Tyson Abston; Chairman of the Board, Chief Executive Officer; Guaranty Bancshares Inc
Shalene Jacobson; Chief Financial Officer, Executive Vice President, Chief Risk Officer, Principal Financial Officer and Principal Accounting Officer; Guaranty Bancshares Inc
Good morning and welcome to the Guaranty Bancshares third-quarter 2024 earnings call. My name is Nona Branch, and I will be your operator for today's call. I would like to remind everyone that this call is being recorded.
After our prepared remarks, there will be a Q&A session. 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, everyone and again, welcome to our third-quarter earnings call. Our company did have a good quarter. We did have some extraordinary expenses related to a couple of properties we have in ORE where we capitalized expenses on those properties. We feel like those will be resolved in the next few weeks as we have both those properties under contract. So that will kind of resolve itself and we'll recoup some of those expenses.
Our growth is still muted. Our best customers are really being cautious right now with where things are with rates, and we do think as we get into '25 we see some rate reductions get past the election. Some of the geopolitical things kind of calm down, we'll see.
Additional growth in our state. Our state still has a very vibrant economy, but we are seeing muted growth again with some of our best customers. We do have a strong core deposit base and that's something we've been really been focused on the last two years and we've certainly added to that this year.
Our strategy, as I've mentioned before, we really grew this company significantly from 2012 to 2016, probably more than any time in our history. That five-year period, we were able to do that because we came out of the financial crisis in a strong position. So our strategy the last couple of years has been to do the same thing: is to position this company where we had strong liquidity, strong capital, strong asset quality, and the capacity to lend. In other words, our lending buckets had room to grow the company and grow the portfolio.
And that's kind of the strategy we've been operating in the last two years as we go into '25. We think we're well positioned to grow this company another $1 billion, $2 billion over the next three to four years because of those conditions, the fact that we have all those strengths in place to grow when we see growth in our markets and we see it make sense. And that's going to be organic growth.
That's going to be both on acquisitions. And there's just a lot of opportunities when you're in that position where you have options to grow the company again, both organically and both on acquisitions as opportunities present themselves. So we're starting to plan 2025. We've been really good about the year. The growth, we're not sure of it at this point. We do think we'll see positive growth.
But again, we're waiting on conditions with rates and political conditions and everything else to kind of help that. But the overall positive narrative around tax is still very positive and a lot of opportunities in front of us related to that. And we're also starting to do our updated strategic plan that we'll do in the first part of '25 which again, like I've kind of outlined, has some real growth opportunities for us because of the way we're positioned as a company in the coming few years to capitalize on opportunities.
So with those opening remarks, I'll turn it over to Shalene who has an investor presentation. And after she goes through that, then we'll open up the Q&A. Shalene?
Shalene Jacobson
Thanks, Ty. I'll kick it off like usual with the balance sheet. Total assets are down about $88 million year-to-date, but our total assets actually increased $15.5 million during the third quarter, while total liabilities increased by about $4.8 million.
Our gross loans decreased by $78.5 million, but we replaced those dollars with available for sale securities and with cash. We purchased about $24.1 million of mortgage-backed securities with a weighted average yield to maturity of about 4.9% during the quarter. And we also purchased $15 million in US treasuries that had a weighted average yield of 3.9%.
And of course, on the cash side, we were yielding about 5.3%. On the liability side of the balance sheet, deposits and repurchase agreement balances increased $48.8 million and those were offset by the repayment of $45 million in Federal Home Loan Bank advances, which now have a zero balance on the balance sheet.
Total equity increased $10.7 million during the quarter, primarily resulting from net income of $7.4 million and an improvement in our accumulated other comprehensive income of$ 6.6 million. This was offset by dividends paid of $2.7 million or $0.24 cents per share. And we repurchased nearly 60,000 shares of Guaranty stock during the third quarter.
On the income statement, the company earned $7.4 million in net income, which equates to $0.65 per basic share, which is consistent with what we earned in Q2, and up from $0.54 per share in the third quarter of 2023. Earnings were fairly on target with where we expected them to be in the third quarter but were boosted slightly by a $500,000 reverse provision for credit losses, as you all noted in your first-look reports this morning and we'll talk about that here in a minute.
