Guaranty Bancshares, Inc.
Q1 2021 Earnings Call Transcript

Published: 19 Apr 2021

[Operator:]

Good morning. Welcome to the Guaranty Bancshares’ First Quarter 2021 Earnings Call. My name is Nona Branch and I will be your operator today. 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 Board, the company; Cappy Payne, Senior Executive Vice President and Chief Financial Risk Officer; Shalene Jacobson, Executive Vice President and Chief Risk Officer. Today, our call -- to begin our call, I will turn it over to our CEO, Ty Abston.

[Ty Abston:]

Good morning, everyone. Again, welcome to our first quarter call, where we're going to do a presentation for you, as Nona mentioned and go through that and then answer any questions you have. We have had a good quarter. We're very -- feel very good about how things are opening up in our economy, in Texas, and pretty positive about not only the overall state of the economy in Texas, but the markets we're in, and kind of how the bank's prospects look for the remainder of the year. So we'll go through some of these numbers and the key points we want to present to you and then we'll answer questions. Cappy?

[Cappy Payne:]

Thank you, Ty. Good morning, everyone. Let me -- I’ll quickly kind of go over a few highlights of both the balance sheet and the income statement. I think many of you have seen the earnings release that was obviously put on the wire this morning. So I'm not going to read anything to you, but our balance sheet trend really over the last five quarters has been continually moving a little higher. I think, again, most of you have seen this in the industry. Our total assets at quarter end were $2.89 billion, that’s up $150 million linked quarter, and $500 million from a year ago. We know a lot happened this year, no doubt. And most bank’s balance sheet, as I said, probably have expanded due to the PPP and the multiple stimulus payments. So there's probably a trend you're seeing a lot of. For my focus this morning I'll just -- I'll address mainly the loans, deposits and liquidity. You'll notice on the balance sheet our temporary investments, mainly our Fed Funds increased significantly linked quarter. We continued to have strong liquidity due to the increase in deposits. I'll get more into detail on that on the earnings mix. Our earnings asset mix, I guess here in just a minute though. Loans obviously make up the biggest part of the asset section. Loans are up $45.5 million from prior quarter, as most banks have, Guaranty participated in round 2 of the PPP. We started that funding during the quarter. And this quarter in round two, we funded $84 million in round two and was offset by a decrease in round one of pay downs or forgiveness, I guess if you will, of approximately $66 million. So the net increase in PPP loans for the quarter about $18 million. The other $27.5 million in growth came in just -- came in our loan book mainly in our central Texas, DFW and Houston regions. Those markets were up nicely. And if you ex out that PPP, net growth was an annualized about 6.4%. Then on the deposit side also showed a nice increase. We were up $189 million or 8.3% and ended the quarter at $2.48 billion in total deposits. I think worthy to note is that that's a -- this is a $475 million increase from a year ago. As we've seen in the last 12 months, I know we've talked about it in prior calls, I think just customer spending habits, PPP funding, the stimulus payments just probably as an overall increase in savings patterns have contributed to this increase in deposits. And we continue to have a high percentage of that, of our deposits in non-interest bearing which is now at 35% of total deposits.

[Shalene A. Jacobson:]

Great. Thank you, Cappy. So with respect to COVID we are definitely seeing more activity on the roads, in stores and in restaurants around Texas. As you all know, our Governor Abbott removed all COVID-related restrictions a couple of months ago. And there are still some local or business specific restrictions, but we're definitely starting to see people get out a lot more. The local news reports also indicate the people are making progress with vaccinations. They definitely appear to be more readily available. So we're optimistic that we can achieve that herd immunity goals sooner rather than later and hopefully get back to normal. And speaking of normal, all of our lobbies are back open at normal banking hours now. We still have approximately 10% to 15% of employees working remotely. We expect all of them to return to their office or in bank work environments by May the 1 of this year. We are excited to say that we again participated in the PPP round 2 program, which began in January and is expected to go through May 31, or until those funds are depleted. As of March 31, we originated $84.5 million of PPP, round 2 loans to 932 borrowers. We recognized origination income from those loans of $1.8 million during the quarter, and we deferred $2.1 million net of origination costs of $392,000, which Cappy just mentioned.

