Guaranty Bancshares, Inc. Reports Fourth Quarter and Year-End 2020 Financial Results
January 19, 2021 at 07:00 AM EST
Guaranty Bancshares, Inc. (NASDAQ: GNTY), the parent company of Guaranty Bank & Trust, N.A., today reported financial results for the fiscal quarter and year ended December 31, 2020. The Company's net income available to common shareholders was $9.9 million, or $0.90 per basic share, for the quarter ended December 31, 2020, compared to $10.1 million, or $0.92 per basic share, for the quarter ended September 30, 2020 and $7.4 million, or $0.64 per basic share, for the quarter ended December 31, 2019. Return on average assets and average equity for the fourth quarter of 2020 were 1.48% and 14.53%, respectively, compared to 1.53% and 15.21%, respectively, for the third quarter of 2020 and 1.25% and 11.24%, respectively, for the fourth quarter of 2019. The increase in earnings during the third and fourth quarters of 2020, compared to the fourth quarter of 2019, was largely due to the forgiveness and amortization of Paycheck Protection Program (“PPP”) loans and recognition of associated loan origination fees, as well as increased non-interest income from mortgage and warehouse lending activities and decreases in interest expense relative to interest income. 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.
"Despite the many challenges endured by our customers and employees during 2020, we are pleased with the Company’s operating and financial results for fourth quarter and for the year. Throughout 2020, we worked diligently with our employees to follow strong safety protocols and to provide technology that allows them to work remotely when necessary. We participated in the SBA’s PPP loan program and worked with our customers to provide temporary payment or interest-only deferrals. We closely analyzed our loan portfolio and increased our reserves for credit losses due to the ongoing uncertainty of the impact and timing of possible economic hardships resulting from COVID-19. We gave back to our communities through monetary and volunteer donations to non-profits that support those impacted by the virus. Texas has proven to be a very resilient economy and it is in a strong position to rebound when the vaccines are readily available and the virus begins to subside. As our fourth quarter and year-end results indicate, our Bank continues to provide a solid core earnings foundation, sustainable net interest margin and very strong asset quality, all of which contribute to strong shareholder prospects. We look forward to 2021 and the ability for our communities, employees and customers to return to a more normal and social lifestyle," commented Ty Abston, the Company's Chairman and Chief Executive Officer.
QUARTERLY AND ANNUAL HIGHLIGHTS
RESULTS OF OPERATIONS
Large provisions for credit losses in the second quarter of 2020 resulting from effects of COVID-19 and participation in the PPP program have created temporary extraordinary results in the calculation of net earnings and related performance ratios. 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:
Net interest income, before the provision for loan losses, in the fourth quarter of 2020 and 2019 was $24.0 million and $20.5 million, respectively, an increase of $3.5 million, or 16.9%, resulting primarily from a decrease in deposit-related interest expense of $3.1 million, or 62.4%, compared to the same quarter of the prior year. Net interest income, before the provision for loan losses, in the third and fourth quarters of 2020 was $22.3 million and $24.0 million, respectively; an increase of $1.7 million, or 7.5%, resulting primarily from an increase in loan income of $1.3 million, or 5.8%, during the current quarter.
Net interest margin, on a taxable equivalent basis, for the fourth quarter of 2020 and 2019 was 3.85% and 3.77%, respectively. Loan yield decreased from 5.32% for the fourth quarter of 2019 to 4.93% for the fourth quarter of 2020, a change of 39 basis points, while the cost of interest-bearing deposits decreased from 1.35% to 0.51% during the same period, a change of 84 basis points. The decrease in loan yield was primarily due to the repricing of variable rate loans to lower interest rates during the period. The decrease in average deposit rate was primarily due to continued reductions in interest rates for non-maturing deposits as market conditions have allowed.