Our return on average assets was 0.96% for the quarter compared to 0.95% in Q2. And our return on average equity was 9.58% for the quarter compared to 9.91% in Q2. Our net interest margin was 3.33% this quarter, which is an increase from 3.26% in the second quarter and 3.02% during this quarter last year. Those increases from the prior quarter and prior year quarter result from improvements in interest-earning assets that were better than our rates on our costing liabilities.
The average yield on interest-earning assets during the third quarter increased 1 basis point from 5.61% to 5.62%, while the average rate of our costing liabilities decreased 7 basis points from 3.43% in the second quarter to 3.36% in the current quarter.
We expect to see continued overall improvements in the NIM, as many of our loan assets continue to reprice, from three and four and five years ago at the higher rates that they are now. But also, we'll be able to see some improvements on the deposit side. A significant amount of our interest-bearing deposits now, about $740 million, our certificates of deposit, those are primarily made up of 9-month and 13-month CD specials that we've had running for the past couple of years.
In the fourth quarter, we anticipate that $253 million in CDs will reprice and those CDs currently have a weighted average rate of 4.77%. The 9-month and 13-month specials that we have now, depending on whether it's a jumbo CD or non-jumbo, range from 3.55% to 4.2%, if it's a Jumbo 9-month CD. So we'll be able to see quite an improvement on the deposit cost side over the next quarter.
And then about 90% of our total CD portfolio will reprice over the next nine months. The average rate on those CDs that are maturing over the next nine months is 4.73%.
Noninterest income decreased by $555,000 during the quarter, resulting primarily from a $900,000 ORE valuation allowance that we had in the prior quarter that was not present in this quarter. However, noninterest expense increased by about $76,000, which was primarily due to holding costs related to the ORE, which I'll talk about a bit more shortly.
Our efficiency ratio was 70.47% for the quarter. On to credit and allowance for credit losses. Our gross loans, as I mentioned, decreased $78.5 million in the second quarter and have decreased about$ 186 million year-to-date, primarily in our C&I construction and development and CRE loan segments. During the third quarter, we did however, originate $63.8 million in new loans that had an average rate of 8.07%. So new loan yields remain at good levels.
Nonperforming assets continue to remain at historically low levels at 0.66% of total assets for the quarter compared to 0.71% in the prior quarter. Those percentages include both ORE and nonaccrual loans. But if you exclude the ORE, which I've mentioned, we expect to resolve in the fourth quarter, nonperforming loans as a percentage of total loans is 0.25%. And as a percentage of total assets, it's only 0.17%. So really, really low levels there.
Net charge-offs also remain low. We had a $239,000 net charge-off during the quarter and our net charge-off to average loans ratio was 0.04%. For the ORE, we currently have the same two properties that we mentioned last quarter in the earnings call and in the [queue], but we now have sales contracts on both of them, as Ty mentioned.
We have incurred some holding expenses to repair those properties for sale during the quarter as well as some legal and maintenance expenses. But we hope to recoup some or all of those expenses on the sale of the properties. We expect both of them to close in the fourth quarter, likely in November, and we do not anticipate any losses from the current book values that we have for both of those.
As I've mentioned for several quarters now, we managed C&D and CRE concentrations including office-related loans very closely. We have a diverse portfolio and we really don't have any significant concerns in those areas. CRE represents about 40.5% of our total loan portfolio. Of that 40.5%, only 5.8% is office-related and those loans have an average loan balance of only $544,000.
Finally, our nonaccrual loans were $5.1 million as of September 30, which were down from $6.2 million in the prior quarter. And our substandard loans were $12.3 million at quarter end, which is down from $18.7 million at the end of Q2. The decrease in substandard loans is a result of payoffs and upgrades for a couple of loans that have been current and compliant with loan terms for a number of months now.
As I've mentioned previously, we did have a reverse provision for credit losses of $500,000 during the quarter which resulted almost entirely from lower loan balances, the lower substandard loan balances and really just stable overall credit trends. Our quarter end ACL coverage is 1.34% of our total loans which is similar to the 1.33% that we had at year end.
All right, on to deposits, liquidity, and capital. Our total deposits grew during the quarter by $42.8 million and our customer repo balances were up about $6 million for a combined increase of $48.8 million. DDA balances increased $19.2 million during the quarter, while CDs increased $24.5 million, and money market and savings accounts decreased about $1 million.
