Press Release

Guaranty Bancshares, Inc. Reports Second Quarter 2020 Financial Results

Company Release - 7/20/2020 4:15 PM ET

ADDISON, Texas--(BUSINESS WIRE)-- Guaranty Bancshares, Inc. (NASDAQ: GNTY), the parent company of Guaranty Bank & Trust, N.A., today reported financial results for the fiscal quarter ended June 30, 2020. The Company's net income available to common shareholders was $1.1 million, or $0.10 per basic share, for the quarter ended June 30, 2020, compared to $6.3 million, or $0.55 per basic share, for the quarter ended March 31, 2020 and $6.0 million, or $0.52 per basic share, for the quarter ended June 30, 2019. Return on average assets and average equity for the second quarter of 2020 were 0.16% and 1.67%, respectively, compared to 1.09% and 9.94%, respectively, for the first quarter of 2020 and 1.05% and 9.97%, respectively, for the second quarter of 2019. Earnings were impacted during the second quarter of 2020 by a large provision for loan loss reserves resulting from additional assumptions made in our CECL methodology due to COVID-19, which was partially offset by loan origination fees earned from the Small Business Association’s (SBA) Paycheck Protection Program (PPP). Net core earnings, excluding provisions for loan losses and income taxes and PPP net origination income, as well as our core net interest margin, adjusted to exclude the effects of PPP loans, are described further in tables below.

"We continue to work with our borrowers, communities and employees to assess and combat the impacts of COVID-19. We are in close contact with borrowers who requested temporary financial relief in order to understand potential longer-term impacts. We are anticipating further guidance from the SBA on the forgiveness of PPP loans, will work with affected borrowers to provide a smooth loan forgiveness process, and will recognize additional deferred revenue as a result. We continue to have a significant portion of our employees working from their homes and closely monitor the trends in COVID-19 positive test results and hospitalizations to determine whether location hours and remote working arrangements should be adjusted to maintain proper virus risk mitigation. These are unusual and uncharted times, however, our Bank has a solid core earnings foundation, sustained net interest margins, a history of strong asset quality and strong capital and liquidity that will allow us to work through this crisis. COVID-19 has also allowed us to realize returns on significant investments in technology and remote banking that we have made in recent years. Investments in video banking, electronic signatures, online account opening, digital marketing and other remote banking channels have allowed us to seamlessly continue delivering banking services to new and existing customers, while maintaining higher levels of safety during this virus," commented Ty Abston, the Company's Chairman and Chief Executive Officer.

QUARTERLY HIGHLIGHTS

  • Steady Credit Quality. Non-performing assets as a percentage of total loans declined to 0.76% at June 30, 2020, compared to 1.00% at March 31, 2020 and 0.64% at June 30, 2019. The Bank provided financial relief to many of its customers during the quarter due to the COVID-19 outbreak through a 3-month principal and interest payment deferral program. At period-end, the Bank had outstanding loan balances of $247.8 million under the 3-month deferral program.
  • COVID-19 Impact on Net Earnings. The Bank had a $12.1 million provision for loan losses in the quarter, compared to $1.4 million in the first quarter of 2020 and $575,000 in the second quarter of 2019. The $12.1 million provision resulted largely from additional qualitative factors considered under the Current Expected Credit Losses (CECL) standard adopted by the bank on January 1, 2020, primarily derived from changes in national GDP, Texas unemployment rates and national industry-related CRE trends, all of which are impacted by the effects of COVID-19.

    Net earnings for the quarter were $1.1 million, down from $6.3 million for the immediately prior quarter and $6.0 million for the same quarter of 2019. Net core earnings, which exclude provisions for loan losses and income tax, net PPP income, and interest on PPP-related borrowings was $10.5 million for the second quarter of 2020, an increase of $1.4 million, or 14.8%, compared to the immediately prior quarter and an increase of $2.5 million, or 30.9%, compared to the same quarter in 2019.
  • Paycheck Protection Program. The Bank issued $208.8 million of PPP loans to 1,905 borrowers, which resulted in $2.1 million in net origination fees recognized by the Bank and $4.9 million in net deferred origination fees. The Bank found that many PPP borrowers deposited the proceeds of such loans into non-interest bearing demand accounts at the Bank, which were largely maintained during the quarter.

