Ty Abston; Chairman of the Board, Chief Executive Officer; Guaranty Bancshares, Inc.
Shalene Jacobson; Chief Financial Officer, Executive Vice President, Advisory Director; Guaranty Bancshares, Inc.
Matt Olney; Analyst; Stephens Inc.
Michael Rose; Analyst; Raymond James Financial, Inc.
Woody Lay; Analyst; Keefe, Bruyette & Woods, Inc.
Good morning. Welcome to the Guaranty Bancshares second-quarter 2024 earnings call. My name is Nona Branch, and I will be your operator for today's call. I want to remind everyone that today's call is being recorded. (Operator Instructions)
Our host for today's call will be Ty Abston, Chairman and Chief Executive Officer; Shalene Jacobson, Executive Vice President and Chief Financial Officer. To begin our call, I will now turn it over to our CEO, Ty Abston.
Thank you, Nona. Good morning and welcome to our second-quarter earnings call. Before I turn it over to Shalene and go through the investor deck, I want to make a few comments. First, I wanted to say how I'm proud of our team and the results we've produced not only for this quarter but for the full year. Our team continues to do a great job of serving our customers and maintain strong relationships in all of our markets and to continue to look for opportunities to build our franchise.
The Texas economy remains resilient, and I really see 2025 as the year that we're going to start seeing additional growth and continued growth in our markets. Our strategy has been and continues to maintain a well-positioned bank for an uptick in economic growth. This requires us to maintain strong asset quality, strong capital position, good liquidity, and really to have lending capacity in all of our key sectors which we currently have and plan to maintain. So we are positioned for growth in the coming quarters.
With these comments, after this, I'll turn it over to Shalene. She's going to go through our investor deck, and then we'll open it up to Q&A. Shalene?
Great. Thanks, Ty. I'll kick it off with the balance sheet first. As Ty mentioned, we're continuing with our strategy to shrink the balance sheet. We believe there's still some economic and political uncertainties out there right now that require heightened risk management around loan growth. But hopefully, those will start to improve in ‘25, as he mentioned. However, because of our strong core earnings stream and our customer base, our net income remains good, and we're on target to keep earning similar to what they were in 2023.
Our total assets decreased to $45.8 million during the quarter, while total liabilities decreased about $48.5 million. Those decreases are primarily from loans, which were down gross about $50.3 million and also on the liability side from a $30 million decrease in Federal Home Loan Bank advances that we repaid during the quarter and some lower customers repurchase account balances.
Cash was up somewhat, and we also purchased about $18.6 million in new available-for-sale securities during the quarter, which had an average yield of about 5.3%. On the liability side, deposits were fairly flat. As I mentioned, we repaid some Federal Home Loan Bank advances, and then customer repo balances were down about $13.9 million.
Total equity increased $2.7 million during the quarter, which was a result of net income of $7.4 million and an improvement in unrealized losses on the AFS portfolio of $1.45 million. That was offset by dividends that we paid of $2.7 million or $0.24 per share. That quarterly dividend is up from $0.23 per share back in 2023.
We've paid $0.24 now for the first quarter and the second quarter. And also, we repurchased 138,427 shares of Guaranty stock during the quarter.
On the income statement, the bank earned $7.4 million as I mentioned in net income, which equates to $0.65 per basic share in the second quarter, which is up from $0.58 per share in the first quarter and down from $0.82 in the second quarter of ‘23. But in the second quarter of ‘23, you'll recall we had a large one-time gain from the sale of TIB stock of $2.8 million, which of course we didn't have this year and helps explain some of that change from the prior year quarter.
Our return on average assets was 0.95% for the quarter compared to 0.85% in Q1, and our return on average equity was 9.91% for the quarter compared to 8.93% in Q1. Our net interest margin continues to increase, which we're proud of. It was 3.26% in the second quarter, up from 3.16% in the first quarter and 3.19% during this quarter last year.
The increase from prior quarter and prior quarter results from improvements in our interest earning assets in both loans and securities that are higher than the costing liabilities during the same period and of course from a lower denominator in that ratio, the average interest earning assets are lower as well overall.