Noninterest-bearing deposits continue to represent a good percentage of our total deposits at 31.5% at quarter end. With respect to overall deposit risk, Guaranty has a very granular and historically stable deposit base. At quarter end, we had nearly 90,000 deposit accounts with an average account balance of just under $30,000.
Our uninsured deposits also remain relatively low. Excluding public funds and Guaranty-owned accounts, uninsured deposits were 26.3% of total deposits at quarter end. Liquidity is also good. We ended the quarter with a liquidity ratio of 17.1%.
And as I mentioned previously, we use some cash flows for matured securities and loan repayments to invest in new, available for sale mortgage [FAT] and treasury securities and also to pay down Federal Home Loan Bank advances by $45 million during the quarter. And that balance is now zero.
We also have total contingent liquidity of about $1.4 billion that's available to us through Federal Home Loan Bank advances, the Federal Reserve Bank, and correspondent bank fed funds lines.
Our total net unrealized losses on investment securities continues to improve and remains reasonable at about $33.2 million. That's for both AFS and HTM. About $10.6 million of that is attributable to our available for sale securities and included within the AOCI.
Capital is also strong. We used a portion of our excess capital in the second quarter to pay a $0.24 cent per share dividend and to repurchase nearly 60,000 shares of GNTY stock at an average price of $30.65 per share. This, of course, continues to add intrinsic value for our shareholders which we like to see. Our total equity to average assets as of June 30 was 10.4%.
That concludes our prepared remarks, so I will turn it back over to Nona for Q&A.
Operator
Michael Rose, Raymond James.
Michael Rose
Hey, everyone. Can you hear me?
Tyson Abston
Yes, yes, Michael. Good morning.
Michael Rose
Hey, good morning. Thanks for taking my questions. I really appreciate the color that you gave on the deposit repricing schedule. Can you just kind of -- and I know you mentioned, loans repricing from three, four, five years ago. Can you just maybe put a finer point on that? And I understand that you guys bought some securities this quarter.
Just trying to understand the interplay between what that would mean for the margin, both on the repricing schedule and securities purchases. And then, you obviously had some deposit growth, DDA growth this quarter, which was nice to see. So I think you previously talked about 2 basis points, 3 basis points a month. Just wanted to see if that was kind of still a range?
I believe previously you talked about exiting 2025 somewhere in the [350 basis points] or higher range. So just any updates there would be great. Thanks.
Tyson Abston
Shalene, you got that?
Shalene Jacobson
Sure, yeah. Yeah, Michael, we still do anticipate that NIM will increase by about 2 basis points per month and we're hoping that we'll be probably a little under [350 basis points], but definitely getting closer to it. For our deposit repricing, we didn't do -- we did small decreases in early September, but we really didn't do our big decreases until late September.
As I mentioned, a lot of those CDs that are repricing are currently at 4.73%-ish on a weighted average rate. 95% of those are in one of those two, either 9-month or 13-month CD specials that I mentioned. And again, those will reprice anywhere from 3.55% to 4.2% at the highest. So we really expect that to help with some tailwinds in Q4.
In terms of our loan side that you mentioned, our overall portfolio turns pretty quickly, Michael. The total portfolio turns over about every three-ish years and a lot of our commercial loans have already repriced, but a lot of our noncommercial, one for family and consumer loans, are fixed for a period of years and will continue to reprice at these higher rates. So we're expecting to see some continued improvement in those couple of portfolios on the loan side.
Tyson Abston
Yeah, Michael, I'll just add that a lot of the loans that we've had rolled out of the balance sheet the last two years that were coming out of low 4s in rates. So we wanted to add some duration to the bond portfolio with these higher rates. We've been systematically doing that the last few quarters. You're really not losing a lot of yield when you're -- because we're actually picking up yield in a lot of ways, of different bonds we're buying versus loans that are coming out of the portfolio.
So that's been the strategy. Kind of add some duration. And we're not adding, I mean, we're buying basically 15-year plain vanilla MBS. But it's still adding some duration while these rates are high. And that's kind of been what we've been focused on the last few quarters, to position that portfolio to really benefit not just from the legacy bonds that are in the portfolio, but also add some as these rates are up there to really benefit when rates come down a little bit.