Non GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in the schedules accompanying this release.

 

RESULTS OF OPERATIONS

With the credit outlook still uncertain as a result of COVID-19 and other economic factors, the following table illustrates net earnings and net core earnings results, which are pre-tax, pre-provision and pre-extraordinary PPP income, as well as performance ratios for the prior five quarters:

 

 

 

Quarter Ended

 

 

 

2020

 

 

2019

 

 

 

June 30

 

 

March 31

 

 

December 31

 

 

September 30

 

 

June 30

 

Net earnings

 

$

1,075

 

 

$

6,278

 

 

$

7,369

 

 

$

7,530

 

 

$

6,043

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

12,100

 

 

 

1,400

 

 

 

 

 

 

100

 

 

 

575

 

Income tax provision

 

 

(190

)

 

 

1,445

 

 

 

1,573

 

 

 

1,634

 

 

 

1,384

 

PPP net origination and interest income

 

 

(2,540

)

 

 

 

 

 

 

 

 

 

 

 

 

Net interest expense on PPP-related borrowings

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

Net core earnings

 

$

10,476

 

 

$

9,123

 

 

$

8,942

 

 

$

9,264

 

 

$

8,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

 

$

2,657,609

 

 

$

2,325,618

 

 

$

2,341,766

 

 

$

2,328,603

 

 

$

2,314,628

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP loan average balance

 

 

(163,184

)

 

 

 

 

 

 

 

 

 

 

 

 

Excess fed funds sold due to PPP-related borrowings

 

 

(84,066

)

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets, adjusted

 

$

2,410,359

 

 

$

2,325,618

 

 

$

2,341,766

 

 

$

2,328,603

 

 

$

2,314,628

 

Total average equity

 

$

258,225

 

 

$

251,159

 

 

$

260,160

 

 

$

254,788

 

 

$

243,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PERFORMANCE RATIOS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings to average assets (annualized)

 

 

0.16

%

 

 

1.09

%

 

 

1.25

%

 

 

1.28

%

 

 

1.05

%

Net earnings to average equity (annualized)

 

 

1.67

 

 

 

9.94

 

 

 

11.24

 

 

 

11.73

 

 

 

9.97

 

Net core earnings to average assets, as adjusted (annualized)

 

 

1.75

 

 

 

1.56

 

 

 

1.51

 

 

 

1.58

 

 

 

1.39

 

Net core earnings to average equity (annualized)

 

 

16.32

 

 

 

14.45

 

 

 

13.64

 

 

 

14.43

 

 

 

13.20

 

PER COMMON SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

 

11,025,924

 

 

 

11,432,391

 

 

 

11,533,849

 

 

 

11,550,335

 

 

 

11,659,513

 

Earnings per common share, basic

 

$

0.10

 

 

$

0.55

 

 

$

0.64

 

 

$

0.65

 

 

$

0.52

 

Net core earnings per common share, basic

 

 

0.95

 

 

 

0.80

 

 

 

0.78

 

 

 

0.80

 

 

 

0.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in the schedules accompanying this release.

 

 

Net interest income, before the provision for loan losses, in the second quarter of 2020 and 2019 was $23.2 million and $19.3 million, respectively, an increase of $3.9 million, or 20.2%, resulting primarily from the recognition of $2.1 million of net PPP loan origination fees and a decrease in deposit-related interest expense of $2.7 million, or 46.7%, compared to the same quarter of the prior year. Net interest margin, on a taxable equivalent basis, for the second quarter of 2020 and 2019 was 3.78% and 3.61%, respectively. Net interest margin, on a taxable equivalent basis, decreased from 3.87% in the first quarter of 2020 to 3.78% in the second quarter of 2020, primarily due to the effects of the PPP loans, which earn only 1.00% interest, on the loan yield for the period. During the period, loan yield decreased from 5.39% for the second quarter of 2019 to 5.15% for the second quarter of 2020, a change of 24 basis points, while the cost of interest bearing deposits decreased from 1.56% to 0.83% during the same period, a change of 73 basis points. The decrease in loan yield was primarily due to the dilutive effect of the 1.00% yield on PPP loans originated during the second quarter of 2020. Loan yield decreased from 5.32% for the first quarter of 2020 to 5.15% for the second quarter of 2020, a change of 17 basis points, while the cost of interest bearing deposits decreased from 1.21% to 0.83% during the same period, a change of 38 basis points. These decreases were due primarily to reductions in interest rates by the Federal Reserve at the end of the first quarter of 2020.

