Guaranty Bancshares, Inc. Reports Second Quarter 2023 Financial Results

Guaranty Bancshares, Inc. (NYSE: GNTY) (the "Company"), the parent company of Guaranty Bank & Trust, N.A. (the "Bank"), today reported financial results for the fiscal quarter ended June 30, 2023. The Company's net income available to common shareholders was $9.6 million, or $0.82 per basic share, for the quarter ended June 30, 2023, compared to $8.3 million, or $0.69 per basic share, for the quarter ended March 31, 2023 and $10.8 million, or $0.90 per basic share, for the quarter ended June 30, 2022. Return on average assets and average equity for the second quarter of 2023 were 1.17% and 12.87%, respectively, compared to 1.01% and 11.18%, respectively, for the first quarter of 2023 and 1.35% and 14.85%, respectively, for the second quarter of 2022. The increase in earnings during the second quarter of 2023, compared to the first quarter of 2023 was primarily due to a one-time gain on the sale of nonmarketable correspondent bank stock of $2.8 million. Without this one-time gain, net of tax, earnings for the quarter were $7.3 million¹, or $0.63 earnings per basic common share.

"We are pleased with several positive developments during the second quarter that continue to strengthen our balance sheet and drive long term shareholder value. The Bank has strong asset quality with historically low nonperforming assets and we expect our credit quality metrics will continue to experience benefits from the robust economic environment in Texas. We put our excess capital to work and repurchased 322,601 shares of stock during the quarter at an attractive average price of $25.13 per share. Our earnings were good with earnings per basic share, net of extraordinary items, of $0.63 per share¹. We've also been able to defend our NIM relative to peers with a 3.19% tax equivalent margin, a slight decrease from the prior quarter. During this period of lower asset growth, we'll continue to focus efforts on our strategic plan execution, improvements to net interest margin and operational efficiencies throughout the Company," said Ty Abston, the Company's Chairman and Chief Executive Officer.

QUARTERLY HIGHLIGHTS

• Excellent Asset Quality. Nonperforming assets as a percentage of total assets were 0.11% at June 30, 2023, compared to 0.40% at March 31, 2023 and 0.30% at June 30, 2022. Net charge-offs (annualized) to average loans were 0.03% for the quarter ended June 30, 2023, compared to 0.00% for the quarter ended March 31, 2023, and 0.02% for the quarter ended June 30, 2022. During the second quarter, four nonperforming loans that were acquired from Westbound Bank with combined balances of $6.7 million were resolved and paid off with minimal charge-offs. An additional nonperforming loan with an outstanding balance of $1.4 million was resolved and paid off with a minimal charge-off.
  
  
  
  Commercial real estate (CRE) loans, particularly office related loans, have received increased scrutiny in recent months. Our CRE loans and real estate C&D loans represent 38.2% and 14.8% of the total loan portfolio, respectively. Office-related loans represent 4.4% of the total loan portfolio and have an average balance of $541,000.
  
  
  
  Although asset quality remains strong, we adjusted certain qualitative factors during the second quarter to incorporate industry-wide concerns over CRE valuations and the possibility of higher-for-longer interest rates, which could impact cash flows and repayment ability of borrowers. These qualitative adjustments, along with minimal charge-offs and a slight reduction in the loan portfolio, resulted in no provision for credit loss in the second quarter of 2023.

• Granular and Reliable Deposit Base. As of June 30, 2023, we have 85,615 total deposit accounts with an average account balance of $29,693. We have a historically reliable core deposit base, with strong and trusted banking relationships. Total deposits decreased by $20.6 million during the second quarter, which consisted primarily of a decrease in public funds balances of $28.1 million, a decrease in other deposits of $52.3 million, partially offset by an increase in brokered certificates of deposit of $50.0 million. The bank has not historically used brokered deposits and does not foresee a reliance on them going forward, but issued these deposits during the quarter to test their availability as a contingent liquidity source. We also had an increase of approximately $7.0 million in collateralized repurchase agreements, which are shown on our balance sheet as a separate line item than deposits, but would be classified as deposits if not for the repurchase agreement.
  