Michael Rose
Shalene and Ty, that's very helpful. Maybe, Ty, just as a follow-up. One thing you said at the outset of the call that kind of struck me is you're kind of positioned to grow the company another [1 billion] or $2 billion over the next three to four years. And then I heard, I think a little bit of cautiousness around maybe growth next year, I know there's a lot of headwinds out there in the economy, we'll see what happens.
But that's pretty meaningful growth and I know some of that's going to be acquisitions. So can you kind of break down both the organic opportunities you see in particular as we get closer to 2026? And then what you see from an M&A standpoint because I don't think you've talked about M&A for a while now? Thanks.
Tyson Abston
Yeah. So like I was saying in the open remarks, the strategy today, as it was coming out of the financial crisis, was be positioned where we weren't playing -- having to play defense when it was a good time to be playing offense. And so, as rates come down, as we get more clarity with politics and everything else around the world, the Texas story is still very strong. There's a lot of opportunity in our state.
We still have a very relevant young management team and we have all these factors in place from the capital to the asset quality, liquidity, and the capacity to grow the company. And so, it's no different than where -- the same play we ran in the five-year period from '12 to '16 where we doubled the size of the bank. And I just see that as an opportunity for us because we have the capacity to do that as we come out of that.
We're going to continue to look at organic growth as kind of our primary driver. But there's 300 banks in Texas under $800 million in assets. So a very granular group of banks in the state, and we're still going to acquire [of choice] when the opportunities make sense for us. We would do [both] on acquisitions.
I don't have a good -- I mean, like I said, we're starting to work on our five-year strategic plan as we go into the Q1 with our Board. We will be modeling some of that out. So I don't have any specifics that I want to give because we really haven't thought it through as far as how much that's going to be acquired, how much organic. I can just tell you that both opportunities are available to us because of our options that we have.
And we can certainly roll this company another $1billion, $2 billion over the next three to four years and not really stretch anything. And we don't really have to stretch as a company and do it kind of as base hits. And that's kind of been our MO for the last 25 years, and I see that kind of coming back around again as an opportunity for us as we come out of and get into a more favorable economic environment in '25 and beyond.
I'm like everyone else. I don't know if that starts January 1, '25 or we're in mid-year '25. But I do know as rates come down, as we get more clarity on things, the overall strength of the economy is there. And again, our strongest borrowers are being cautious, which we certainly encourage. But they also have a lot of capacity to continue to get out there and grow and we want to grow with them. And we're going to be positioned to do that.
Michael Rose
Very helpful. And then maybe just one last final one for Shalene. Just on the buyback. I know you guys previously talked about finishing out the program. I think it expires in the first or second quarter of 2026, but I just wanted to get any updated thoughts there now that the sector has moved a little bit higher. I think the earn-back on the buyback is about four years.
Just wanted to see if you will continue to be opportunistic and potentially finish up the program in the allotted time? Thanks.
Shalene Jacobson
Michael, that's a good question. But I mean, the price where it's at right now is a little bit higher given the earn-back potential and other opportunities for us to use our capital. So it just depends on where the stock price goes from here. If it goes down $1 or $2, then we may be back buying up again. We'll just have to see where it goes there. We'll certainly use it up if we can. But we want to be careful of that earn-back period.
Michael Rose
Okay, great. Thanks for taking my questions.
Tyson Abston
Thanks, Michael.
Operator
Woody Lay, KBW.
Woody Lay
Hey, good morning, guys.
Tyson Abston
Morning, Woody.
Woody Lay
I wanted to follow up on sort of the loan shrinkage in the third quarter. I think in the release, you called out some non-relationship runoff driving part of that shrinkage. Just any way to quantify how much was related to the non-relationship and how much more there might be to go?
Tyson Abston
Well, I would say the majority of what we've allowed to run off, either we didn't consider core relationships or the deposit side of the equation wasn't what we wanted it to be. Or it was a project that was looking to go vertical, and we weren't comfortable with the vertical piece of it at this point. Additional runoff, I don't have a good sense of that. We could see additional runoff in Q4. We could see additional runoff in Q1 and Q2 and '25.
But again, we're positioned to grow the portfolio as we see the opportunities that make sense to us and we see the strong borrowers out there kind of getting more engaged. So we're not losing any core relationships, certainly over pricing or anything else.
