Guaranty Bancshares, Inc. Reports Second Quarter 2022 Financial Results

Guaranty Bancshares, Inc. (NASDAQ: 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, 2022. The Company's net income available to common shareholders was $10.8 million, or $0.90 per basic share, for the quarter ended June 30, 2022, compared to $10.7 million, or $0.89 per basic share, for the quarter ended March 31, 2022 and $10.4 million, or $0.87 per basic share, for the quarter ended June 30, 2021. Return on average assets and average equity for the second quarter of 2022 were 1.35% and 14.85%, respectively, compared to 1.38% and 14.44%, respectively, for the first quarter of 2022 and 1.42% and 14.64%, respectively, for the second quarter of 2021. The modest increase in earnings during the second quarter of 2022, compared to the first quarter of 2022, was primarily due to improved net interest margin, but offset by lower non-interest income and higher non-interest expense. Our net core earnings^†, excluding provisions for credit losses, income taxes and PPP1/PPP2 net income, as well as our core net interest margin, adjusted to exclude the effects of PPP1/PPP2 loans, are described further in tables below.

"Our second quarter results were strong with an increase in net core earnings of nearly $2.0 million from the first quarter of 2022. We improved our net interest margin through repricing of new and existing loans at higher yields and through deployment of excess liquidity held in fed funds throughout the pandemic into higher yielding securities during the first half of 2022. Loan growth has also been strong. Excluding PPP and warehouse loans, our loan portfolio grew 7.1% during the second quarter and 16.4% year-to-date, although this will likely slow during the second half of the year as rates continue to rise and fears of an economic downturn continue to develop. Despite possible slowing of loan growth, we've built a solid earnings stream that should continue to deliver good financial outcomes for our Company and our shareholders. Texas also remains a very vibrant market and should weather this period of economic uncertainty better than most. Non-performing assets remain very low and we maintain our conservative approach to credit underwriting. As with most companies, inflation pressure and wage increases from a tight labor market have caused increases in our non-interest expense, which we are closely monitoring and managing. Historically, Guaranty has navigated both rising rate and recessionary cycles with good outcomes, which we are confident we will do again during the current economic environment" commented Ty Abston, the Company's Chairman and Chief Executive Officer.

QUARTERLY HIGHLIGHTS

• Strong Loan Growth. The second quarter of 2022 saw strong organic loan growth, increasing $124.3 million, or 6.2%, during the quarter. Excluding PPP and warehouse lending changes, our loans grew $139.9 million, or 7.1%, during the quarter. Our loan growth is a result of internally generated sources and is not from loan purchases from other originators.
• Solid Net Earnings and Core Earnings. Net earnings have remained consistent quarter-over-quarter. Net core earnings^†, which exclude provisions for credit losses and income tax, and net PPP income, have trended upwards, demonstrating a solid and consistent core earnings stream. Net core earnings^† were $12.8 million for the second quarter, compared to $10.9 million for the first quarter of 2022, and $9.8 million during the second quarter of 2021.
• Good Asset Quality. Non-performing assets as a percentage of total assets were 0.30% at June 30, 2022, compared to 0.08% at March 31, 2022 and 0.13% at June 30, 2021. Net charge-offs to average loans (annualized) were 0.02% for the quarter ended June 30, 2022, compared to 0.02% for the quarter ended March 31, 2022, and 0.05% for the quarter ended June 30, 2021.
• Repricing Loans. The Bank is slightly asset-sensitive and should see benefits from expected rate increases by the Federal Reserve. As of June 30, 2022, $267.8 million, or 12.5% of our loan portfolio is fully floating and $1.1 billion, or 51.8% are adjustable rate term loans, repricing at defined future time periods or at maturity. A rate increase of 75 bps at the July FOMC meeting would result in the repricing of approximately $322.7 million, or 23.5%, of our floating and variable rate loans in July. Total rate increases of 175 bps between June 30 and December 31 would result in repricing of approximately $453.6 million, or 33.0%, of our total floating and adjustable rate loans by December 31, 2022. Although we have raised interest rates paid on deposit accounts, we continue to maintain a conservative approach to increases. A total of 39.8% of our deposits are noninterest-bearing and total cost of funds on total deposits during the second quarter was 0.23%.

RESULTS OF OPERATIONS

Participation in the PPP1 and PPP2 program, as well as large provisions for credit losses in the second quarter of 2020, resulting from the expected effects of COVID-19, along with subsequent provision releases, has created temporary extraordinary results in the calculation of net earnings and related performance ratios. The following table illustrates net earnings and net core earnings results, which are pre-tax, pre-provision and pre-extraordinary PPP1/PPP2 income, as well as performance ratios for the prior five quarters:

Net interest income, before the provision for credit losses, in the second quarter of 2022 and 2021 was $26.9 million and $23.5 million, respectively, an increase of $3.4 million, or 14.4%. The increase in net interest income resulted from an increase in interest income of $3.8 million, or 15.2%, which was partially offset by an increase in interest expense of $462,000, or 25.6%, quarter over quarter. Interest and fee income from PPP loans decreased $1.5 million, or 77.7%, while all loan and other interest income increased $3.4 million, or 14.8%, during the current quarter compared to the prior year quarter. In addition, interest income from investment securities increased $1.9 million, or 88.9%, from the same quarter in the prior year.

