Guaranty Bancshares, Inc. (NASDAQ:GNTY) Q1 2022 Earnings Conference Call April 18, 2022 11:00 AM ET
Company Participants
Ty Abston – Chairman and CEO
Cappy Payne – Senior Executive Vice President and CFO
Shalene Jacobson – Executive Vice President and Chief Risk Officer
Conference Call Participants
Brady Gailey – KBW
Michael Rose – Raymond James
Matt Olney – Stephens
Brad Milsaps – Piper Sandler
Operator
Good morning. Welcome to the Guaranty Bancshares’ First Quarter 2022 Earnings Call. My name is Nona Branch, and I will be your operator for today’s call. A reminder that this call is being recorded. After the 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 Abston
Thank you Nona. Good morning everyone. Welcome to our call for the first quarter, earnings call for Guaranty Bancshares’. As we noted in our press release this morning, the company had a very good quarter. We had very strong growth and good earnings for our company. As we mentioned, we did unwind all of our COVID related reserves and Shalene will go through that in a little bit. We did offset most of that negative or that release with additional reserves on some of the macro factors we’re seeing out there and the economy and everything going on right now and we’ll discuss that further too.
I’m going to turn it over to Cappy Payne to go through the numbers. And then when we’re done, we’ll do Q&A and cover anything you’d like to cover, Cappy?
Cappy Payne
Thank you, Ty. Thanks for joining us, everyone. As Ty said, we had a good quarter, starting off 2022. A lot of key components on our balance sheet saw nice increases. Our total assets were up $104 million for the quarter now stands at just under $3.2 billion. I think obviously the biggest component of that component of that is loans. They closed that little over $2 billion. And looking at the growth for the quarter ex-PPP and warehouse lending, we had a nice increase of $157 million, that’s 8.6% of those loans when you when you take out PPP and warehouse.
The other big changes as you saw in the earnings release was a was a 50 plus percent increase in our bond portfolio, putting some of that excess liquidity, liquidity to work Shalene we’ll talk a little bit about that in a minute. And we can answer any questions you might have on that later on also. But really the biggest driver of that growth and assets was created by our growth and deposits. Deposits grew again nicely this quarter $127 million for the quarter, and they’re now $2.8 billion. We continue to add core deposits and open new checking accounts just like we did in 2021. At quarter end, our DDA accounts were — non-interest bearing accounts were 38% of our total deposit. So a good portion of those being in core DDA checking type accounts.
You’ll notice our shareholders equity did decrease during the quarter a little unusual; it decreased about $10.3 million, that’s driven by a negative market value swing, just that just right at $17 million that went through our OCR, or other comprehensive income category and our capital account. That’s related to what is now a unrealized loss in our securities portfolio.
At the beginning of the quarter, we had a $6 million unrealized gain in net portfolio, and that, that move to the end of the quarter, fell to $11 million unrealized loss in the bond portfolio. So there’s that $17 million swing, which is about $1.40, $1.45 of tangible book value. We also bought back shares during the quarter, a little over 56,000 shares at spin and a little over 2 million, right at $2 million, and we paid an increased cash dividend of $0.22 for the quarter. That’s up from $0.20 in Q4 of 2021.
Of course, the positive to our capital account was our good earnings that Ty was talking to — talking about. For the quarter, we reported $0.89 per share, $0 88 fully diluted, that’s related to the $10.7 million net earnings that we reported in Q1. And those earnings were up $1.6 million from linked quarter. The biggest drivers of those the extraordinary in comparing quarter-to-quarter would be the release of provision Ty alluded to $1.25 million. And then the gain on some swap transactions that we terminate a swap that Shalene will talk about in a little bit. And that’s a non-interest income 685,000. She’ll talk about the process of that. Even looking at our core earnings, and we define that in our earnings release is pretax, pre-provision and pre-PPP. It was the highest it’s been in the last six quarters and our Q1 core earnings were 10.9%.
So looking at our — on the income side, our NIM stayed pretty steady. Our stated NIM was 3.37%, that’s down two basis points. Looking at it ex-PPP activity, or NIM was 3.30% down three basis points, so really, really pretty steady. Our loan yield slipped a little bit, still strong at 4.59% at ex-PPP. But that’s down seven basis points. We did, as I said booked quite a few loans. So looking at our yield on new loans originated they stayed steady for the quarter, they were 4.22%. And that’s compared to 4.24% and linked quarter.
