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 September 30, 2020. The Company's net income available to common shareholders was $10.1 million, or $0.92 per basic share, for the quarter ended September 30, 2020, compared to $1.1 million, or $0.10 per basic share, for the quarter ended June 30, 2020 and $7.5 million, or $0.65 per basic share, for the quarter ended September 30, 2019. Return on average assets and average equity for the third quarter of 2020 were 1.53% and 15.21%, respectively, compared to 0.16% and 1.67%, respectively, for the second quarter of 2020 and 1.28% and 11.73%, respectively, for the third quarter of 2019. The increase in earnings during the third quarter of 2020 was largely due to a significant decline in loan loss provision from the prior quarter, 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 Paycheck Protection Program (“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 are pleased with our third quarter results. We have analyzed our loan portfolio and believe our loans are risk rated appropriately and our allowance for credit losses is adequate to absorb potential future loan losses resulting from the pandemic. Temporary payment or interest-only deferrals offered at the onset of the pandemic have declined significantly as borrowers have returned to contractual payment schedules. Requests for additional deferrals have been minimal thus far and have occurred primarily in the hospitality industry. Despite the various business challenges posed as a result of COVID-19, the Texas economy went into the downturn in a very strong positon and the resilience of the Texas economy has been very clear this quarter. Our bank has a solid core earnings foundation, with a sustainable net interest margin, controlled expense structure and growing non-interest income departments. Asset quality remains strong even while our loan loss reserves remain defensive from earlier quarter provisions," commented Ty Abston, the Company's Chairman and Chief Executive Officer.

QUARTERLY HIGHLIGHTS

• Strong Net Earnings. Net earnings for the quarter were $10.1 million, up from $1.1 million for the immediately prior quarter and $7.5 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, were $11.1 million for the third quarter, compared to $10.5 million for the second quarter of 2020, and $9.3 million during the third quarter of 2019.

The Bank had a $300,000 provision reversal for loan losses during the quarter, compared to a $12.1 million provision expense in the second quarter of 2020 and $100,000 provision expense in the third quarter of 2019. The $300,000 provision reversal resulted primarily from lower loan balances in segments with higher allowance factors as of September 30, 2020, compared to prior quarters. Additionally, in the second quarter of 2020, qualitative factor adjustments were made in our Current Expected Credit Losses (“CECL”) model, 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 and resulted in the $12.1 million provision expense during second quarter. Qualitative factor adjustments made in the second quarter remained consistent in the third quarter because our CECL model assumes a six-to-nine month lag in estimated losses as a result of economic factors present during the second quarter and continued uncertainty surrounding the virus and timing of economic recovery. As of September 30, 2020, the Bank’s allowance for credit losses to gross loans is 1.72%, or 1.93% excluding PPP loan balances.

• Solid Net Interest Margin. The fully tax-equivalent net interest margin was 3.61% for the third quarter of 2020, compared to 3.78% in the preceding quarter and 3.71% in the third quarter of 2019. Net interest income decreased $903,000, or 3.9%, from $23.2 million in the second quarter of 2020 to $22.3 million in the third quarter of 2020. Interest expense decreased $722,000, or 21.2%, from $3.4 million in the second quarter of 2020 to $2.7 million in third quarter of 2020. The Bank continues to decrease cost of funds as higher rate CDs mature and to reduce interest rates on non-maturing deposits as market conditions allow. In addition, 54.0% of the loan portfolio, or $1.0 billion, has interest rate floors and 49.9% of those loans are currently at their loan floor. The weighted average interest rate of loans currently at their floor is 4.55%.
• Steady Credit Quality and Reduced Deferrals. Non-performing assets as a percentage of total loans were 0.72% at September 30, 2020, compared to 0.76% at June 30, 2020 and 0.69% at September 30, 2019. Net charge-offs (recoveries) to average loans (annualized) were 0.01% at September 30, 2020, compared to (0.02)% at June 30, 2020 and (0.13)% at September 30, 2019.

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 payment deferrals or through 6-month interest-only deferrals. Outstanding balances of loans on the initial 3-month principal and interest (“P&I”) deferral program declined from $247.8 million on 658 loans as of June 30, 2020 to $5.3 million on 20 loans as of September 30, 2020. Outstanding balances of loans on the initial 6-month interest-only (“I/O”) deferral program declined from $183.7 million on 336 loans as of June 30, 2020 to $141.9 million on 203 loans as of September 30, 2020. Of the initial 3-month P&I deferrals, 12.4%, or $30.6 million, were approved for a second 6-month I/O payment period. As of October 15, 2020, outstanding balances and number of loans for the initial P&I deferral program and initial I/O deferral program were $3.7 million on 11 loans and $114.5 million on 140 loans, respectively, not including the $30.6 million in additional I/O deferrals. Detailed information about both deferral programs, by loan type and certain higher risk industries, in provided later in this earnings release.