[Ty Abston:]

Thank you, Shalene. So like I said, we're seeing increased loan demand and loan opportunities in all of our markets across our footprint. Obviously, there's a lot going on in the DFW market. The Houston market is active. The Central Texas market, particularly Austin, MSA is very active. We're opening two locations, additional locations in the Houston region, Lakeway, Georgetown and have we think strong lending teams there that should help us grow, continue growing that Austin presence. We're seeing -- I think I mentioned this last quarter, surprising through all this, we're seeing a lot of strength and opportunity in our east Texas regions, in our footprint opportunities and really strength that I haven't seen in 30 years. It's -- we're seeing opportunities as far as loan opportunities in the East Texas region. We're seeing deposit relationship opportunities and just strengthened real estate prices and activity. And think a lot of that has to do with really with COVID because a year ago, that really -- we didn't see that strength.

[Shalene A. Jacobson:]

Okay, great, thanks, Ty. There was no ACL provision or reverse provision in Q1. Within our CECL model, we have nine standard qualitative factors that we developed as part of our methodology, that when COVID began in early 2020, we chose to create a hopefully temporary COVID specific Q factor, which we've described in prior filings and earnings calls that added about 55 basis points of reserves to our portfolio. So the Texas economy is showing some positive trends from the baseline that we used to develop that back in March and April of 2020. The economy here was really at its worst. So throughout the upcoming year, what we plan to do is cautiously unwind that COVID specific qualitative factor that we put in place while transitioning some of that COVID residual risk, or really any other risks that come about during the year back to our standard nine qualitative factors within the model. So during Q1, we reduced the COVID specific Q factor by about 14 basis points. But that was offset by some growth in our loan portfolio, as well as some adjustments we made to the standard qualitative factors for items such as concentration changes in certain segments and possible impacts of tax rate increases on our borrowers over the next couple of years. So as a result of those changes, our first quarter allowance for credit losses, excluding PPP loans is now at about 1.87% of total loans. As we unwind that COVID specific factor that I was telling you about, we don't anticipate that we're going to release all of the effects of that. We do think that there's going to be some research old COVID risks that we're going to account for in our standard qualitative factors. So we're going to be cautious and conservative about releasing that but we do believe that if our portfolio continues to grow and the asset quality trends stay as they are that we probably will need to release some additional reserves throughout 2021. So Ty and Cappy, unless you have anything else to add, that concludes our planned remarks, and we can turn it over to Nonette for Q&A.

[Operator:]

Thank you, Shalane . Our first call today is from Matt only with Stephens. And Matt, your line should be unmuted.

[Matt Olney:]

Okay, great. Thanks. Good morning, guys. Can you hear me?

[Ty Abston:]

Sure, hi, Matt.

[Matt Olney:]

I'll start, I guess with Ty, you made some interesting comments about seeing some surprising strength in the East Texas markets. It's great to hear this. It sounds like the bank could benefit from this. But for the last several years, I think you've worked hard to move into some other Texas Metro markets in order to get more growth. If you're starting to see a shift of more growth in East Texas, does it give you any pause to your growth strategy in other markets? I'm just trying to appreciate if the trend continues. Is there any strategic shift we could see?

[Ty Abston:]

Thanks, Matt. No, no, there would not be a change in our overall philosophy in view of the fact that the majority of the growth in Texas, the next 20 years are going to be in the DFW-Central Texas-Houston regions. But what it has done is increased our focus and attention that we're paying to the East Texas markets as far as opportunities we see to grow within the East Texas footprint. So I wouldn't -- it doesn't change the strategy. But it's definitely something that we're looking at as we're updating our strategic plans. We see opportunities in these types of region that we just haven't seen in a long time. So we think that's a net positive, but we're going to continue the strategy of growing throughout our footprint.

[Matt Olney:]

Okay, got it. And then on the deposit side, another great quarter of deposit growth. Any more details you can provide about the pace of the growth in the quarter? Was it steady throughout the quarter? Or did it accelerate towards the end? Or what have you seen in recent weeks? I’m trying to appreciate if this growth can continue in the near term.