Non-interest income decreased by $659,000 during the quarter, which resulted primarily from a $900,000 ORE valuation allowance, which I'll talk about in a second. That was offset by higher debit card income in the current quarter from an annual Mastercard bonus payment that we received. And then in the first quarter, we also had a $499,000 receivable recovery that we did not have this quarter, which also contributed to the linked quarter change.
For the ORE valuation allowance, we mentioned last quarter that we foreclosed on a nice mixed-use property in a good area in South Austin. The appraisal we had from March of 2023 had a pretty aggressive capitalization rate. And as we dug into the cap rate trends in South Austin, along with getting a better understanding of the property and the income stream from that property, we felt it was prudent to apply a more aggressive cap rate.
So that resulted in the $900,000 valuation allowance that we recorded. But of course, there's factors that could allow us to reverse that if cap rates go back down or hopefully not, but conversely go the other way as well. But we believe that with that valuation allowance, we have the property conservatively valued on our books right now and appropriately valued. Ty, do you have any further comments on that right now?
Ty Abston
No. We have a team that's marketing the property. They're going to start marketing property in the next couple of weeks. We have had some indication of interest. We do think we have it fairly valued, and we're going to recognize full value on the property.
It's a good property, has a good yield on it, and it just comes down to where the cap rates are and ultimately, where we're able to sell it and at what cap rate. But we just felt like instead of taking -- we felt like it was prudent to take this provision and reserve against it given that we had some extraordinary income during the quarter.
Shalene Jacobson
All right. Thank you. Before we move on, non-interest expense was down slightly by about $90,000. And that was due to lower employee related costs but then offset by some higher occupancy, debit card, and other non-interest expenses. Our efficiency ratio was 72.34% for the quarter, which was driven higher by the decrease in non-interest income.
All right. On to our credit portfolio and allowance for loan losses, as I mentioned, gross loans decreased by $50.3 million in the first quarter and have decreased by about $108 million year to date. That was primarily in our construction and development and our CRE segments.
We did originate $73.5 million in new loans during the second quarter at an average rate of 8.26%, so new loan yields remain strong. Non-performing assets continue to remain at historically low levels. They were 0.71% of total assets for the quarter compared to 0.68% in the prior quarter. So still well below 1%.
Those percentages include both the ORE and non-accrual loans. But if we exclude the ORE, non-performing loans as a percentage of total loans is only 0.28%, and non-performing loans as a percentage of total assets is only 0.2%. So still pretty good percentages there.
Net charge-offs also remain low. We had $78,000 in net charge-offs during the quarter and a net charge-off to average loans ratio of 0.01% for the second quarter. In early July, we did foreclose on a single-family property in our DFW market that has a book value of $1.2 million. That property is for sale, and we expect minimal losses in disposing of that asset.
Commercial real estate and office-related loans continue to be a hot topic as you all know. However, as we've mentioned in prior calls, we manage those concentrations very well. We've got a diverse portfolio and really don't have any significant concerns in those areas. CRE represents about 40.6% of our total loan portfolio. And of that percentage, only 5.5% is office related, with relatively low average loan balances of only $551,000 as of June 30.
Our substandard loans were $23.5 million at quarter end, which is up from $17.5 million at the end of Q1. That increases the results primarily of two loan relationships totaling $7.9 million that were downgraded to substandard this quarter. However, those loans are on -- their current loan payments were well collateralized on those, and we really don't expect any significant losses if any as we work through those. We believe those loans are reserved appropriately as a result of their substandard risk rating now.
Overall, we have 131 substandard loans with an average balance of only about $179,000. So most of those credits are smaller consumer or small business-related customers that we're working with to get those loans current or hopefully paid.
We did have a reverse provision for credit losses of $1.2 million during the quarter and that's almost entirely due to the lower loan balances of $108 million so far year to date that I described earlier as well as our just stable overall credit trends. We, like everyone else, I think, have some one-offs, but overall our past due percentages non-accrual percentages. Those non-performing loan trends are still looking really good.
We've made minimal adjustments to applicable Q factors so far in 2024 because we think that the adjustments that we made during ‘23 remain relevant today. The reverse provision, again, is almost entirely due to lower loan balances. But it was offset somewhat in Q2 by that increase in the substandard loan pool that I mentioned. The quarter-end ACL coverage is 1.32% of total loans, which is similar to the ratios we had at the end of the first quarter and year end, which were 1.35% and 1.33% respectively.
