Guaranty Bancshares, Inc. Reports Third 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 September 30, 2023. The Company's net income available to common shareholders was $6.3 million, or $0.54 per basic share, for the quarter ended September 30, 2023, compared to $9.6 million, or $0.82 per basic share, for the quarter ended June 30, 2023 and $10.9 million, or $0.92 per basic share, for the quarter ended September 30, 2022. Return on average assets and average equity for the third quarter of 2023 were 0.78% and 8.43%, respectively, compared to 1.17% and 12.87%, respectively, for the second quarter of 2023 and 1.30% and 14.87%, respectively, for the third quarter of 2022. The decrease in earnings during the third quarter of 2023, compared to the second quarter of 2023 was primarily due to a one-time gain on the sale of nonmarketable correspondent bank stock of $2.8 million during the second quarter. Without this one-time gain, net of tax, earnings for the second quarter were $7.4 million¹, or $0.63 earnings per basic common share.

"Our company is performing well despite various economic and industry headwinds. Earnings were adequate in the third quarter and although we're seeing signs of a slowing economy, the Company is well-positioned for it with a strong balance sheet and stable core deposit base. We continue to have strong asset quality with historically low nonperforming assets. We expect to see some borrower stress as loan interest rates reprice but our loans are conservatively underwritten and many of our borrowers will continue to experience benefits from the robust economic environment in Texas. Our capital remains very healthy and we repurchased 61,688 shares of stock during the quarter at an attractive average price of $27.38 per share. As the year progresses, we'll continue to focus on strategic goals and operational efficiencies that will drive long term shareholder value," said Ty Abston, the Company's Chairman and Chief Executive Officer.

QUARTERLY HIGHLIGHTS

• Granular and Stable Core Deposit Base. As of September 30, 2023, we have 87,208 total deposit accounts with an average account balance of $30,482. We have a historically reliable core deposit base, with strong and trusted banking relationships. Total deposits increased by $55.5 million during the third quarter, which consisted primarily of an increase in core deposits of $75.7 million, offset by a decrease in public funds deposits of $20.2 million. The bank has not historically used brokered deposits and does not foresee a reliance on them going forward, however, we issued $50.0 million of these deposits during the second quarter to test their availability as a contingent liquidity source. Half of the brokered CD's mature in November 2023 and the remainder in February 2024. Excluding public funds and bank-owned accounts, our uninsured deposits as of September 30, 2023 were 25.02% 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 34.0% of total deposits. Our cost of interest-bearing deposits increased 59 basis points during the quarter from 2.41% in the prior quarter to 3.00%, representing a beta on interest-bearing deposits of approximately 217.6% for the linked quarter compared to the federal funds target rates. Our cost of total deposits for the third quarter of 2023 increased 45 basis points from 1.53% in the prior quarter to 1.98%, representing a beta on total deposits of approximately 166.0% for the linked quarter.

• Strong Asset Quality. Nonperforming assets as a percentage of total assets were 0.09% at September 30, 2023, compared to 0.11% at June 30, 2023 and 0.28% at September 30, 2022. Net charge-offs (annualized) to average loans were 0.11% for the quarter ended September 30, 2023, compared to 0.03% for the quarter ended June 30, 2023, and 0.07% for the quarter ended September 30, 2022. During the third quarter, nonperforming assets consisted primarily of nonaccrual loans and the decrease from the prior quarter resulted from the resolution or payoff of smaller balance loans.
  
  
  
  Loans risk rated as substandard increased during the quarter from $8.1 million as of June 30, 2023 to $29.5 million as of September 30, 2023, an increase of $21.4 million. Despite the increase, substandard loans continued to represent a modest 1.3% of total loans at quarter-end. The increase results primarily from two commercial real estate loans, with outstanding balances of $14.5 million and $6.9 million, respectively. The larger credit is currently performing, is not past due, and is well-collateralized in the desirable Austin, Texas market with an LTV of 69%. Management believes this credit will be favorably resolved with minimal to no loss by year-end. The second, smaller loan is an amortizing commercial real estate loan in which we hold a priority first lien position. The project is being developed under an SBA 504 program, with a different lender managing the project's construction phase and financing the second lien debenture note. This loan is also performing, is not past due and is well-collateralized with an LTV of 46%. These two downgrades resulted from general economic stress factors, and appropriate credit reserves were captured in our CECL model.
  
  
  
  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 38.9% and 13.7% of the total loan portfolio, respectively. Office-related loans represent 4.7% of the total loan portfolio and have an average balance of $523,000.
  