But if we have a relationship over the last couple of years that wasn't as core to what we consider a core relationship with the bank and/or didn't have deposits with us that we felt like we wanted with the relationship, or they were taking it to a -- doing another tranche of the project we weren't comfortable in funding, then we would let those opportunities leave the bank.
So I hope that gives you some basic color on that.
Woody Lay
That's really helpful. If we do see loan growth continue to lag over -- you said maybe through the first half of 2025, do you think we see more bond portfolio purchases? Just to help offset some of the rising cash level?
Tyson Abston
Well, I think you would from us. Because again, I mean, people were standing in line to buy bonds when they were at zero and why wouldn't we buy in the last two years? So we're going to continue to systematically add the bond portfolio because we have the ability to do it. If you have the liquidity and the ability to do it. I mean, it's been a good time to add the bond portfolio. So we'll likely systematically continue adding to that each quarter as we have the cash, and then what do you do [with] that from our perspective?
Woody Lay
Great. And then just last, to follow up on deposits. I appreciate all the color in the opening commentary. I think you said 90% of the CDs portfolio reprices in the next nine months. Any additional detail you can provide on how much reprices in the next quarter?
Shalene Jacobson
Yeah, Woody. About $254 million will reprice of our CD portfolio in Q4. So that's about 34% of our CD portfolio. That $254 million currently has a weighted rate of 4.77% and it will reprice anywhere between 3.55% and 4.2%. So we'll get quite a savings there on deposit cost.
Woody Lay
Great. That's all for me. Thanks, guys.
Tyson Abston
Thanks, Woody.
Operator
Matt Olney, Stephens.
Matt Olney
Hey, thanks. Good morning, everybody.
Tyson Abston
Good morning, Matt.
Matt Olney
Okay, sticking with this deposit discussion. I'm just curious about the overall level of competition in your footprint with respect to deposit pricing? You said you lowered some of your promo rates a few weeks ago. Curious how much pushback you're seeing? And then maybe longer term, curious about how you see deposit betas playing out throughout the downcycle as compared to what we just saw over the last two years in the upcycle? Thanks.
Tyson Abston
I mean, Matt, we're seeing less deposit pressure as far as pricing, less aggressive pricing in our markets. Rates have been coming down really across the Board with our competitors and we've certainly pulled rates back to -- and that's been the case really for the last six to nine months. It's not as frantic as it was certainly a year and a half ago from a competitive standpoint.
There's still one-offs out there in [RV] market, but for the most part, much less pressure on the deposit side. Shalene, you have anything you want to add to that?
Shalene Jacobson
No, I agree.
Matt Olney
I guess the second part of that was kind of longer term thinking about deposit base throughout the cycle. Any [betas] around that over the next year or two? Thanks.
Shalene Jacobson
Matt, we had previously modeled sensitivity passing on at about 0.4% of any rate decrease. This past time around, we were a little bit higher than that and we'll probably model a bit higher than that in the first part of 2025, maybe slow it back down to 0.4% sensitivity in the second half of '25. We're still kind of working through that. But that's what we're envisioning.
Matt Olney
Okay. That's helpful, Shalene. Thank you for that. And then on the loan side, just remind us of the dollar amount of the loans that are floating that will reprice lower with the fed's recent movement a few weeks ago?
Shalene Jacobson
About $250 million, a little less than $250 million is floating daily.
Matt Olney
Okay, perfect. And then just lastly on the expense side. I think a while back, we talked about those expenses kind of targeting that 2.5% of the assets. Just trying to appreciate how much of an opportunity that could be as you look into 2025?
Tyson Abston
Well, I mean that remains our target, always has been. We're not [uncomfortable] floating above that if we're shrinking the balance sheet, which we've been doing the last two years. Our current ratio is a little inflated from the ORE expense. But as we get back in the growth mode, we'll drive that down below that. But that 2.5% remains our target, if that's what you're asking.
But that being said, we float above that and we know why. We're not going to dismantle programs we have or investments we're making in the future of the company and technology. Just to get the ratio down if we know why it's above it and we know kind of how we're going to offset that and move that back below our target going forward.
Matt Olney
Okay, thanks for taking the questions.
Tyson Abston
Thanks, Matt.
Shalene Jacobson
Thank you.
Operator
Thank you for your questions. I will 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. We appreciate you attending the call. This concludes it for today. Thank you.