All right, on to deposits, liquidity and capital. As I mentioned previously, total deposits were relatively flat during the quarter, while customer repo balances were down about $14 million. We continue to see a shift from non-interest bearing to interest bearing deposits, although it is slowing down.
Non-interest-bearing deposits decreased $8.4 million in the second quarter, while interest-bearing accounts increased $6.8 million, primarily driven by new CDs. We've got a few markets that have some specials and are doing a good job getting new CDs.
Despite the shift, non-interest-bearing deposits still represent 31.2% of total deposits at quarter end. And as I've mentioned in previous quarters, we expect that ratio to be closer to our historical average of mid- to high-20s at some point as we continue to move later into ‘24 or early ‘25, but we're happy to see it continuing to be above 30% for now.
With respect to overall deposit risk, Guaranty has a very granular and historically stable core deposit base. At quarter end, we had over 89,000 deposit accounts with an average account balance of just over $29,000. Our uninsured deposits also remain relatively low, excluding public funds and Guaranty-owned accounts. Uninsured deposits were 25.7% of our total deposits at quarter end.
Liquidity is good. We ended the quarter with a liquidity ratio of 13.6% despite using some cash flows from matured securities to loan repayments to investments in new higher yielding AFS securities and to pay down Federal Home Loan Bank advances by $30 million during the quarter. We've actually repaid $150 million in FHLB advances during the last 12 months.
We also have total contingent liquidity of about $1.3 billion available through either Federal Home Loan Bank advances, the Federal Reserve Bank, or correspondent bank, Fed funds lines and revolving lines of credit. Our total net unrealized losses on investment securities remains reasonable at about $50.8 million, of which $19.1 million is attributable to our AFS securities and included within the equity in AOCI.
Our capital also remains strong. We used a portion of our excess capital in the second quarter to pay the $0.24 per share dividend that I mentioned earlier and also to repurchase those 138,427 shares of Guaranty common stock at an average price of $29.50 per share. And this of course continues to add intrinsic value for our shareholders, we believe.
Our total equity to average assets as of June 30 was 9.9%. That concludes our prepared remarks. So I will turn it back over to Nona for Q&A.
Operator
Matt Olney, Stephens
Matt Olney
Hi, good morning. Okay, great. Thanks for taking my question. On the balance sheet, we saw the loan balances contract again the second quarter. Just trying to get a better idea of when we could see loan balances stabilize.
And, Ty, I think you mentioned you expect 2025 to be the year of growth in footprint? Just trying to appreciate if we should read into this that there could be additional loan pressure in the back half of the year?
Ty Abston
Matt, I would say, that's possible, second half of the year. We could have the loan book overall pay down. It could be another $100 million, just depends on how things go.
I am seeing, and what -- I think everyone else is seeing is the possibility of rate decreases in the coming quarters. And the economy seems like it's continuing to be very resilient. So once we get maybe a rate decrease or two and get past this election, it's just starting to feel like things are going to kind of strengthen across the Board. And that would give us more growth opportunities. And that's probably going to happen in ‘25, at least that's my current thoughts.
Matt Olney
Okay, thanks for that, Ty. And then on the funding side, any more color on the FHLB advances that you paid down in the quarter as far as when that was, what the rate was, and then on the remaining FHLB advances still in the books as of June 30? Any more color on the duration of those and the rate on those?
Shalene Jacobson
Yeah. So we paid down a majority of those towards the end of the quarter. The rate was around 5.38%, 5.4%. The remaining advances are short term, and the rate is about that same amount, 5.4%.
We'll just see where we are if we've got good opportunities to invest in some more available-for-sale securities, Matt, we'll do that. If not, we'll likely take some of our excess cash and continue to pay those down. We're just going to play that by year. But the remaining amount is due within this quarter, and 5.4% is not the rate.
Matt Olney
Okay, thanks for that, Shalene. And then on the Austin property that you guys discussed, sounds like you're putting a more conservative cap rate assumption on that. Just remind me of the most recent appraisal on that property and then any more color on just the existing leases on that property?
Ty Abston
Yeah. It's -- I think we have one remaining space that is under an LOI. We're negotiating to get the lease signed. It'll be 100% occupied. It just -- with our appraisal we have, I believe is $17 million, depends on the cap rates you use.