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

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 third quarter of 2020 and 2019 was $22.3 million and $20.1 million, respectively, an increase of $2.2 million, or 10.9%, resulting primarily from a decrease in deposit-related interest expense of $3.0 million, or 58.6%, compared to the same quarter of the prior year. Net interest income, before the provision for loan losses, in the second and third quarters of 2020 was $23.2 million and $22.3 million, respectively; a decrease of $903,000, or 3.9%, resulting primarily from a decrease of $1.6 million in PPP origination income in the third quarter compared to the prior quarter, partially offset by a $722,000 decrease in interest expense.

Net interest margin, on a taxable equivalent basis, for the third quarter of 2020 and 2019 was 3.61% and 3.71%, respectively. Net interest margin, on a taxable equivalent basis, decreased from 3.78% in the second quarter of 2020 to 3.61% in the third quarter of 2020, primarily due to the effects of the PPP loan origination income recognized during the second quarter of $2.1 million, which increased net interest margin during that quarter, but recognized only $549,000 during the third quarter. Loan yield decreased from 5.37% for the third quarter of 2019 to 4.59% for the third quarter of 2020, a change of 78 basis points, while the cost of interest bearing deposits decreased from 1.43% to 0.63% during the same period, a change of 80 basis points. The decrease in loan yield was comprised of a 31 basis point reduction attributable to the dilutive effect of the 1.00% yield on PPP loans, with the remainder of the decrease due to repricing of variable rate loans to lower interest rates during the period. Loan yield decreased from 5.15% for the second quarter of 2020 to 4.59% for the third quarter of 2020, a change of 56 basis points due primarily to higher recognition of PPP loan origination income during the second quarter than during the third quarter and continued repricing of variable rate loans. The cost of interest bearing deposits also decreased from 0.83% to 0.63% during the same period, a change of 20 basis points. These decreases were due primarily to maturity of higher-rate CDs during the third 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. In order to prepare for participation in this program during the second quarter of 2020, 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 PPP borrowers 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 invested the FHLB borrowings in fed funds sold, earning an interest rate of 0.10%, and paid off $50.0 million during the second quarter and the remaining $50.0 million in mid-July of 2020. 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 nine months ended September 30, 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 a $300,000 reversal in the provision for loan losses during the third quarter of 2020, compared to provision expense of $12.1 million in the second quarter of 2020 and $100,000 in the third quarter of 2019. 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 quarter of 2020, qualitative factor adjustments remained consistent because our CECL model assumes a six-to-month lag in estimated losses as a result of economic factors present during the second quarter. However, 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 during the third quarter. Although we do not anticipate additional provision expenses for the remainder of 2020 at this time, 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 $2.0 million, or 44.3%, in the third quarter of 2020, to $6.7 million, compared to $4.6 million for the third 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, or132.3%, and anincreasein merchant and debit card fees of $558,000, or 50.9%, from the same quarter of the prior year. Other increases resulted from a $268,000 increase in mortgage and warehouse fee income and a $149,000 improvement in the fair value of the SBA servicing assets. These increases were partially offset by a $261,000, or 26.7%, decrease in service charges during the third quarter of 2020, as compared to the same quarter of 2019, due primarily to temporary service charge waivers as a result of COVID-19.

Noninterest income increased $1.7 million, or 33.6%, to $6.7 million in the third quarter of 2020, compared to $5.0 million for the quarter ended June 30, 2020. This was primarily attributable to an increase in the gain on sale of loans of $606,000, or 40.2%, an increase in merchant and debit card fees of $320,000, or 24.0%, and an increase in service charges of $146,000, or 25.6%. Other noninterest income increased $515,000, or 67.5%, attributable primarily to a $115,000 increase in mortgage and warehouse fee income and a $118,000 increase in gains on sales of other assets and OREO. There was also a $256,000 write-down included in other non-interest income in the second quarter of 2020 that did not occur during the third quarter of 2020.