[Cappy Payne:]

I'll answer that Matt. No is a pretty steady growth during the quarter. I think, again, part of that's going to be the some of the PPP money that's just kind of hanging on to be conservative on businesses' balance sheets. But it we've seen, I think each month was an increase in deposits now. So I will say this, about $30 million of that is public fund-related. I failed to mention that and it should have. But traditionally in Q1, that's an increase in public fund money. Each first quarter we get growth in public fund money, and then it starts going out in Q2 and Q3. And it starts building back up in Q4. So that's pretty traditional. So part of that was lapped but now we did -- we've seen a continual increase in deposits throughout the quarter.

[Matt Olney:]

And then, Cappy, it sounds like you're still not very excited about investing liquidity in a securities portfolio. I would love to hear how you guys are thinking about that, that potential and when you would consider that more throughout the year?

[Cappy Payne:]

Well, we did increase our security portfolio, you'll notice, the end of period in Q4 to end of period in Q1 of this year. As I said, we're going to gradually go into it some. We're not going to leave all that money parked on the sideline. But a couple of thoughts, as I alluded to that the rate environment isn’t great and it does potentially put in a lot of interest rate risk in an upgrade environment which at some point in time we're going to have. And two we do plan on our loan growth continue upward. And we think we can deploy more money in Q2 and Q3 specifically in the loan book. But we are willing to take a little bit of a decrease in earnings and I guess some headwinds to the NIM by keeping that money parked on the sidelines a little more conservatively.

[Ty Abston:]

Let me add a little bit to that Matt. We like, Cappy said I would look at what we're doing basis dollar cost averaging in the bond portfolio where we did have concerns with rates being as low as they are, buying in the bond portfolio and adding to the bond portfolio. But that being said, it's a bet on the other side to sit on all cash and not buy bonds. So we're just -- the intent is to buy bonds as we go along in each quarter. But as Cappy said though, we're also planning to continue to grow the loan book and deploy some of that liquidity in the loan portfolio. Our model continues to be to develop core deposits. And so one thing we're -- I'm doing a video for employees after this call, and we're talking about the next quarter and the fact that we're going to get out again and go on offense and be out in customers -- in customers’ businesses, and doing calls and developing core deposit relationships and core loan opportunities for the company. So -- we're going to continue to develop our deposit base. We're going to be thoughtful in how we deploy it, certainly in the bond -- longer bond side or bond market instruments, but we're still also looking at deploying more of our liquidity into loans as we grow throughout the year. We're still guiding kind of mid-single digit loan growth. That's probably going to end up being a little conservative, but we're still being a little cautious with how we got going forward given there's still some unknowns out there. But again, overall, we're very confident and pleased with what we're seeing as far as the strength in overall economy in Texas.

[Matt Olney:]

Okay, great. Well, thanks for the commentary and Nonette I’ll hop back in the queue.

[Ty Abston:]

Thanks, Matt.

[Operator:]

Okay, our next call is going to be from Brady Gailey with KBW.

[Brady Gailey:]

Thanks. Good morning, guys.

[Cappy Payne:]

Hey Brady.

[Ty Abston:]

Hey, Brady.

[Brady Gailey:]

I wanted to start with the PPP income. I know you highlighted, as about $3.5 million this quarter. How do you envision that income playing out for the next couple quarters going forward?

[Cappy Payne:]

Well, we have -- this is Cappy. We have more loans that we are booking in Q2. So we do take some of that when we book it. So there'll be a little bit more increase because of that in Q2, but then it's going to really depend on the forgiveness piece going forward, especially in round 2. I think they pretty well got it figured out. The SBA got the program figured out, as we're seeing round 1 being forgiven. We're down quite nicely in it. And some of that will continue. Obviously, that will continue to go down. So we'll get some income in Q2, 3 and 4, I think for round 1 and for round 2. But it's hard to model out how much, how quick the SBA will get that money to us. But we do see a pretty good amount to be recorded yet in 2021.