During the second quarter, the Bank’s participation in the PPP program created temporary extraordinary results in the calculation of net interest margin. In order to prepare for participation in this program, the Bank borrowed $100.0 million from the FHLB at an interest rate of 0.25%. However, the Bank discovered that PPP loans mostly self-funded as many of the borrowers during the quarter deposited their loan proceeds into non-interest bearing demand accounts at the Bank and largely maintained those deposits during the quarter. As a result, the Bank had large amounts of fed funds sold during the quarter, which earned an interest rate of 0.10%. To illustrate core net interest margin and remove the noise resulting from the PPP, the table below excludes PPP loans and their associated fees and costs, as well as the average balance of related FHLB borrowings and fed funds sold, for the three and six months ended June 30, 2020:

 

 

 

For the Three Months Ended June 30, 2020

 

 

For the Six Months Ended June 30, 2020

 

 

 

Average
Outstanding
Balance

 

 

Interest
Earned/
Interest
Paid

 

 

Average
Yield/ Rate

 

 

Average
Outstanding
Balance

 

 

Interest
Earned/
Interest
Paid

 

 

Average
Yield/ Rate

 

Total interest-earnings assets

 

$

2,486,636

 

 

$

26,581

 

 

 

4.30

%

 

$

2,318,947

 

 

$

51,833

 

 

 

4.49

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP loan average balance and net fees(1)

 

 

(163,184

)

 

 

(2,540

)

 

 

6.26

 

 

 

(81,592

)

 

 

(2,540

)

 

 

6.26

 

Excess fed funds sold due to PPP-related borrowings

 

 

(84,066

)

 

 

(21

)

 

 

0.10

 

 

 

(42,033

)

 

 

(21

)

 

 

0.10

 

Total interest-earnings assets, net of PPP effects

 

$

2,239,386

 

 

$

24,020

 

 

 

4.31

%

 

$

2,195,322

 

 

$

49,272

 

 

 

4.51

%

Interest expense adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP-related borrowings

 

 

(84,066

)

 

 

(52

)

 

 

0.25

 

 

 

(42,033

)

 

 

(52

)

 

 

0.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

23,182

 

 

 

 

 

 

 

 

 

 

$

43,751

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.75

%

 

 

 

 

 

 

 

 

 

 

3.79

%

Net interest income, net of PPP effects

 

 

 

 

 

 

20,673

 

 

 

 

 

 

 

 

 

 

 

41,242

 

 

 

 

 

Net interest margin, net of PPP effects

 

 

 

 

 

 

 

 

 

 

3.71

 

 

 

 

 

 

 

 

 

 

 

3.78

 

Efficiency ratio(2)

 

 

 

 

 

 

 

 

 

 

53.90

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio, net of PPP effects†(3)

 

 

 

 

 

 

 

 

 

 

62.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

† Non-GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in the schedules accompanying this release.

 

(1) Interest earned consists of interest income of $407,000 and net origination fees recognized of $2.1 million for the three and six months ended June 30, 2020.

 

(2) The efficiency ratio was calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.

 

(3) The efficiency ratio was calculated by dividing total noninterest expense, net of PPP-related deferred costs, by net interest income, net of PPP effects, plus noninterest income, excluding securities gains or losses. Taxes are not part of this calculation.