Then our cost of deposits remained steady for this quarter. They are 18 basis points and they are 18 basis points in Q4 of last year. So they have they’ve remained steady. Looking at our non-interest income category, it’s showing up 7%. Again Shalene is going to give us the details on the main driver that being the termination of the swaps. But I will say if you looked at the components of that, our mortgage volume was down as expected a little more than what we thought I’d think I had projected last time it’d be 12% to 15%. It was down 20% linked quarter and actually down 35% from a year ago when mortgage activity was really at it’s highest. I’ll speak to a little bit about that in just a second.
Looking at our expenses, they were up slightly about 103,000 for the quarter. The main driver continues to be employee compensation and benefits. Three quick points, I think, to that regard. The first one is we did on-board five new production officers in Q1. Three of those are in the Central Texas region, one in the DFW region and in one SBA.
And then the second bullet point I’d say is we did have a turnover in leadership in our mortgage division, and there’s going to be some added staff there most likely in Q2 related to that as we develop in a more defined strategic plan and mortgage. And that staff will probably should include both production and back office. So that change that we’re looking forward to going forward.
And then I — third bullet, bullet point, I think we addressed this last quarter too. We still have about four to five key production positions open that are currently not filled but likely to be filled sometime in 2022. We’ll see. And those are production positions in Houston, Central Texas, and DFW mainly. So that’s a quick recap of the balance sheet, Shalene, I’ll turn it over to you.
Shalene Jacobson
Thanks, Cappy. Next, I’ll cover some of the highlights of our loan portfolio, credit quality and the allowance for credit losses. Luckily, our economy here in Texas continues to be outstanding. Hopefully, most of you have received our annual report by now which we highlight several really interesting statistics about the growth in our state and economy.
Last year, Texas was number one on the U-Haul, One-Way Growth index. So we’ve got lots of people coming to our state and I think as a result of that, partially as a result of that loan demand has been really strong as well. As Cappy mentioned a moment ago, excluding PPP and warehouse loans, our loans increased about $157 million or 8.6% during the quarter. Our loan yields excluding PPP did slip slightly during the quarter to 4.59% compared to 4.66% in the previous quarter. However, we hope that downward trend will soon reverse itself as rates increase as some economists and others predict that they will. So we included some information about rate sensitivity here in the presentation and in our release.
We have about $1.3 billion or 65% of our loan portfolio that have variable rates. And so if rates increase as expected, which we estimated as 50 basis points in both May and June, and 25 basis points in each of the remaining fed meetings during 2022, then $346 million or 27% of those variable rate loans will reprice by year end.
So the loans that aren’t repricing are really because of their next repricing date being after December 31 2021 and not because of loan rate floors. So we as of March 31 2022, we have $685 million of loans that are at their floor rate. But if rates increased 75 basis points, 83% of those would be above their loan floor rate and at 150 basis point increase 97% would be above their floor rate. So again, the loans that are not going to be repricing by year end, or because their next route pricing date is in 2023 or 2024.
And then we also crunch some numbers and basically said, assuming no payoffs or modifications under the scenario described repricing would provide us with an estimated additional loan interest income of about $2.8 million between now and year end. And then we also have a few bullets illustrating recent non-performing asset and charge-off trends which continued to remain low.
For the allowance for credit losses, as Cappy mentioned, we recorded a reverse provision of $1.25 million during the quarter. We’ve seen significant improvements in COVID related health statistics and economic impacts of COVID during the first quarter in our communities, so as a result of that we fully unwound the remaining COVID specific Q factor in our allowance methodology. However, the effect of unwinding that COVID specific key factor was really offset quite a bit by growth in our loan portfolio. And then we also did make some adjustments to some of our standard key factors for uncertainties related to inflation, uncertainties related to the impact of increases in interest rates on our borrowers, and then overall, geopolitical concerns such as the war in Ukraine and Russia. As of quarter end, our allowance coverage excluding PPP loans was 1.46% which is down from 1.64% at year-end.