Noninterest expense increased $1.3 million, or 8.6%, in the third quarter of 2020, compared to the third quarter of 2019. The increase in noninterest expense in the third quarter of 2020 was primarily driven by an increase in employee compensation and benefits expense of $543,000, or 6.1%, to $9.4 million, from the same quarter of the prior year, as well as the effects of a $252,000, or 100%, increase in FDIC insurance assessment fees during the third 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 $208,000, or 23.5%, as a result of new software and hardware investments to allow employees to securely work from home and to improve online deposit account opening. There was an increase in ATM and debit card expense of $199,000, or 64.2%, resulting from increased usage of ATM and debit cards during the period. Occupancy expenses increased $149,000, or 6.1%, from the same quarter of the prior year. The company’s efficiency ratio in the third quarter of 2020 was 57.90%, compared to 62.49% in the same quarter last year. Adjusted to remove the effects of PPP-related transactions, the company’s efficiency ratio† for the third quarter of 2020 was 60.22%.

Noninterest expense increased $1.6 million, or 10.4%, in the third quarter of 2020 to $16.8 million, compared to the quarter ended June 30, 2020. The increase was primarily due to a $1.4 million, or 16.9%, increase in employee compensation and benefits as employee bonus accruals were reduced during the second quarter of 2020 but were resumed at normal levels during the third quarter. Additionally, during the second quarter, compensation expense was reduced by approximately $862,000 due to deferred origination costs associated with PPP loans, which did not occur during the third quarter. The company’s efficiency ratio in the third quarter of 2020 was 57.90%, compared to 53.90% in the prior quarter. Adjusted to remove the effects of PPP-related transactions, the company’s efficiency ratio† for the third quarter of 2020 was 60.22% and 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 $2.66 billion at September 30, 2020, compared to $2.67 billion at June 30, 2020 and $2.33 billion at September 30, 2019. Gross loans increased 0.1%, or $1.2 million, to $1.96 billion at September 30, 2020, compared to loans of $1.96 billion at June 30, 2020. Gross loans increased 12.8%, or $222.2 million, from $1.74 billion at September 30, 2019. The increase in gross loans during the third quarter of 2020, as compared to 2019, included outstanding PPP loan balances of $209.6 million, to 1,944 borrowers, as of September 30, 2020. Excluding the increase in the balance of PPP loans, gross loans increased 0.02%, or $378,000, from the prior quarter and 0.72%, or $12.6 million, from September 30, 2019. Deposits decreased by 0.8%, or $18.9 million, to $2.22 billion at September 30, 2020, compared to $2.24 billion at June 30, 2020. Total deposits increased 13.2%, or $259.8 million, from $1.96 billion at September 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 $266.9 million as of September 30, 2020, compared to $258.9 million at June 30, 2020 and $255.9 million at September 30, 2019. The increase from the previous quarter resulted primarily from an increase in net income of $10.1 million and the purchase of treasury stock during the quarter of $633,000, partially offset by the payment of dividends of $2.2 million. The company also resumed its stock repurchase plan during the third quarter of 2020.

Nonperforming assets as a percentage of total loans were 0.72% at September 30, 2020, compared to 0.76% at June 30, 2020, and 0.69% at September 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 September 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 final quarter of 2020. Excluding these partially guaranteed SBA loans, non-performing assets as a percentage of total loans at September 30, 2020 would be 0.28% and would be 0.31%, excluding PPP loans.

Through June 30, 2020, the Bank provided COVID-19 related financial relief to many of its customers through a 3-month principal and interest (“P&I”) deferral program or an up to 6-month interest-only (“I/O”) program. The initial deferral program was not underwritten in a needs-based manner. Rather, it was provided to borrowers who believed it prudent to request such a deferral to assist during the initial uncertainty of the pandemic. For future subsequent deferral requests, the Bank will study opportunity for improved underwriting, consider the reasons for the request, look at the strength of the guarantors, other sources of repayment ability and additional collateral available, prior to approval of a second deferral.

As of September 30, 2020, 85.5% of the total amount of the loans under 3-month P&I deferrals have returned to their contractual payment agreement and there were no borrowers in this group approved or in underwriting for a second P&I deferral. However, 12.4% of the total amount of the loans under 3-month P&I deferrals, or $30.6 million, have been approved for an additional 6-month I/O payment period. Of the $30.6 million, $680,000 are considered to be troubled debt restructurings (“TDRs”) under Accounting Standards Codification 310-40 and Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as of September 30, 2020.

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 September 30, 2020, Guaranty Bancshares, Inc. had total assets of $2.7 billion, total loans of $2.0 billion and total deposits of $2.2 billion. Visit gnty.com for more information.