We did receive an LOI on the property that's 90% of what we had originally booked it at that we passed on. We did take this reserve because, again, it depends on the cap rates you use. And we just felt it was prudent to take the reserve we took because we had available earnings to do it.
But we think it's a good property, good assets, in a strong part of Austin. And we're going to -- we don't have the pressure to offload it immediately. So we're going to get it leased up. We have one of the best management firms in Austin managing it for us and also marketing it for us. And they're rolling out the marketing. I think that's starting actually this week.
And we're going to dispose-off the property, sell it, but we're going to get full value for it. And we think it's a good asset for the bank while we're getting to that point. The property we foreclosed on the home, that's a $1.8 million appraisal on a $1.2 million home in the DFW market. We think we'll actually sell it probably as it is where it is.
And we don't see any exposure on that. It's kind of an unusual situation that we even foreclosed on it, but we don't see any exposure on that property.
Matt Olney
Okay, guys. Thanks for taking my questions.
Ty Abston
Thanks, Matt.
Shalene Jacobson
Thanks.
Operator
Michael Rose, Raymond James.
Michael Rose
Hey, good morning. Thanks for taking my questions. Just following up on a similar line to Matt. Just as it relates to some of the on-balance sheet liquidity and FHLB borrowings, I think your liquidity ratio was up about 300 basis points Q on Q.
I know there's been a push for -- by regulators, particularly for the banks over $10 billion in size to have more on-balance sheet liquidity. Was that some of the rationale there?
And then just separately related to that, if I look at cash to assets, which I've heard from an increasing number of banks that regulators may want that number or percentage higher. I think you guys are about 1.5%. Would you take some of those maturing cash flows, understanding that you would look to buy some additional AFS securities, but just given what we saw with the total liquidity ratio this quarter, would you expect that to continue to build as we move forward? Thanks.
Ty Abston
Yeah, Mike, I would say that it's likely to build. Our strategy, like I said in my opening comments, is to really maintain a strong position. So we're ready to grow the balance sheet as we see the economy improve and opportunities improve.
That's very similar to how we approached the 2008 financial crisis. And we want to be positioned with liquidity, with capital, and also with capacity -- lending capacity in all of our buckets to grow the company as we see growth opportunities open back up.
So we're going to grow liquidity. And as we see that it makes sense for us, we are adding to the bond portfolio, which we think -- add to that portfolio, now is a good time that and we have the ability to do it, which is a good place to be. We have the excess capital buyback stock at advantageous prices. Again, trying to make sure we're positioned to take advantage of opportunities we see not only currently, but also in front of us.
So we'll build liquidity and more than likely, we're just -- we're not seeing strong loan demand, although we're seeing again, very resilient economy across Texas. But things just aren't as attractive for our customers as we're looking at opportunities at 7.5%, 8.5% borrowings versus what they've been.
So we're not going to fight against that reality. But we plan to be well positioned as things improve because we don't want to be in a position where we either don't have capacity to land, we don't have the capital, we don't have liquidity and when things open up, we can't go back on offense.
So that's been our strategy really the last two years. And we plan to continue that more than likely throughout the remainder of this year until we see the environment improve.
Michael Rose
Very helpful. And then just as we think about maybe potential for more on-balance sheet liquidity, juxtapose with the declining loan balances, you guys have done pretty well on the margin, particularly this quarter, up 10 basis points Q on Q.
You previously talked about 2 to 3 basis points a month with some of the fixed asset repricing. Can you just help us appreciate some of the puts and takes and if that 2 to 3 basis points a month is the way we should still think about it with all that in context? Thanks.
Ty Abston
Yes. That's still the run rate with our NIM. It’s still improving 2 to 3 basis points a month as we're catching up on the asset side of the balance sheet repricing. And so that's what we anticipate to continue seeing as we go forward. And I think that's a pretty good assumption.
Michael Rose
Okay. And then I know previously you talked about a 3.50% level by the end of next year, but just given that dynamic. And then, what I'm hearing, I think, is just an inflection in the balance sheet as we get into next year and maybe pushing on the accelerator a little bit in terms of growth. It seems like that number could actually end up being -- the 3.50% could actually end up being a little bit lower.