On to the next slide, we talk a bit about PPP updates and asset liability management and other items. Nearly all of our PPP 1 loans have been forgiven or are paying as agreed, and all of the related deferred income has been recognized. We made really good progress on PPP 2 forgiveness during the quarter, with only about 19.1 million remaining on our books and unrecognized deferred fees of about $477,000.
As both Ty and Cappy mentioned, we did terminate some interest rate swaps that were used to hedge three month Federal Home Loan Bank advances. So we paid off those advances that were $40 million. And then we recognize the $685,000 net gain on termination of these swaps, which is included in other non-interest income on the income statement.
We also deployed quite a bit of excess cash to purchase securities, including about $270 million and short term treasuries that mature from August of 22 through March of 24. And then we purchased about $30 million of agency mortgage backed securities, all of the purchases in 2022 are classified as held to maturity. And if we continue to buy more, we’ll classify this as held to maturity as well, in order to take some of that volatility out of the AOCI and tangible book value hopefully. And then we will continue to maintain a conservative stance on our cost of total deposits and in raising rates, there given our excess liquidity position. As of quarter end 38 1% of our total deposits are non-interest bearing, so that helps as well.
And then finally, back on March 4, we issued $35 million in subordinated notes with a fixed rate of 3.6% to 5%. So it sticks for five years and then converts to a floating rate equal to the three month term so far, plus a spread of 192 basis points until it matures in April of 2032. And we’ve already been able to put quite a bit of that money to work through the share repurchases that Cappy mentioned earlier.
So that concludes our presentation today. I will now turn it over to you all for questions.
Question-and-Answer Session
Operator
Thank you, Shalene. [Operator Instructions] Our first call today will be from Brady Gailey with KBW.
Brady Gailey
Hey thanks good morning guys.
Ty Abston
Good morning, Brady.
Brady Gailey
So you have several moving parts within spread income with the termination and also with this bond book growth. I think you ended the quarter at about 800 million in bonds. But it seems like you have a little more cash that you could put to use there. How should we think about the bond balances going forward?
Ty Abston
So Brady, its Ty. So we, this quarter, we purchased quite a few bonds. And really they’re short treasuries, so we started to kind of build a ladder from six months out to two years just because everything has gone on the yield curve. And that leaves us with about $150 million, $160 million or so in Fed Funds. That’s kind of a peg bounce for us. So I wouldn’t, we’re not going to probably be moving a lot of additional funds into that program. But we certainly could. And we just were taking advantage of the yield curve, the shift in the yield curve and felt like it made sense and still kept us very short as far as those bonds.
Brady Gailey
Okay, all right, that’s helpful. And then on the expense side, it sounds like you’re making some changes in mortgage and maybe growing that group more now. How should that impact expenses? I know before we’ve kind of talked about a $76 million to $77 million expense run rate and will that be higher given the changes you’re making in mortgage this year?
Cappy Payne
Yes, a little bit. Brady, this is Cappy. I would say our run rate will be in the $77 million, maybe $78 million range going forward to this year.
Brady Gailey
Okay and then yes, I think mortgage fees, depth a little more than you thought any update on how you think your mortgage and just overall fee income will trend for the rest of the year?
Cappy Payne
I think we’re — as we’re deploy this new team, we’re going to think of different ways to be more productive and get more production off of our staff. So I think that that will increase going forward, or well, I’m assuming as late as — I think it will not continue to decrease. I think we’ll be flat for Q2, and then we’ll Q3 and Q4 we’ll see how that can, how we can grow that.
Brady Gailey
Okay. All right, great. Thanks guys.
Cappy Payne
Thanks Brady.
Operator
Our next call will be from Michael Rose with Raymond James.
Michael Rose
Hey, good morning, everyone. How are you?
Ty Abston
Hey, Michael.
Cappy Payne
Hey good morning, Michael.
Michael Rose
Hey, so really strong loan growth this quarter. And you mentioned that the pipelines still remain, pretty strong. Previously you guys have talked about kind of a high single digit growth rate, you’re well above that. If you annualized, this quarter’s growth, ex-warehouse, ex-PPP, any sort of way we should think about it? Is — are you seeing any pull forward of growth, some rebuilding of inventories? And then conversely, do you have any caution as we potentially move into the back half of the year just given obviously, some of the key factors for, it went up for environmental concerns? Thanks.