  
  
  As an additional resource to our uninsured depositors, we implemented both the IntraFi CDARS and ICS programs during the second quarter of 2023. These programs allow CD and money market deposit customers, respectively, to obtain full FDIC deposit insurance while maintaining one time deposit or savings relationship with our Bank. Excluding public funds and bank-owned accounts, our uninsured deposits as of June 30, 2023 were 22.31% of total deposits.
  
  
  
  We continued to increase interest rates paid on deposits during the quarter in order to pay competitive rates, however noninterest-bearing deposits still represent 35.2% of total deposits. Our cost of interest-bearing deposits increased 50 basis points during the quarter from 1.91% in the prior quarter to 2.41%, representing a beta on interest-bearing deposits of approximately 105.6% for the linked quarter compared to the federal funds target rates. Our cost of total deposits (cost of funds) for the second quarter of 2023 increased 35 basis points from 1.18% in the prior quarter to 1.53%, representing a beta on total deposits of approximately 73.9% for the linked quarter.
  
  

• Strong Capital and Liquidity. Our capital and liquidity ratios, as well as contingent liquidity sources, are solid. We are taking advantage of low stock prices to repurchase shares of Company stock and add intrinsic value for shareholders. During the second quarter of 2023, we repurchased 322,601 shares, or 2.8% of average shares outstanding during the period, at an average price of $25.13 per share. Our liquidity ratio, calculated as cash and cash equivalents and unpledged investments divided by total liabilities, was 12.9% as of quarter-end. Our total available contingent liquidity, net of current outstanding borrowings, is $1.5 billion, consisting of FHLB, FRB and correspondent bank fed funds and revolving lines of credit. Finally, our total equity to average assets as on June 30, 2023 is 9.1%. If we had to recognize our entire unrealized losses on both AFS and HTM securities, the ratio would be 8.3%^†, which is still well capitalized under regulatory requirements.
  
  
  
  
• Investment Portfolio Discipline. During late 2021 and early 2022, we had significant excess cash but did not believe the low yields on investments at that time warranted the interest rate risk. To slightly improve the yields meant investing in securities with much longer lives. Because of this disciplined approach, our total unrealized losses, including both AFS and HTM securities remain manageable and low. However, during the second quarter, we used advantageous market movements to restructure $14.3 million in AFS securities to improve overall yield with minimal realized losses and an estimated earnback period of just under one year. The table below presents total unrealized losses as of June 30, 2023, along with estimated unrealized losses if interest rates increase or decrease by 100 basis points.

RESULTS OF OPERATIONS

Net interest income, before the provision for credit losses, in the second quarter of 2023 and 2022 was $24.7 million and $26.9 million, respectively, a decrease of $2.1 million, or 8.0%. The decrease in net interest income resulted from an increase in interest expense of $11.8 million, or 518.4%, compared to the prior year quarter, which was partially offset by an increase in interest income of $9.6 million, or 33.0%, from the same quarter in the prior year. The increase in interest expense was due primarily to an $8.3 million increase in deposit interest and a $3.2 million increase in FHLB advance interest, each resulting from rising interest rates between the two periods. The increase in interest income was primarily due to an increase in loan interest of $9.0 million, or 36.6%, and an increase in fed funds sold and interest-bearing deposits of $701,000, or 667.6%, during the current quarter compared to the prior year quarter.

Net interest margin, on a fully taxable equivalent basis, for the second quarter of 2023 and 2022 was 3.19% and 3.61%, respectively. Net interest margin decreased 41 basis points primarily due to interest bearing liabilities repricing faster than our interest-earning assets. The cost of interest-bearing liabilities increased 232 basis points from the prior year quarter, while interest earning asset yields increased 117 basis points. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of interest-bearing deposits from 0.38% to 2.41%, a change of 203 basis points, in the second quarter of 2023 compared to the same period in 2022, as well as increased rates on FHLB advances, which increased from 1.62% to 5.13%, an increase of 351 basis points, from the prior year quarter. The increases in cost were partially offset by increases in yield on the loan portfolio from 4.77% to 5.70%, or 93 basis points, as well as 54 bps and 70 bps increases in yield on AFS and HTM securities, respectively. Although the cost of interest bearing liabilities have repriced more quickly during this period, the weighted average yield on $65.2 million in new loans originated in the second quarter was 8.14%.