 

 

The Bank adopted the Current Expected Credit Losses (CECL) standard (Accounting Standards Update 2016-13 or ASC 326) on January 1, 2020. The day one impact of adopting CECL resulted in an allowance increase of $4.5 million, or 28.1%, from December 31, 2019. There was a $12.1 million provision for loan losses in the second quarter of 2020, compared to $1.4 million in the first quarter of 2020 and $575,000 in the second quarter of 2019. The $12.1 million provision this quarter results largely from additional qualitative factors, primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which are impacted by the effects of COVID-19. Beginning in March 2020, and through the date of this earnings release, the Bank has closely reviewed its loan portfolio and has spoken to borrowers about their financial hardships, if any. As a result, the Bank has downgraded additional loans in industries affected by this crisis to appropriate risk ratings given the expected impacts of COVID-19 on those industries. Management believes the provisions made in both the first and second quarter, as a result of loan downgrades and qualitative factor adjustments in the CECL model, appropriately capture the current credit risks associated with COVID-19 and do not anticipate provisions at these levels during the second half of 2020 at this time. However, the outbreak could worsen in the short term, leading to possible changes in customer and consumer behavior and stronger response measures by government officials, and the long term economic impacts of COVID-19 are still very much unknown.

Noninterest income increased $877,000, or 21.3%, in the second quarter of 2020, to $5.0 million, compared to $4.1 million for the quarter ended June 30, 2019. The increase from the same quarter in 2019 was due primarily to an increase in the gain on sales of loans of$825,000, or120.8%, and anincreasein merchant and debit card fees of $265,000, or 24.8%, from the same quarter of the prior year. Additionally, bank-owned life insurance income increased $52,000, or 33.5%, and fiduciary income increased $40,000, or 9.2%, during the second quarter of 2020. These increases were partially offset by a $318,000 or 35.8% decrease in service charges during the second quarter of 2020, as compared to the same quarter of 2019, due to certain temporary service charge waivers as a result of COVID-19.

Noninterest income increased $26,000, or 0.5%, to $5.0 million in the second quarter of 2020, compared to $5.0 million for the quarter ended March 31, 2020. This was primarily attributable to an increase in the realized gain on sale of loans of $319,000, or 26.8%, and an increase in merchant and debit card fees of $203,000, or 17.9%, from the prior quarter. These gains were partially offset by a $337,000, or 37.1%, decrease in service charge income due to certain temporary service charge waivers as a result of COVID-19 and decrease in fiduciary income of $40,000, or 7.8%, from the previous quarter.

Noninterest expense decreased $210,000, or 1.4%, in the second quarter of 2020, compared to the second quarter of 2019. The decrease in noninterest expense in the second quarter of 2020 was primarily driven by a decrease in employee compensation and benefits expense to $8.1 million, a decrease of $616,000, or 7.1%, from the same quarter of the prior year due to a reduction in bonus accrual during the quarter, as well as the effects of deferred origination fees associated with PPP loan originations. Legal and professional fees decreased $98,000, or 14.3%, compared to the same quarter of the prior year due and director and committee fees decreased $61,000, or 27.0%. These decreases were partially offset by an increase in software and technology expense of $173,000, or 22.4%, resulting from new software and hardware investments to allow employees to securely work from home and to improve online deposit account opening. Additionally, there was an increase in ATM and debit card expense of $176,000, or 58.1%, resulting from increased usage of debit cards during the period. Occupancy expenses increased $113,000, or 4.6%, from the same quarter of the prior year. The company’s efficiency ratio in the second quarter of 2020 was 53.90%, compared to 65.74% in the same quarter last year. Adjusted to remove the effects of PPP-related transactions, the company’s efficiency ratio for the second quarter of 2020 would have been 62.44%.

Noninterest expense decreased $1.2 million, or 7.5%, in the second quarter of 2020 to $15.2 million, compared to the quarter ended March 31, 2020. The decrease was primarily due to a $1.4 million, or 14.7%, decrease in employee compensation and benefits, resulting primarily from reduction of the employee bonus and effects of net deferred revenue associated with PPP loan originations. This was partially offset by a $73,000, or 2.9%, increase in occupancy expenses and a $70,000, or 13.5%, increase in legal and professional fees from the previous quarter. Other noninterest expense increased $74,000, or 6.0%, from the previous quarter. The company’s efficiency ratio in the second quarter of 2020 was 53.90%, compared to 64.27% in the prior quarter. Adjusted to remove the effects of PPP-related transactions, the company’s efficiency ratio for the second quarter of 2020 was 62.44%.