Ty Abston
So Michael, there’s, like I mentioned, I mean, there’s a lot of positive things going on in our state. And we’re certainly participating in that. And I would guide, on an annualized basis, low to mid double digits, for our growth. But like I said, in my press release, I mean, with all the things going on they are positive. We still have growing concerns from a macro standpoint of things that are going on, obviously, outside of our control, with inflation, rising rates, and there’s geopolitical environment, things going on around the world. So all those things collectively create some real concerns. And so that’s why we added additional reserves. We, like I mentioned, we took COVID out of our, our reserve models, but we doubt and some additional concerns we have from a macro standpoint, so we’re going to continue to be cautious as we look at opportunities to grow the company. And as we were certainly underwriting with that caution, and but there’s just a lot of very positive things happen in our state, but those things can be, those things can be side lined as well with macro advance.
Michael Rose
Okay maybe as a follow up to that. So if I look at kind of post a one seesaw, your reserve was around the 120, 1.2% range, you guys are a little bit above that, obviously, negative provision this quarter is kind of walk through. Do you still feel like there’s room to bring that down over coming quarters, just given how strong the asset quality metrics are? Or would you expect to be, somewhat cautious just given the broader economic concerns?
Ty Abston
It’s going to be more of the latter Mike. I mean, we’re going to, we’re still going to, obviously, we have very strong asset quality, but just the factors that we’ve put in place, and just our overall thoughts on things I mentioned, we’re going to maintain pretty conservative reserves for the foreseeable future.
Michael Rose
Okay, and then maybe finally, for me, you guys repurchase a little bit of stock this quarter, but I think your program expired at the middle of last month, is there any plans to potentially put another one into place just given a performance of just bank stocks in general, yours included, and be a little bit more opportunistic here. Just any sort of thoughts on buyback would be great. Thanks.
Ty Abston
Yes, Michael. We got we have that already teed up, and that will be renewed this week.
Michael Rose
Perfect. Thanks for taking my questions.
Ty Abston
Thanks Mike.
Operator
Our next call was from Matt Olney with Stephens.
Matt Olney
Hey, thanks, morning, everybody. I want to circle back on the long growth commentary. It sounds like the guidance is a little bit more optimistic now than it was previously. I think last time we talked in January, you talked about the concern of loan pay downs are going to remain elevated and possibly accelerate. I’m curious what you saw on the pay down front in 1Q and what the expectations are now for the full year with respect to the pay downs and what that updated guidance now assumes.
Ty Abston
So Matt, pay downs definitely slowed in Q1 and we anticipate that kind of maintaining its current pace. That being said, the things I’ve been talking about, really, it’s hard to, to gauge that, but pay down, slowed down. And some of the things we’ve had in pipeline, ending the year, kind of came to fruition, and we’re able to close in Q1. So I still, I’m confident that guiding [ph] higher based on those two factors, and just overall strength we’re seeing in our footprint. But again, just try not to get ahead of ourselves with everything else going on.
Matt Olney
Okay, yes, thank you for that.
Ty Abston
Sure.
Matt Olney
And then on the deposit growth, some really good numbers in 1Q just remind us of the seasonal nature of the banks deposit base, just trying to appreciate what the expectation should be for the rest of the year with respect to deposit growth?
Cappy Payne
Well, I don’t, I don’t think we’ll have that type of growth going forward, Matt. But normally in Q1 we see pretty good growth in deposit public funds deposits. And that did not happen this year. So we none of that growth for this quarter was really related to deposit public fund money. So when you separate that out, typically, public fund money will decrease in Q3, and Q4 and increase in Q1 specifically. I think that will pan out and that back then we’ll have a little bit of a decrease there. But as we continue to open up new accounts and new markets, and we really emphasize the total relationship as we’re even as we’re finding loan customers to add a checking accounts and deposit accounts with it. I think that that pace will slow down, but I don’t see a big drop off.