Net interest income, before the provision for credit losses, decreased $459,000, or 1.8%, from $25.2 million in the first quarter of 2023 to $24.7 million in the second quarter of 2023. The decrease in net interest income resulted primarily from an increase in interest expense of $2.0 million, or 17.1%, partially offset by an increase in interest income of $1.6 million, or 4.3%. The increase in interest expense resulted primarily from an increase of $2.3 million, or 29.9%, in interest-bearing deposit expense, offset by a slight decrease in FHLB advances expense of $425,000, or 11.3%, from the prior quarter. Interest earned on loans increased $1.4 million, or 4.5%, from the prior quarter.

Net interest margin, on a taxable equivalent basis, decreased from 3.24% for the first quarter of 2023 to 3.19% for the second quarter of 2023, a decrease of five basis points. The decrease in net interest margin was primarily due to an increase in the cost of interest-bearing deposits from 1.91% in the first quarter to 2.41% in the second quarter of 2023, a change of 50 basis points, while loan yield increased from 5.46% for the first quarter of 2023 to 5.70% for the second quarter of 2023, a change of 24 basis points.

During the first and second quarters of 2023, we recorded no provision for credit losses. During the fourth quarter of 2022, we recorded a $2.8 million provision to incorporate economic forecasts for a recession into our CECL model. The factors that were adjusted in the fourth quarter of 2022 are still relevant, however additional adjustments to certain qualitative factors were made in the current quarter to incorporate industry level concerns with respect to CRE valuations and "higher for longer" interest projections that could impact borrower cash flows and repayment ability. These qualitative factor adjustments were offset by a decline in the total loan portfolio balance during the quarter, resulting in no adjustment to the ACL during the quarter. As of June 30, 2023 and December 31, 2022, our allowance for credit losses as a percentage of total loans was 1.36% and 1.34%, respectively.

Noninterest income increased $1.8 million, or 29.5%, in the second quarter of 2023 to $7.9 million, compared to $6.1 million for the second quarter of 2022. The increase from the same quarter in 2022 was due to an increase in other noninterest income of $2.6 million, or 295.1%, resulting primarily from a one-time gain on the sale of nonmarketable correspondent bank stock of $2.8 million. This increase was partially offset by a decrease in the gain on sale of loans of $409,000, or 46.4%, and a $322,000, or 100.0%, increase in the net realized loss on sale of securities, along with a $52,000, or 51.0%, decrease in mortgage fee income compared to the same quarter in the prior year.

Noninterest expense increased $777,000, or 3.9%, in the second quarter of 2023 to $20.5 million, compared to the second quarter of 2022. The increase in noninterest expense in the second quarter of 2023 was driven primarily by a $285,000, or 120.3%, increase in FDIC insurance assessment fees, a $212,000, or 27.4%, increase in legal and professional fees primarily related to recruiting and additional proxy related fees, a $209,000, or 1.8%, increase in employee compensation and benefits, due to higher salaries and benefits of $581,000, partially offset by a decrease in bonus expense of $404,000, and an increase in software and technology expense of $192,000, or 14.3%, compared to the second quarter of 2022, due to additional technology investments and an increase in the cost of our core processing software. The increases were partially offset by a $94,000, or 3.3%, decrease in occupancy expense, a $51,000, or 15.9%, decrease in advertising and promotions fees and a decrease in amortization expense of $29,000, or 16.3%, from the prior year quarter.