  
  
  Although asset quality remains strong, we made minor adjustments to certain qualitative factors during the third quarter to incorporate improvements in C&D concentrations and past-due and non-accrual trends. These qualitative adjustments, along with minimal charge-offs and a reduction in the total loan portfolio, resulted in no provision for credit loss in the third quarter of 2023.

• Healthy Capital and Liquidity. Our capital and liquidity ratios, as well as contingent liquidity sources, remain very healthy. We continue to take advantage of low stock prices to repurchase shares of Company stock and add intrinsic value for shareholders. During the third quarter of 2023, we repurchased 61,688 shares, or 0.53% of average shares outstanding during the period, at an average price of $27.38 per share. Our liquidity ratio, calculated as cash and cash equivalents and unpledged investments divided by total liabilities, was 14.0% as of quarter-end. Our total available contingent liquidity, net of current outstanding borrowings, is $1.2 billion, consisting of FHLB, FRB and correspondent bank fed funds and revolving lines of credit. Finally, our total equity to average assets as on September 30, 2023 is 9.2%. If we had to recognize our entire unrealized losses on both AFS and HTM securities, our total equity to average assets ratio would be 8.2%^†, which is still a strong capital level under regulatory requirements.

RESULTS OF OPERATIONS

Net interest income, before the provision for credit losses, in the third quarter of 2023 and 2022 was $23.3 million and $28.3 million, respectively, a decrease of $5.0 million, or 17.7%. The decrease in net interest income resulted from an increase in interest expense of $12.3 million, or 295.2%, compared to the prior year quarter, which was partially offset by an increase in interest income of $7.3 million, or 22.6%, from the same quarter in the prior year. The increase in interest expense was due primarily to a $10.6 million increase in deposit interest and a $1.4 million increase in FHLB advance interest, each resulting from higher interest rates between the two periods. The increase in interest income was primarily due to an increase in loan interest of $7.3 million, or 26.6%, and an increase in fed funds sold and interest-bearing deposits of $499,000, or 257.2%, during the current quarter compared to the prior year quarter.

Net interest margin, on a fully taxable equivalent basis, for the third quarter of 2023 and 2022 was 3.02% and 3.59%, respectively. Net interest margin decreased 57 basis points primarily due to interest-bearing liabilities repricing faster than our interest-earning assets and a shift from lower interest cost DDA and money market accounts to higher cost certificates of deposit. The cost of interest-bearing liabilities increased 241 basis points from the prior year quarter, while interest earning asset yields increased 113 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 0.59% to 3.00%, a change of 241 basis points, in the third quarter of 2023 compared to the same period in 2022, as well as increased rates on FHLB advances, which increased from 2.37% to 5.29%, an increase of 292 basis points, from the prior year quarter. The increases in cost were partially offset by increases in yield on the loan portfolio from 4.97% to 5.91%, or 94 basis points, as well as 43 and 56 basis point 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 $76.2 million in new loans originated in the third quarter was 8.49%.

Net interest income, before the provision for credit losses, decreased $1.4 million, or 5.7%, from $24.7 million in the second quarter of 2023 to $23.3 million in the third quarter of 2023. The decrease in net interest income resulted primarily from an increase in interest expense of $2.5 million, or 17.7%, partially offset by an increase in interest income of $1.1 million, or 2.8%. The increase in interest expense resulted primarily from an increase of $3.1 million, or 31.4%, in interest-bearing deposit expense, offset somewhat by a decrease in FHLB advances expense of $761,000, or 22.7%, from the prior quarter. Interest earned on loans increased $1.2 million, or 3.5%, from the prior quarter.

Net interest margin, on a taxable equivalent basis, decreased from 3.19% for the second quarter of 2023 to 3.02% for the third quarter of 2023, a decrease of 17 basis points. The decrease in net interest margin was primarily due to an increase in the cost of interest-bearing deposits from 2.41% in the second quarter to 3.00% in the third quarter of 2023, a change of 59 basis points, while loan yield increased from 5.70% for the second quarter of 2023 to 5.91% for the third quarter of 2023, a change of 21 basis points.

We recorded no provision for credit losses during the first three quarters of 2023. During the fourth quarter of 2022, we recorded a $2.8 million provision to incorporate forecasts for an economic downturn and possible borrower stressors into our CECL model. The factors that were adjusted in the fourth quarter of 2022 are still relevant, however certain minor adjustments were made in subsequent quarters to reflect current portfolio credit quality trends. As of September 30, 2023 and December 31, 2022, our allowance for credit losses as a percentage of total loans was 1.34%.