[Brady Gailey:]

All right. And then, I heard your comments about not being as interested in the buyback. Obviously, the stock has done really well. It's almost two times tangible book value now. Maybe on the flip side, is that you have a currency that is more valuable now. What's your take on bank M&A? And we saw a big deal last week in Texas, but what -- I know you guys have bought some nice franchises over time, but how are you thinking about bank M&A with you guys as a buyer?

[Ty Abston:]

Brady, this is Ty. Let me take that. So we're definitely looking at opportunities throughout our footprint. We're seeing increased conversations. It does help that we have -- our stock price is stronger. And I think you'll -- I mean, I think you'll see some additional activity in M&A throughout our state. And we're definitely in those conversations. Certainly banks will vary in the calls that they make. And so we're going to continue to be disciplined with how we approach that. But at the same token, we think it's a pretty good opportunity, not only where our stock is at but just opportunity with the economy and everything to possibly do some acquisitions as we go forward. So that's -- I mean, we're obviously more focused on that today than we were a year ago. And we think that'll continue at least for the foreseeable future.

[Brady Gailey:]

Okay, so then lastly, for me, is just on loan growth. I know you guys just touched on it. You're sticking to your mid-single digit loan growth guidance, but the tone definitely feels a lot better. I mean, would it be far off to think about you guys doing double digit loan growth for the next couple of years?

[Ty Abston:]

That wouldn't be out of the possibility -- of the realm of possibilities, no. I mean, but we'll try to kind of give more detailed guidance on that as we get through midyear. But yes, we were seeing a lot of opportunities mid-single digit may prove to be conservative, without a doubt, and we'll try to update as we get further into the year.

[Brady Gailey:]

Great. Thanks, guys.

[Ty Abston:]

Thanks Brady.

[Operator:]

Our next question will be from Brad Milsaps of Piper Sandler. Brad, you should be ready.

[Brad Milsaps:]

Hey, good morning. Am I coming through?

[Ty Abston:]

Yeah, Brad.

[Cappy Payne:]

Hey, Brad.

[Brad Milsaps:]

Hey, guys. You guys have addressed most everything, but wanted to follow up on the loan growth. I think last quarter that you mentioned, you hired six new lenders in the fourth quarter. And those folks kind of averaged anywhere from $30 million to $75 million at their previous banks in terms of their loan portfolio. I don't think your loan growth guidance of mid-single digits included any production from those folks. But just curious, did they drive any of the growth in the first quarter? Have you hired anyone else new? And does that production from them maybe kind of bridge to maybe some higher loan growth levels as you move through the year?

[Ty Abston:]

So Brad, this is Ty. So yes, that definitely gives us tailwinds on our loan growth with the lenders we've brought online, I would -- I don't think there's a lot of their production in Q1, maybe a little bit. But we've brought on at least one other lender, I think since your last call, maybe two. So yes. And that's what I'm saying that as we get to midyear, we'll give some more detailed guidance on that, on loan growth. But without a doubt we have tailwinds there with not only just what's going on with overall economy, but with the lender, lending teams we've brought on -- within our different regions.

[Brad Milsaps:]

Great, thanks. That's helpful. And I hear you guys loud and clear on not willing to maybe add to the bond portfolio, but I do think it's interesting, the yield there stayed relatively flat for three consecutive quarters. Just kind of curious through how you've been able to do that even though, you are reinvesting kind of what you're buying and kind of where new bonds are coming on kind of relative to the book yield?

[Cappy Payne:]

Well, one -- this is Cappy. One reason for that, Brad is for years now, we've been on the level yield accounting method that takes a little bit of rodeo out of that in how we amortize the premium and accrete the discounts. And we've been doing that for 6, 7, 8 years now for quite a while. So that makes the yield a little a little more level. So that's the main reason why it has stayed consistent. Now some of the bonds obviously, they were bringing in are going to be a little bit lower. And I think that's going to weigh it down some and has, but the main reason is the accounting treatment is the level of interest level -- level of interest rate.

