today. But again, we think we can defend our NIM. We don't think it's going to expand until overall rates start moving in a favorable direction for banks.

So with that in place and with the expected loan growth, which seems like it's going to be a little bit higher than mid-single digits, do you actually think you can grow NII dollars over the next couple of quarters?

I'm going to say no on that, Michael. I would be pleased if we do. I'm just being cautious with the overall interest rate environment where we are, and the fact that we're just being conservative with how much liquidity we're sitting on versus buying securities. And so our goal-- the last 18 months and remains going forward the next year or so is to defend our NIM. And then obviously be positioned well when rates start moving up to some normalized level to be able to expand at that point.

Okay. Thanks for taking my questions.

Sure, Michael.

Thanks, Michael.

Our next call will be from Matt Olney with Stephens.

Hi, guys. Good morning.

Hi, Matt.

I want to ask about M&A. And we keep hearing data points that the M&A chatter is improving in Texas. Love to get your take on just Texas M&A chatter overall. And then how engaged the bank is with M&A discussions with other banks. And then when you think about the M&A for Guaranty, remind us of the strategic priorities for the bank?

Matt, this is Ty. So we are hearing a lot of additional talk, M&A talk throughout the state without a doubt, probably as active as I've heard in long time. And we're in those conversations I would say any bank below 1 billion pretty much where at some point we're in the conversation. We are going to be pretty selective with how we approach that like we have been. If it's a bank that makes sense for us, it fits kind of our strategy, it's in one of our four regions and that we can do a deal that makes sense, it's not overly diluted to our company, then we're very, very interested. But we're going to be disciplined with how we approach that. We've had a lot of conversations. We'll see if that develops into an actual transaction. We're going to stay, like I said, within our four regions. I would say kind of the profile we're looking for is 200 million to 600 million. We would look at a larger deal than that, but probably not a smaller deal. But again, it has to be in the four regions. It has to be a transaction that we think that markets that would be a good cultural fit for our company. There are markets we want to be in that the economics makes sense for us. We just finished our strategic planning, kind of updating our strategic plan post COVID and we did some really careful modeling on our company going forward the next three years. And without swinging for the fences, just base hits without including any M&A, we create a lot of intrinsic value of this company next three years. And so kind of our litmus test on everything, be it M&A or any other strategic decisions we're making, is that it has to be accretive to that plan. And the execution risk, we have to be comfortable with that. So anything we are seeing that's accretive to that plan, then we're moving forward with. But if we can't get comfortable that it's accretive to the plan that we think we can execute on pretty confidently, then we're going to be disciplined on how we approach it. So we are more interested in the East Texas region that we worked pre-COVID. Like I've mentioned, we're just seeing real strength there. There's a lot of relocations going on around the country and even within the state to some of the more rural markets with remote work, and that's added some real strength to some of those markets. So we're looking at opportunities in the East Texas region as well as the metro region as well.

Okay. That's perfect, Ty. Thank you. And then switching gears over to PPP for round one, it sounds like there's not many more fees to be recognized but round two and over $2 million of unrecognized fees. And I think I heard you say you're not yet taking the forgiveness applications yet for round two. So I guess the question is how are you guys thinking about the pace of recognizing those remaining fees?

Well, I'll pick that up, Matt. We have not opened that up. I think we're going to open it up pretty quick. I think the pace will go faster than round one. We don't have it all projected to hit in the second half of the year, but we have probably two-thirds of it just in our mind projected. None of it's in the budget. But it all depends on obviously the pace of the SBA. Round one really -- once it got going, we cranked up pretty quickly. So we still got close to 3 million in round one and round two to 2.8 million. So we'll get some of that in the second half of this year.

Okay, great. Thank you, guys.

Okay. Our next call will be from Brady Gailey with KBW. Brady, you should be able to unmute.

Hi. Thanks. Good morning, guys.

Good morning, Brady.

So you guys have been fairly active in the buyback the last couple of years in 2019 and even more so in 2020. And with the stock having -- all bank stocks are at pullback, but you guys are in there too. The stock is a little cheaper now. Maybe just updated thoughts on how you think about the share buyback?

We're going to continue to be optimistic on that, Brady. Where the current valuation is we're starting actually to run numbers on it. And certainly, our stock below 30 starts getting pretty attractive as far as just, again, kind of what we're modeling out intrinsic value that we create of next three years, and kind of what we see as far as just value of the company. So we maintain a line of credit in a holding company that's unfunded. I think it's currently at 10 million and have excess capital so we can take advantage of buyback opportunities, and we will, as we see that the valuation makes sense. Very similar to the 10 million or so we repurchased in 2020 when the valuations were really low. And if we see opportunities to buy Guaranty, we'd much rather buy Guaranty than another bank. So we'll certainly be in there aggressively doing it.

Okay, great. It's good to hear the more positive tone on loan growth going forward. Maybe just -- I know you gave a little bit of color on hiring, but has the pace of hiring slowed, is it consistent, like what are your plans on additional hires from here?

It's probably slowed, Brady. We did a lot of that in 2020 kind of during the downtime, kind of getting prepared for the opening. And so we on-boarded quite a few lenders to our footprint, the last 12 months. So from here, it's going to be a slower pace other just replacing lenders maybe, but we don't -- we're not going to have a lot of net growth on the credit side as far as personnel would be my estimate at this point.

Okay. All right, great. Thanks, guys.

Thank you, Brady.

Our next question will be from Brad Milsaps with Piper Sandler.

Hi. Good morning, guys. Am I coming through?

Yes, Brad. Hi, Brad.

Hi. You've addressed most everything. Was just kind of curious on the $30 million of payoffs that you mentioned that came near the end of the quarter. You said you kind of weren't anticipating those. Just curious, were those payoffs as a result of other banks coming in and just undercutting your rate or terms, or are these just maybe construction loans, they got termed out in the secondary market or something else? Just kind of curious what might be behind some of those paydowns?

So, Brad, I would think the majority of the larger one was actually a transaction that moved out into -- can you hear me okay?

Yes.

Okay. I think one of the larger ones the last week of Q2 was a loan that moved out into our money center bank on a non-recourse basis. And that was kind of the design upfront. That customer is consolidating around $250 million block to go into a REIT and we're doing some interim financing for him as he moves to that in much smaller pieces. And then he's rolling those into non-recourse financing with all the money center banks. And so that we thought was going to come in Q3. He's actually already backfield another request as part of that program. So that was one of them. It hasn't been a situation where we're losing credits to direct competitors. But there are non-bank lenders out there that are doing some pretty aggressive things. And we're seeing some opportunities and some frankly either are pricing or structure, we're actually recommending clients take them. If they're going from full recourse to non-recourse, things like that, or on longer term lower rate loans, then we're recommending those clients take those opportunities and understand that they're still our customer and we'll still do business with them.

Got it. Great. That's helpful. I appreciate all the color today.

Sure.

Thanks, Brad.

That concludes our Q&A session for today. I want to remind everyone there will be a recording of the call available by 1 PM today on the Investor Relations page at gnty.com. We appreciate you attending today.