Noninterest income decreased $970,000, or 16.7%, in the third quarter of 2023 to $4.8 million, compared to $5.8 million for the third quarter of 2022. The decrease from the same quarter in 2022 was due to a decrease in other noninterest income of $869,000, or 57.1%, resulting primarily from a gain on sale of an airplane asset of $894,000 during the third quarter of 2022. There was also a decrease in the gain on sale of loans of $120,000, or 35.5% along with a $29,000, or 38.7%, decrease in mortgage fee income compared to the same quarter in the prior year.

Noninterest expense increased $171,000, or 0.8%, in the third quarter of 2023 to $20.4 million, compared to the third quarter of 2022. The increase in noninterest expense in the third quarter of 2023 was driven primarily by a $399,000, or 79.3%, increase in legal and professional fees primarily related to recruiting fees, a $93,000, or 0.8%, increase in employee compensation and benefits, a $91,000, or 33.5%, increase in FDIC insurance assessment fees and an increase in software and technology expense of $81,000, or 5.7%, compared to the third quarter of 2022. These were partially offset by a $491,000, or 28.3%, decrease in other noninterest expense, primarily due to a write-down in the second quarter of 2022 of $487,000 related to an SBA loan related receivable that was subsequently resolved.

Noninterest income in the third quarter of 2023 decreased by $3.0 million, or 38.6%, from $7.9 million in the second quarter of 2023. The decrease is due to a decrease in other noninterest income of $2.9 million, or 81.4%, primarily resulting from a one-time gain on the sale of nonmarketable correspondent bank stock of $2.8 million during the second quarter. Merchant and debit card fee income also decreased $369,000, or 17.4%, quarter-over-quarter, mainly due to an annual service provider bonus of $299,000 received during the previous quarter. Additionally, gain on sale of loans decreased $255,000, or 53.9%. The decreases were partially offset from a realized loss of $322,000 that was recognized on securities during the second quarter of 2022 that was not present in the current quarter.

Noninterest expense decreased $63,000, or 0.3%, in the third quarter of 2023, from $20.5 million for the quarter ended June 30, 2023. The decrease resulted from a decrease in FDIC insurance assessment fees of $159,000, or 30.5%, a $83,000, or 8.4%, decrease in legal and professional fees which was primarily due to annual meeting, proxy and related filing fees paid during the second quarter of 2023, and a $41,000, or 2.7%, decrease in software and technology expense during the third quarter of 2023 compared to the second quarter of 2023. These decreases were partially offset by a $100,000, or 3.6%, increase in occupancy expense and a $64,000, or 8.7%, increase in ATM and debit card expense.

The Company’s efficiency ratio in the third quarter of 2023 was 72.54%, compared to 59.35% in the prior year quarter and 62.84% in the second quarter of 2023.

FINANCIAL CONDITION

Consolidated assets for the Company totaled $3.23 billion at September 30, 2023, compared to $3.21 billion at June 30, 2023 and $3.39 billion at September 30, 2022.

Gross loans decreased $15.7 million, or 0.67%, to $2.32 billion at September 30, 2023, compared to loans of $2.33 billion at June 30, 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 $52.2 million, or 2.3%, from $2.27 billion at September 30, 2022. The increase in gross loans during the third quarter of 2023 compared to the third quarter of 2022 resulted from organic loan growth and was partially offset by a $10.9 million decrease in warehouse lending loans, as we discontinued that line of business in the second quarter of 2023.

Total deposits increased by $55.5 million, or 2.1%, to $2.66 billion at September 30, 2023, compared to $2.60 billion at June 30, 2023, and decreased $132.2 million, or 4.7%, from $2.79 billion at September 30, 2022. The increase in deposits during the past quarter resulted from an increase in interest-bearing deposits of $67.5 million offset somewhat by a decrease in noninterest-bearing deposits of $12.1 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 $237.8 million partially offset by an increase in interest-bearing deposits of $105.6 million.

Nonperforming assets as a percentage of total loans were 0.13% at September 30, 2023, compared to 0.15% at June 30, 2023 and 0.41% at September 30, 2022. Nonperforming assets as a percentage of total assets were 0.09% at September 30, 2023, compared to 0.11% at June 30, 2023, and 0.28% at September 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 lower balance nonperforming assets during the quarter.

Total equity was $296.8 million as of September 30, 2023, compared to $297.4 million at June 30, 2023 and $288.7 million at September 30, 2022. The decrease from the previous quarter resulted primarily from an increase in accumulated other comprehensive loss of $3.0 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 $1.7 million during the third quarter of 2023. This was partially offset by net income of $6.3 million during the period.