[Brad Milsaps:]

Okay. And then finally, Cappy 42 basis points on interest bearing deposit costs. How much more room do you think you have to drive down lower?

[Cappy Payne:]

I think in Q2, that will go down. I think, probably not the level of nine basis points that we did comparable to linked quarter, but there is room for it to go down more, I would say in the five plus basis points. So it's going to continue to improve in Q2.

[Brad Milsaps:]

Okay, great. Thank you, guys.

[Ty Abston:]

Thanks, Brad.

[Operator:]

We have another question from Matt Olney.

[Matt Olney:]

Thanks. Nonette, just to follow up with respect to credit and the $50 million of loans that are interest only, that on that six month window, I guess, when does that window start to expire for the majority of those borrowers and remind me how those loans of the $50 million how are those currently rated internally? And could we see additional downgrades over the next few quarters as that six month term expires? Thanks.

[Ty Abston:]

So thanks, Matt. So this is Ty. So they are all coming out of that program, I believe at the end of Q2, I think every one of them. So they'll go back on contract in Q2. We have them graded very conservatively in house. We don't see exposure in those credits and we haven't from day one. Like I said, we just wanted to give them some relief on some of the -- on the principal portion of payment. But the loans have a group that -- and I believe the majority of the dollars are actually with one group that has strong liquidity and strong guarantor support and actually have very low LTV. So we're very comfortable with the credits. We just gave them that program to kind of get them through this but we will actually be upgrading and not downgrade them from where we have them.

[Matt Olney:]

Okay And Ty as far as the resolution of those lingering credits in the first quarter, I think those were mostly hotel loans in that Houston market. I think from our side, we're trying to understand that the market value of these hotels post-pandemic. Is there anything else you can you share with us about how these hotels are being valued today versus pre-pandemic?

[Ty Abston:]

It really depends. But we're seeing we see different valuations for different sectors in hospitality. But overall, I will say it strengthened quite a bit. There's quite a bit of money out there looking to invest in hospitality. And so for instance, one of these had two or three different people trying to buy it. So I think my best guess is valuations are actually getting back to with 80% before they were pre-pandemic. Again, I mean the challenge in hospitality is always the the supply side of how many properties are brought on line. And that's pretty much been muted and will be muted going forward. And so we are going to start seeing some real opportunities in occupancy and think you'll see a real improvement in that area. So we're -- I mean, the valuations then improve without a doubt. They're not probably back where they were 100% pre-pandemic, but they're getting closer.

[Matt Olney:]

Okay, thanks. And then on the loan balances, any color on the mortgage warehouse balance, the change from last quarter?

[Ty Abston:]

No, nothing specific, specific. We just -- we saw quite a bit of growth in the warehouse space, as well as the mortgage division. And that's starting to level out a little bit from where we stand today, but it was a strong quarter and kind of followed up with a strong quarter in fourth quarter. So both our mortgage and warehouse kind of run in tandem. And we're just seeing a lot of opportunities, there as people refinancing and purchases and I don't see that growing materially, but I think it's going to continue to run at a pretty good pace.

[Matt Olney:]

And lastly for me, on the fee side, we saw some really good strength on merchant debit card fees. Is that -- I mean, that's both sequential and year-over-year. Is that growth we've seen recently, is that surely volume-based or is there some other nuances that have also supported that growth over the last year or so?

[Ty Abston:]

Go ahead Cappy.

[Cappy Payne:]

That's volume base. And we've seen an uptick in that and that's going to continue. I think Q2 will be stronger than Q1. I'm pretty, pretty sure it will. I mean, it's just strongly that we have a strong volume there. And we did renegotiate that contract a couple of years ago and we're seeing the benefits of that also somewhat.

[Matt Olney:]

Okay, sounds good. Thank you guys.

[Ty Abston:]

Thanks, Matt.

[Operator:]

Okay, there are no more calls in the queue. We'll give it a few more minutes. A few more seconds. Since there are no further questions I want to remind everyone that the recording of the call will be available by 1 pm today, and will be posted on our Investor Relations page at gnty.com. Thank you for attending our call today. And it is now concluded. Have a good day.