Net interest margin, on a taxable equivalent basis, increased from 3.61% in the third quarter of 2020 to 3.85% in the fourth quarter of 2020. Loan yield increased from 4.59% for the third quarter of 2020 to 4.93% for the fourth quarter of 2020, a change of 34 basis points due primarily to the effect of PPP loans during the third and fourth quarters of 2020. Loan yield, excluding the effect PPP loans, decreased seven basis points from the third quarter to the fourth quarter of 2020, due to the continued repricing of variable rate loans to lower interest rates. The cost of interest-bearing deposits decreased from 0.63% to 0.51% during the same period, a change of 12 basis points. These decreases were due primarily to the maturity of higher-rate CDs during the fourth quarter of 2020, as well as continued reductions in interest rates for non-maturing deposits as market conditions have allowed.
The Bank’s continued participation in the PPP program has created temporary extraordinary results in the calculation of net interest margin. To illustrate core net interest margin, 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 months and year ended December 31, 2020:
The Bank adopted the 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 no provision for loan losses during the fourth quarter of 2020 and 2019, compared to provision reversal of $300,000 in the third quarter of 2020. The provision expense recorded during the first half of 2020 resulted largely from additional qualitative factors, primarily derived from changes in national GDP, Texas unemployment rates and national industry related CRE trends, all of which were impacted by the effects of COVID-19. Other provision increases in the first half of 2020 resulted from detailed review of the loan portfolio and from discussions with borrowers about their financial hardships, if any, which led to downgrades of loans in loans and industries affected by the crisis to appropriate risk ratings given the expected impacts of COVID-19. Management believes the provisions made in both the first and second quarter, as a result of risk rating downgrades and qualitative factor adjustments in the CECL model, appropriately capture the current credit risks associated with COVID-19. During the third and fourth quarters of 2020, qualitative factor adjustments remained consistent because our CECL model assumes a lag in estimated losses as a result of economic declines caused by the virus. During the third quarter of 2020, loan balances declined in certain pooled segments that contain higher allowance allocation factors, resulting in a lower calculated allowance for credit losses and a reverse provision of $300,000. Furthermore, a new round of stimulus has been introduced (known as “PPP-2”), which is an indication that the economic effects of the pandemic may be longer lasting than initially predicted. It is possible that the economic effects of the pandemic could continue throughout and even beyond the 2021 year, and the long term economic impacts of COVID-19 and the response of governments and our customers are still unknown.
Noninterest income increased $1.8 million, or 37.5%, in the fourth quarter of 2020, to $6.4 million, compared to $4.7 million for the fourth quarter of 2019. The increase from the same quarter in 2019 was due primarily to an increase in the gain on sale of loans of $1.2 million, or 159.4%, and an increase in merchant and debit card fees of $256,000, or 22.5%, from the same quarter of the prior year. The remaining increase resulted from a $163,000 increase in mortgage and warehouse fee income and a $70,000 increase on gains on sale of assets and ORE. These increases were partially offset by a $154,000, or 15.1%, decrease in service charges during the fourth quarter of 2020, as compared to the same quarter of 2019, due primarily to lower insufficient funds fees as consumers are transitioning to more digital spending methods.
Noninterest income decreased $237,000, or 3.6%, to $6.4 million in the fourth quarter of 2020, compared to $6.7 million for the quarter ended September 30, 2020. This was primarily attributable to a decrease in merchant and debit card fees caused by the receipt of approx. $190,000 from an annual contract incentive payment from the debit card processor in the third quarter that was not present in the fourth quarter 2020, as well as a decrease in the gain on sale of loans of $91,000, or 4.3%, during the fourth quarter. These were partially offset by an increase in service charges of $151,000, or 21.1%.