Matt Olney
Okay, thanks for that, Cappy. And then just last question for me, I want to dig in a little bit more on the loan floors and the expectations of repricing some of those loans. And I was a little surprised that the disclosure that 27% of the variable rate loans would reprice higher under that rate scenario, you guys disclosed. Shalene, I think you were saying this is more of a timing issue, because it sounds like the loans are going to be above the floors for a while. But contractually, it can still be several months before you receive the benefits of higher rates. Anymore color you give me on the timing aspect of those loans?
Shalene Jacobson
So yes, it definitely is the floors really aren’t going to play a significant factor because we’re estimating that they’re raising the rates so quickly. But, yes, we have quite a few loans that reprice every 12 months or every 24 months, or maybe they’re fixed for a period of time, and then they move to variable. So we’re including those within the 100 or the 1.3 billion of variable rate loans that we mentioned. So, so it really is just a timing issue. I don’t have the numbers. I’ve got some people pulling a report that can tell me exactly when the remainder will reprice. But it will be majority of that will reprice in 2023 with some going over into 2024 because most of our variable rate loans that reprice over a period of time will be 12 months.
Matt Olney
Got it. Okay, thanks, guys. I appreciate your help.
Ty Abston
Thanks, Matt.
Operator
Our next call will be from Brad Milsaps with Piper Sandler.
Brad Milsaps
Hey, good morning, guys.
Ty Abston
Hey Brad.
Cappy Payne
Hey Brad.
Brad Milsaps
I just wanted to maybe delve into the margin a little bit more. Can you guys, give me a sense of kind of the rates on the bonds that you purchase during the quarter. And obviously, you’re going to have your benefit from an exchange here, just kind of how you’re thinking about, the NIM, Cappy sort of rate hike side?
Cappy Payne
Well, the bonds we purchased during the quarter as time Shalene both mentioned were pretty short term, a lot of taking advantage of that shift in the yield curve. A lot of the treasury notes that we bought were again, six months to two years. So those rates weren’t very high, it’s just more effective putting our excess liquidity to work quicker. And that will work until they mature. We did buy a few mortgage backs. Not much really. But that yield, that yield was somewhere in the in the 3% now. So, that’s a pretty good increase from what they were about a year ago when at about 1%. So again, getting back to what Ty said, I think well, the bond portfolio growth will probably will slow down quite a bit. As far as the loan growth and putting those loans to work quicker, or putting those loans on the books in Q1 got that margin work and a little quicker. So I, I think we continue to see a little bit of shift or decrease in the loan yield, but they’ll start going up here and cube in the second half of the of the year for sure. So I don’t see much of slippage at all in our margin. I think we can we can really play defensive on our liability side still, that will we’ll see an increase in cost of funds as rates go up, no doubt, but not to the pace that they change our prime for sure.
Brad Milsaps
And just to follow up on that point, Cappy, have you guys I know, this is tough to predict. But if we do get that rate scenario that that you guys laid out in the deck, that would result in your loan portfolio repricing as you expect, what do you think that would do to the right side of the balance sheet? What is your crystal ball, say sort of on deposit betas, at very various levels of rates going up?
Cappy Payne
Well as I said, we’re going to have to increase rates on deposits, there’s no doubt. We’re going to do that to be competitive, it just not going to keep up with the same pace. But I guess, I guess, if you will, if it’s a 20% forever 20% for every 50 basis point increase, or something like that. And or any increase in prime or an increase in Fed Funds, would be our increase in deposits.
Brad Milsaps
Okay. And then finally, just maybe a question for Ty, the five new producers that you brought over, did with a contributor at all, during the first quarter? And then to the extent they were they weren’t what would be your expectation on what those folks can kind of bring in, is that a big part of sort of your increased loan guidance as you think about 2022?
Ty Abston
No, Brad, it really I mean, yes. Producers we on board in the last 12 months were part of that growth, but honestly, it was part of it was really across our footprint. All four regions that we’re in really had strong a strong quarter. So our expectations yes, new producers will be part of that our growth the rest of this year, but our existing producers and our existing footprint, big part of the equation as well.
Brad Milsaps
Okay, great. Thank you guys.
Ty Abston
Sure. Thanks Brad.
Operator
This concludes our Q&A session for our call. I would like to remind everyone that recording will be available at gnty.com in our Investor Relations page by 1 p.m. today. Thank you for attending. Goodbye.
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