 

Non GAAP financial metric. Calculations of this metric and reconciliations to GAAP are included in the schedules accompanying this release.

 

FINANCIAL CONDITION

Consolidated assets for the company totaled $2.67 billion at June 30, 2020, compared to $2.39 billion at March 31, 2020 and $2.33 billion at June 30, 2019. Gross loans increased 13.9%, or $239.1 million, to $1.96 billion at June 30, 2020, compared to loans of $1.72 billion at March 31, 2020. Gross loans increased 15.6%, or $263.6 million, from $1.69 billion at June 30, 2019. The increase in gross loans during the second quarter of 2020 included outstanding PPP loan balances of $208.8 million, to 1,905 borrowers, as of June 30, 2020. Excluding the outstanding balance of PPP loans, gross loans increased 1.8%, or $30.3 million, from the prior quarter. Deposits increased by 12.1%, or $241.6 million, to $2.24 billion at June 30, 2020, compared to $2.00 billion at March 31, 2020. Total deposits increased 13.0%, or $258.0 million, from $1.98 billion at June 30, 2019. Changes in gross loans and deposits during these periods resulted primarily from PPP loans and the deposit of related PPP funds into demand accounts at the Bank, as well as apparent changes in depositor spending habits during the quarter resulting from economic and other uncertainties due to COVID-19. Shareholders' equity totaled $258.9 million as of June 30, 2020, compared to $253.6 million at March 31, 2020 and $250.1 million at June 30, 2019. The increase from the previous quarter resulted primarily from net income of $1.1 million and unrealized gains in our investment security portfolio of $8.8 million, partially offset by purchase of treasury stock early in the quarter of $2.7 million and payment of dividends of $2.1 million. The company will limit additional purchases of treasury stock for the foreseeable future.

During the first quarter of 2020, the Bank transferred all of its investment securities classified as held-to-maturity to available-for-sale in order to provide maximum flexibility to address liquidity and capital needs that may result from COVID-19. Management believes these transfers are allowable under existing GAAP due to the isolated, non-recurring and usual events resulting from the pandemic.

Nonperforming assets as a percentage of total loans were 0.76% at June 30, 2020, compared to 1.00% at March 31, 2020, and 0.64% at June 30, 2019. The Bank’s nonperforming assets consist primarily of nonaccrual loans, three of which 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 $8.7 million as of June 30, 2020. These loans were internally identified as problem assets prior to COVID-19 and are properly reserved. Management expects these three loans to be resolved in the second half of 2020. Excluding these partially guaranteed SBA loans, non-performing assets as a percentage of total loans at June 30, 2020 would be 0.30%.

The Bank has worked with borrowers since March of 2020 to provide financial relief through a 3-month principal and interest payment deferral program due to the impact of the COVID-19 pandemic. This initial relief program was offered to loan customers in good standing who needed, or wanted, the additional liquidity during the early stages of the virus. However, further modification requests will be carefully reviewed prior to approval in order to evaluate a true financial hardship and need for additional relief. As of June 30, 2020, the Bank had 658 borrowers with outstanding loan balances totaling $247.8 million who had requested this relief under the 3-month payment deferral program. The Bank will closely monitor the credit quality and repayment ability of these borrowers as the temporary modification periods end.

Finally, management continues to closely monitor loans and concentrations in COVID-19 effected industries. Social distancing, stay-at-home orders and other measures as a result of the virus have particularly affected the restaurant, hospitality, retail commercial real estate (CRE) and energy sectors. Excluding SBA partially guaranteed (75%) loans, the Bank has direct exposure, through total loan commitments and weighted average loan-to-values (LTV), as of June 30, 2020, of $35.8 million and 64.6% weighted average LTV to restaurants, of $61.5 million and 52.17% weighted average LTV to retail CRE and $71.8 million and 56.8% weighted average LTV to hotel/hospitality borrowers.

 

Guaranty Bancshares, Inc.

Consolidated Financial Summary (Unaudited)

(In thousands, except share and per share data)

 

 

 

As of

 

 

 

2020

 

 

2019

 

 

 

June 30

 

 

March 31

 

 

December 31

 

 

September 30

 

 

June 30

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

35,490

 

 

$

40,354

 

 

$

39,907