Noninterest expense increased $1.9 million, or 12.0%, in the fourth quarter of 2020, compared to the fourth quarter of 2019. The increase in noninterest expense in the fourth quarter of 2020 was primarily driven by an increase in employee compensation and benefits expense of $879,000, or 9.4%, to $10.2 million, from the same quarter of the prior year, as well as an increase in legal and professional fees of $357,000, or 58.4%. Additional increases were due to the effects of a $252,000, or 100%, increase in FDIC insurance assessment fees during the fourth quarter of 2020 due to FDIC assessment credits of $534,000 that were received and recognized during the prior year. Software and technology expense also increased $225,000, or 24.9%, as a result of new software and hardware investments to allow employees to securely work from home and to improve online deposit account opening. Occupancy expenses increased $98,000, or 3.9%, from the same quarter of the prior year and there was an increase in ATM and debit card expense of $89,000, or 19.5%, resulting from increased usage of ATM and debit cards during the period. The company’s efficiency ratio in the fourth quarter of 2020 was 59.82%, compared to 64.47% in the same quarter last year. Adjusted to remove the effects of PPP-related transactions, the company’s efficiency ratio† for the fourth quarter of 2020 was 65.55%.
Noninterest expense increased $1.4 million, or 8.4%, in the fourth quarter of 2020 to $18.2 million, compared to the quarter ended September 30, 2020. The increase was primarily due to a $772,000, or 8.2%, increase in employee compensation and benefits associated with the resumption of normal levels of employee bonus accruals through the end of the year, as well as a $394,000, or 68.6%, increase in legal and professional fees during the quarter resulting from recruiting costs and additional audit and legal fees. The company’s efficiency ratio in the fourth quarter of 2020 was 59.82%, compared to 57.90% in the prior quarter. Adjusted to remove the effects of PPP-related transactions, the company’s efficiency ratio† for the fourth quarter of 2020 was 65.55% and for the third quarter of 2020 was 60.22%.
Consolidated assets for the company totaled $2.74 billion at December 31, 2020, compared to $2.66 billion at September 30, 2020 and $2.32 billion at December 31, 2019. Gross loans decreased 4.7%, or $91.8 million, to $1.87 billion at December 31, 2020, compared to loans of $1.96 billion at September 30, 2020. Gross loans increased 9.4%, or $160.4 million, from $1.71 billion at December 31, 2019. The increase in gross loans during the fourth quarter of 2020 compared to the fourth quarter of 2019 included outstanding PPP loan balances of $139.8 million, to 1,452 borrowers, as of December 31, 2020. Excluding the outstanding PPP balances as of December 31, 2020, gross loans increased $20.6 million, or 1.21%. The decrease in gross loans from the third quarter of 2020 to the fourth quarter of 2020 is primarily due to the $70.0 million, or 33.3%, decline in outstanding PPP loan balances in the fourth quarter of 2020. Excluding the decrease in the balance of PPP loans, gross loans decreased by 1.1%, or $22.0 million, from the prior quarter.
Deposits increased by 2.8%, or $63.3 million, to $2.29 billion at December 31, 2020, compared to $2.22 billion at September 30, 2020. Total deposits increased 16.8%, or $329.6 million, from $1.96 billion at December 31, 2019. Changes in deposits during these periods were heavily impacted by the deposit of PPP loan proceeds into demand accounts at the Bank, as well as apparent changes in depositor spending habits in these periods resulting from economic and other uncertainties due to COVID-19. Shareholders' equity totaled $272.6 million as of December 31, 2020, compared to $266.9 million at September 30, 2020 and $261.6 million at December 31, 2019. The increase from the previous quarter resulted primarily from an increase in net income of $10.0 million, offset by the purchase of treasury stock during the quarter of $2.8 million and the payment of dividends of $2.2 million.
Nonperforming assets as a percentage of total loans were 0.70% at December 31, 2020, compared to 0.72% at September 30, 2020 and December 31, 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 December 31, 2020. These loans were internally identified as problem assets prior to COVID-19 and are properly reserved. Management continues to work toward a satisfactory resolution for these three loans. Excluding these partially guaranteed SBA loans, non-performing assets as a percentage of total loans at December 31, 2020 would be 0.29% and, excluding PPP loans, would be 0.32%.