Net interest margin, on a taxable equivalent basis, for the second quarter of 2022 and 2021 was 3.61% and 3.44%, respectively. Net interest margin increased 17 basis points primarily due to a 21 basis point yield increase on total interest earning assets that was offset by an eight basis point increase in cost of interest bearing liabilities. The increase in yield on interest earning assets resulted primarily due to the reinvestment of interest bearing deposits held at other banks, which earned a yield of 0.06% in the prior year quarter, into higher yielding investment securities and loans. There was a slight decrease in loan yield from 4.79% for the second quarter of 2021 to 4.77% for the second quarter of 2022, a change of two basis points, caused primarily due to recognized PPP origination fee and interest income of $2.0 million during the prior year quarter, compared to $436,000 in the current year quarter. The increase in net interest margin was offset slightly by an increase in the cost of interest-bearing deposits from 0.37% to 0.38% during the same period, a change of one basis point, and an increase in the overall cost of interest-bearing liabilities of eight basis points, from 0.42% in the second quarter of 2021 to 0.50% in the second quarter of 2022.

Net interest income, before the provision for credit losses, increased $2.5 million, or 10.4%, from $24.3 million in the first quarter of 2022 to $26.9 million in the second quarter of 2022. The increase in net interest income resulted primarily from an increase in loan income of $2.3 million, or 10.4%, from the prior quarter, as well as an increase in investment security income of $1.0 million, or 33.4% from the prior quarter. The increase was partially offset by an increase in the cost of interest bearing liabilities of $699,000, or 44.5%, from the prior quarter.

Net interest margin, on a taxable equivalent basis, increased from 3.37% for the first quarter of 2022 to 3.61% for the second quarter of 2022, an increase of 24 basis points. Loan yield increased from 4.66% for the first quarter of 2022 to 4.77% for the second quarter of 2022, a change of 11 basis points. The remaining increase in net interest margin resulted primarily from a decrease in average interest bearing deposits held at other banks of $260.8 million, which earned a yield of 0.13% in the prior quarter, and which were reinvested into higher yielding investment securities and loans. The increase in net interest margin was offset slightly by an increase in the cost of interest-bearing deposits from 0.29% in the first quarter to 0.38% in the second quarter of 2022, a change of nine basis points. There was an increase in the overall cost of interest-bearing liabilities of 14 basis points, from 0.36% in the first quarter to 0.50% in the second quarter of 2022.

The Bank’s participation in the PPP program created temporary extraordinary results in the calculation of net interest margin. To illustrate the impact of the PPP program on net interest margin, the table below excludes PPP1 and PPP2 loans and their associated fees and costs for the quarter ended June 30, 2022:

During the second quarter of 2022, we recorded no provision for credit losses. At the onset of the COVID pandemic in 2020, we established COVID-specific qualitative factors to estimate the potential impact of the pandemic to our loan portfolio as a whole, which led to a provision during 2020 of $13.2 million. As the economic, health and other impacts of the virus became more clear and cases began to decline, we reduced the COVID-specific qualitative factors during 2021 and fully unwound these specific factors during the first quarter of 2022. The impact of unwinding the remaining COVID-specific qualitative factors was offset by growth in our loan portfolio, however, we also decreased certain of our standard qualitative factors in the second quarter to capture current macro-economic conditions that we believe are more similar to the environment prior to the COVID-19 pandemic (i.e. near the end of a long up-cycle with a downturn expected) and consistent with our day-one CECL methodology. As of June 30, 2022, our allowance for credit losses as a percentage of total loans was 1.36%.

Noninterest income increased $111,000, or 1.9%, in the second quarter of 2022 to $6.1 million, compared to $6.0 million for the second quarter of 2021. The increase from the same quarter in 2021 was due primarily to an increase in services charges of $215,000, or 25.1%, an increase in merchant and debit card fees of $139,000, or 7.2%, and an increase in other noninterest income of $169,000, or 26.4%, compared to the same quarter in the prior year. The increase in noninterest income was partially offset by a decrease in the gain on sale of loans of $362,000, or 29.1%, a $55,000, or 35.0%, decrease in mortgage fee income and a $132,000, or 62.6%, decrease in warehouse lending fees compared to the same quarter of the prior year. The increase in service charges and merchant and debit card fees, as well as the decreases in gain on sale of loans, mortgage fee income and warehouse lending fees were primarily volume driven. The increase in other non-interest income was comprised of various smaller items such as increases in loan processing fees, SBA servicing revenue, and a $45,000 loss on sale of ORE in the prior year quarter that was not present in the current year.

Noninterest expense increased $2.0 million, or 11.2%, in the second quarter of 2022 to $19.7 million, compared to the second quarter of 2021. The increase in noninterest expense in the second quarter of 2022 was driven primarily by a $1.5 million, or 15.0%, increase in employee compensation and benefits due to increased salaries, higher insurance expense accruals due to increased claims experience and increased bonus accruals due to higher net income. Software and technology expense increased $284,000, or 26.9%, compared to the second quarter of 2021, due to additional technology investments. The increase was partially offset by a decrease in amortization of deposit premiums and software of $158,000, or 47.0%, from the prior year quarter.