So just how should we think about that number? Is that number actually closer to 3.60% just if I do 2 to 3 basis points a month and add in some growth?
Ty Abston
More than likely, the answer to that is yes. That's certainly our goal, is to get our NIM back to where we're -- our historical average. And that creates a much stronger earnings stream, helps our efficiency ratio, helps all of our metrics.
At this point, like everyone else, we've been trying to build it back, so we kind of targeted 3.50%. But without a material change in rates, and I'm talking about, 200 basis point, 300 basis point change in rates over a short period of time, we should pick up 2 to 3 basis points on a forward basis a month for the next several quarters. So we do go past that 3.50% as we're continuing to, again, reprice the assets out of the balance sheet.
Michael Rose
Very helpful. And then maybe just finally for me, just on the buyback, I think the earn-back this quarter was around 3.6 years, certainly well within acceptable earn-back. Should we expect continued -- just given where your capital levels are, looks like more shrinkage of the balance sheet potentially here in the next couple quarters, should we expect share repurchases to continue at or around this pace as we move forward and potentially finish out the program in the timeline?
I think it expires in April of 2026. Should we expect full usage of that, assuming an earn-back around these levels and just the capital levels? Thanks.
Ty Abston
The answer is yes, Michael. If the earn back is kind of in that same range, which means our price would be -- average price would be in the range we've purchased in this past quarter, then yes. That's a capital allocation priority for us. If the earn-back pushes out, obviously, we'd be less aggressive.
Michael Rose
Totally understand. Thanks for taking all my questions.
Ty Abston
Absolutely.
Shalene Jacobson
Thank you.
Operator
Woody Lay, KBW.
Woody Lay
Good morning, guys. Yeah. I wanted to touch on the loan growth and the expectations that maybe we see it pick up in 2025. Just as you talk to your customers, do you think it's enough to just get one rate cut and that'll push loan growth higher? Or do you think your customers need to see two or three rate cuts to really engage on potential projects?
Ty Abston
Woody, I would say it's more the latter. I would say that two or three cuts certainly would give more confidence in the overall marketplace. And getting past this election, uncertainty of that and where the policies are going to land, regulatory policies and the growth policies, and we're just hearing a lot of that kind of conversation that everyone wants to get past that, see some rate cuts because they see tremendous opportunities for growth in our state and opportunities going forward.
There's just a lot of uncertainty right now. And so there's a lot of capital that's on the sidelines waiting for those -- that environment to improve. And we'll see how that plays out. But my best sense is that, sometime in the first half of ‘25, we could see those events play out that would create opportunities for us to get back into a more of a growth mode in our markets. And that would be -- that'd be obviously strong for our state and our bank, and it'd be very welcomed.
Woody Lay
Yeah, and then I also just wanted to touch on the construction portfolio. Construction and development balances have been gradually falling over the past year. Can you just give some overarching comments on the segment and maybe what your appetite is for the segment, maybe be heading in closer to 2025?
Ty Abston
Our appetite is more constrained. Obviously, we're underwriting and have been for a couple of years with obviously higher rates and looking at more equity positions, stronger guarantor support and those things as you would with higher rates that we're currently managing. So I do think, again, we're seeing projects that are put on the shelf that are good projects that just the investors and borrowers are waiting for a more favorable environment, not just rate, but the overall, environment had a little less uncertainty to it.
So we do see opportunities going forward, but it's going to be more muted like it has been the last 12, 18 months with the current environment where rates are. And then certainly the bank's appetite for risk is -- has tightened in the last two years. And so we're underwriting a little closer and more stringent just like every bank I'm sure is.
Woody Lay
Yeah. And then lastly, just on expenses, they were relatively flat quarter over quarter. I know the OREO project has a little bit of variability in there, but does it seem like second quarter’s rate is a pretty good run rate going forward?
Ty Abston
Shalene, you take that.
Shalene Jacobson
Yes, Woody. I think it is a good run rate.
Woody Lay
All right, thanks for taking my questions.
Ty Abston
Sure. Thanks, Woody.
Operator
Thank you for your questions. I would like to remind everyone the recording of this call will be available by 1:00 PM Central Time today on our investor relations page at gnty.com. Thank you for attending, and this concludes our call. Have a good day.