Noninterest income in the second quarter of 2023 increased by $3.0 million, or 60.5%, from $4.9 million in the first quarter of 2023. The increase is due to an increase in other noninterest income of $2.8 million, or 406.8%, primarily resulting from a one-time gain on the sale of nonmarketable correspondent bank stock of $2.8 million. Merchant and debit card fee income also increased $447,000, or 26.7%, quarter-over-quarter, due to an annual service provider bonus of $299,000 received during the current quarter. These increases were partially offset by a $415,000, or 446.2%, decrease in income resulting from a realized gain on securities of $93,000 in the first quarter and realized loss on securities of $322,000 in the second quarter of 2023.

Noninterest expense increased $504,000, or 2.5%, in the second quarter of 2023, from $20.0 million for the quarter ended March 31, 2023. The increase resulted from a $402,000, or 69.0%, increase in legal and professional fees which was primarily due to annual meeting, proxy and related filing fees paid during the second quarter of 2023. The remainder of the increase was due to an increase in FDIC insurance assessment fees of $221,000, or 73.4%, a $140,000, or 23.4%, increase in ATM and debit card expense and a $135,000, or 9.7%, increase in software and technology expense during the second quarter of 2023 compared to the first quarter of 2023. These increases were partially offset by a $325,000, or 2.7%, decrease in employee compensation and benefits, primarily from lower bonus expense accruals.

The Company’s efficiency ratio in the second quarter of 2023 was 62.84%, compared to 59.80% in the prior year quarter and 66.41% in the first quarter of 2023.

FINANCIAL CONDITION

Consolidated assets for the Company totaled $3.21 billion at June 30, 2023, compared to $3.36 billion at March 31, 2023 and $3.28 billion at June 30, 2022.

Gross loans decreased $43.9 million, or 1.85%, to $2.33 billion at June 30, 2023, compared to loans of $2.38 billion at March 31, 2023. Loan growth has declined as we have tightened credit underwriting standards and loan terms and borrowers have responded to the increases in interest rates with fewer requests.

Gross loans increased $195.5 million, or 9.1%, from $2.14 billion at June 30, 2022. The increase in gross loans during the second quarter of 2023 compared to the second quarter of 2022 resulted from organic loan growth and was partially offset by a $25.3 million decrease in warehouse lending loans, as we discontinued that line of business in the second quarter of 2023, and a $2.1 million reduction in PPP loan balances during the period. Excluding PPP and warehouse lending loans, gross loans increased $223.0 million, or 10.6%, from June 30, 2022.

Total deposits decreased by $20.6 million, or 0.8%, to $2.60 billion at June 30, 2023, compared to $2.62 billion at March 31, 2023, and decreased $176.8 million, or 6.4%, from $2.78 billion at June 30, 2022. The decrease in deposits during the quarter resulted from a decrease in noninterest-bearing deposits of $77.1 million, offset by an increase in interest-bearing deposits of $56.5 million. The decrease in deposits during the current quarter compared to the prior year quarter resulted primarily from a decrease in noninterest-bearing deposits of $190.3 million and an increase in interest-bearing deposits of $13.5 million.

Nonperforming assets as a percentage of total loans were 0.15% at June 30, 2023, compared to 0.57% at March 31, 2023 and 0.46% at June 30, 2022. Nonperforming assets as a percentage of total assets were 0.11% at June 30, 2023, compared to 0.40% at March 31, 2023, and 0.30% at June 30, 2022. The Bank's nonperforming assets consist primarily of nonaccrual loans. The decrease in nonperforming assets is primarily due to the resolution of several nonperforming assets during the quarter, four of which had outstanding principal balances of $6.7 million and were Small Business Administration (SBA) 7(a), partially guaranteed (75%) loans, acquired in the June 2018 acquisition of Westbound Bank. All of these nonperforming assets were resolved with minimal incurred losses.

Total equity was $297.4 million as of June 30, 2023, compared to $300.3 million at March 31, 2023 and $282.8 million at June 30, 2022. The decrease from the previous quarter resulted primarily from an escalation in accumulated other comprehensive loss of $1.8 million due to fluctuations in the fair value of available for sale securities during the period, by the payment of dividends of $2.7 million and repurchase of Company stock of $8.1 million during the second quarter of 2023. This was partially offset by net income of $9.6 million during the period.