Noninterest income in the second quarter of 2022 decreased by $398,000, or 6.1%, from $6.5 million in the first quarter of 2022 due primarily to a decrease in other noninterest income of $890,000, or 52.4%, resulting primarily from a $685,000 net gain on the termination of interest rate swaps that occurred during the first quarter of 2022.

Noninterest expense increased $615,000, or 3.2%, in the second quarter of 2022, from $19.1 million for the quarter ended March 31, 2022. The increase was primarily due to an increase in employee compensation and benefits of $198,000, or 1.7%, an increase in occupancy expenses of $137,000, or 5.1%, an increase in software and technology expense of $130,000, or 10.8%, an increase in ATM and debit card expense of $96,000, or 16.6%, and an increase in other noninterest expense of $161,000, or 15.6%, during the second quarter of 2022. The increase in other non-interest expense resulted primarily from increases in charitable contributions, travel, lodging and meal expenses and from customer account related fraud losses, compared to the prior year quarter. These were partially offset by a decreases in amortization expense of $41,000, or 18.7%, and advertising expense of $87,000, or 21.4%, during the second quarter of 2022.

The Company’s efficiency ratio in the second quarter of 2022 was 59.80%, compared to 61.94% in the prior year quarter and 60.12% in the first quarter of 2022. Adjusted to remove the effects of PPP-related transactions, the Company’s efficiency ratio^† for the second quarter of 2022 was 60.60%, was 63.56% for the first quarter of 2022 and was 64.66% for the second quarter of 2021.

FINANCIAL CONDITION

Consolidated assets for the Company totaled $3.28 billion at June 30, 2022, compared to $3.19 billion at March 31, 2022 and $2.93 billion at June 30, 2021.

Gross loans increased $124.3 million, or 6.2%, to $2.14 billion at June 30, 2022, compared to loans of $2.01 billion at March 31, 2022. The increase in gross loans from the first quarter of 2022 to the second quarter of 2022 is primarily due to increased loan originations and advances, which were partially offset by continued forgiveness of PPP loans, which decreased $16.7 million during the quarter. Excluding PPP and warehouse lending loans, gross loans increased $139.9 million, or 7.1%, from March 31, 2022.

Gross loans increased $248.2 million, or 13.1%, from $1.89 billion at June 30, 2021. The increase in gross loans during the second quarter of 2022 compared to the second quarter of 2021 resulted primarily from organic loan growth and was partially offset by a $124.8 million reduction in PPP loan balances during the period. Excluding PPP and warehouse lending loans, gross loans increased $420.2 million, or 24.9%, from June 30, 2021.

Total deposits decreased by $17.8 million, or 0.6%, to $2.78 billion at June 30, 2022, compared to $2.80 billion at March 31, 2022, and increased 9.7%, or $246.6 million, from $2.53 billion at June 30, 2021. The decrease in deposits during the current quarter resulted primarily from a $38.4 million decrease in public funds accounts.

Nonperforming assets as a percentage of total loans were 0.46% at June 30, 2022, compared to 0.13% at March 31, 2022 and 0.20% at June 30, 2021. The Bank's non-performing assets consist primarily of non-accrual loans. Four loans were added to non-accrual status in the current quarter and are Small Business Administration (SBA) 7(a), partially guaranteed (75%) loans, acquired in the June 2018 acquisition of Westbound Bank, with combined book balances of $6.7 million as of June 30, 2022. These loans, collateralized by two hotels, were identified as problem assets prior to COVID-19 but obtained government stimulus and other relief which allowed the two related borrowers to remain current through early 2022. Management continues to work toward a satisfactory resolution for these four loans, however, in the event of foreclosure, a significant loss is not expected due to estimated current collateral values.

Total equity totaled $282.8 million as of June 30, 2022, compared to $291.9 million at March 31, 2022 and $287.7 million at June 30, 2021. The decrease from the previous quarter resulted primarily from the payment of dividends of $2.6 million, repurchase of 175,181 shares of treasury stock for $6.2 million and a decrease in accumulated other comprehensive income of $11.7 million during the second quarter of 2022 resulting from fluctuations in the fair market value of securities, offset by net income of $10.8 million. Although the unrealized losses in accumulated other comprehensive income during the quarter do not impact regulatory capital ratios, they did result in a decrease in the tangible common equity^† ratio from 8.16% as of March 31, 2022 to 7.64% as of June 30, 2022.

In September 2021, we announced the formation of a partnership with CaliberCos, Inc., a vertically integrated alternative asset manager and fund sponsor, in an effort to drive investments that will revitalize communities across Texas through real estate developments. We recorded this investment by our Bank subsidiary and the noncontrolling interest during the first quarter of 2022. Further details of this partnership can be found in a Form 8-K filed with the Securities and Exchange Commission on September 7, 2021.

Nonperforming assets as a percentage of total assets were 0.30% at June 30, 2022 compared to 0.08% at March 31, 2022, and 0.13% at June 30, 2021.