2023-04-27 03:36:57 ET
Summary
- Guaranty Bancshares is a small regional bank that reported earnings last week.
- Deposits shrank less than the industry norm and actually grew in March.
- Despite the success in deposits, there are other financial elements that paint a mixed signal.
Earnings reports of various banks have been rolling in for nearly two weeks. Last Monday, one of the first small banks to release earnings, Guaranty Bancshares ( GNTY ), reported its first quarter earnings . Immediately following the earnings report, share prices of the small bank stabilized, but recent volatility has sent shares lower, with the company's stock down 33% from a year ago. The post earnings sell-off is a good time to review earnings and assess whether now is a good time to buy shares.
Guaranty's statement of earnings is split into two sections; interest and noninterest earnings. Net interest income is the interest earned from the bank's loans less interest expenses related to deposits and borrowings. While interest income increased, interest expenses increased by more leading to a $3 million quarter to quarter drop in net interest income to $25 million. Since the bank did not need to add loan loss provisions and its noninterest expenses were lower, net earnings increased by 3% quarter to quarter to $8.2 million. While quarterly earnings are approximately $2.5 million lower than a year ago, return on equity remains healthy at over 11%.
Like many smaller banks, Guaranty's balance sheet consists of mostly loans and deposits. It is important to note that the bank has built its cash and cash equivalents up to $158 million. Lending was flat for the quarter, but total loans are 18% higher than they were a year ago, nearly twice the growth that average banks saw in the same timeframe . Deposits declined by 2.15% from the prior quarter and for the second consecutive quarter, but the decline was slower than the average bank balance sheet (3.3%) and the bank grew deposits in the month of March.
The new buzz number that has come up in this quarter's bank earnings is uninsured deposits. Guaranty's uninsured deposits were $686 million at the end of the quarter, or 30% of total deposits. Where that becomes important is comparing it to the bank's liquidity. Should uninsured depositors demand their money, the bank has $1.3 billion in available borrowing to draw from to cover these requests, which represents twice as much as uninsured deposits.
It's important to note that Guaranty Bancshares' loan to deposit ratio is much higher than the industry norm at 89%. Additionally, cash on hand as a percentage of deposits is lower at 6%. The risk the ratios present is that a deposit outflow could force the bank to either borrow additional funds or sell loans, which can create a cascading effect on shareholder equity.
But, what about the value story? Guaranty Bancshares is trading at 7.5 times trailing earnings and 10.37 times forward earnings. The trailing twelve month earnings multiple is below sector averages, but the forward looking earnings multiple is more than 1.5 points higher, meaning the stock could fall 10% and still be more expensive than its peers when valuing based on forward earnings. While the bank's price to book ratio is more attractive than the rest of the sector, book value can erode quickly when banks come under pressure.
I believe $20 per share would be a good entry point here. At that price, the stock becomes valued relative to its peers on forward earnings and cheaper when it comes to book value. Additionally, the growth in deposits in March shows the bank is maintaining its customer relationships and mitigating the risk of a run. Until then, I feel the shares are a hold.
For further details see:
Guaranty Bancshares: Bucking The Trend On Deposits, But Is It A Buy?