During the first and second quarters of 2020, the Bank provided financial relief to many of its customers due to the COVID-19 outbreak through either 3-month principal and interest (“P&I”) payment deferrals or through 6-month interest-only (“I/O”) deferrals. Under the initial deferral program, the Bank provided 3-month P&I deferrals on 658 loans with principal balances of $247.8 million and provided up to 6-month I/O deferrals on 336 loans with principal balances of $183.7 million. As of January 14, 2021, there are 16 loans totaling $50.4 million that remain under a deferral program. There are three loans with outstanding balances of $1.4 million that remain under their initial 6-month I/O deferral. There are 12 loans with principal balances of $46.6 million that have entered a subsequent interest-only deferral. There is one loan with a principal balance of $2.4 million that has entered a subsequent P&I deferral. We will continue to work with these borrowers, who are primarily in the hotel, restaurant and hospitality industries, to allow their businesses and payment sources to recover to normal levels.
The table below provides detail about the current I/O and P&I and deferral programs as of January 14, 2021:
Finally, management continues to closely monitor loans and concentrations in COVID-19 affected 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 with weighted average loan-to-values (“LTV”), as of December 31, 2020, of $26.4 million with 60.5% weighted average LTV to restaurants, $56.1 million with 51.5% weighted average LTV to retail CRE and $67.0 million with 56.5% weighted average LTV to hotel/hospitality borrowers.
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible book value per share”, “net core earnings,” “core net interest margin,” and PPP-adjusted metrics are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.
A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures is included at the end of the financial statement tables.
Conference Call Information
The Company will hold a conference call to discuss fourth quarter and year-end 2020 financial results on Tuesday, January 19, 2021 at 10:00 am CST. The conference call will be hosted by Ty Abston, Chairman and CEO, Cappy Payne, SEVP and CFO, and Shalene Jacobson, EVP and CRO. All conference attendees must register before the call at https://www.gnty.com/register. The conference materials will be available by accessing the Investor Relations page on our website, gnty.com. A recording of the conference call will be available by 1:00 pm CST the day of the call and remain available through January 31, 2021 on our Investor Relations webpage.
About Guaranty Bancshares, Inc.
Guaranty Bancshares, Inc. is a bank holding company that conducts commercial banking activities through its wholly-owned subsidiary, Guaranty Bank & Trust, N.A. As one of the oldest regional community banks in Texas, Guaranty Bank & Trust provides its customers with a full array of relationship-driven commercial and consumer banking products and services, as well as mortgage, trust, and wealth management services. Guaranty Bank & Trust has 31 banking locations across 24 Texas communities located within the East Texas, Dallas/Fort Worth, greater Houston and Central Texas regions of the state. As of December 31, 2020, Guaranty Bancshares, Inc. had total assets of $2.7 billion, total loans of $1.9 billion and total deposits of $2.3 billion. Visit gnty.com for more information.
Cautionary Statement Regarding Forward-Looking Information
This communication contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Actual results will also be significantly impacted by the effects of the ongoing COVID-19 pandemic, including, among other effects: the impact of the public health crisis; the extent and duration of closures of businesses, including our branches, vendors and customers; the operation of financial markets; employment levels; market liquidity; the impact of various actions taken in response by the U.S. federal government, the Federal Reserve, other banking regulators, state and local governments; the adequacy of our allowance for loan losses in relation to potential losses in our loan portfolio; and the impact that all of these factors have on our borrowers, other customers, vendors and counterparties. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Such factors include, without limitation, the “Risk Factors” referenced in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, other risks and uncertainties listed from time to time in our reports and documents filed with the Securities and Exchange Commission ("SEC"). We can give no assurance that any goal or plan or expectation set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements. The forward-looking statements are made as of the date of this communication, and we do not intend, and assume no obligation, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.