Guaranty Bancshares, Inc.

Good morning. Welcome to Guarantee Bankshare's fourth quarter 2024 earnings call. My name is Nona Branch and I will be your operative operator for today's call. This call is being recorded. Our host for today's call will be Ty Abston, Chairman and Chief Executive Officer, Shalene Jacobson, Executive Vice President and Chief Financial Officer. To begin our call, I will now turn it over to our CEO, Ty Abston.

Thank you, Nona. Good morning and welcome everyone to Guarantee Bankshare's fourth quarter earnings call. Our company had a good year in 2024 with prospects of an even stronger year in 2025. I'm very proud of our whole team and our ability to continue to build and deepen strong relationships with our customers throughout our footprint in Texas. We see very positive trends across the board in our company and in every one of our markets. We are ending the year with very strong performance metrics. Our credit metrics, liquidity, capital and earnings are all strong. We also have the capacity to grow a loan portfolio in the current year as we hopefully see increased opportunities. This capacity comes from our strong funding base of core deposits and the fact that we have good capacity in all of our lending buckets, as well as our overall strong liquidity position. We see the biggest opportunity for our company to build further shareholder value in the area of continued organic growth and as we further mature our expansion markets and our footprint throughout the state of Texas. This is going to remain our focus in the coming year. Additional organic growth of assets in our current platform is very creative to our shareholder value for us long term. We also see a disconnect between our current stock price and what we feel is a fair market value for our company. So we also plan to utilize our strong capital position to much more aggressively buy back stock in the coming months. We are fortunate to be in some of the strongest markets in the country and have a very strong brand name and brand recognition within the state of Texas. And we're also the right size bank at three billion to handle almost any customer relationship while at the same time being small enough to maintain a true community bank philosophy and focus. Again, I'm extremely proud of our team and the results our team produced this past year and we're very excited about the current year. Now with this, I'm going to turn it over to Shalene to go through our investor deck and then we'll open it up to questions. Shalene.

Thanks, Ty. I'll kick it off this morning with the balance sheet. Total assets were up about 19 million during the fourth quarter of 2024. Our securities portfolio increased by nearly 56 million. However, that was offset by a decrease in cash balances of about 17 million. Our net loans were down 5 million. And we also sold an REO property that had a book value of 14 million during the quarter. On the liability side, total deposits were up 23 million during the fourth quarter. But equity was down slightly because our net income of about 10 million was offset by an increase in unrealized losses in the AFS securities portfolio of 8.1 million. And we also paid dividends of 2.7 million or 24 cents per share during the fourth quarter. For the year, total assets were down about 69 million, primarily due to a smaller loan portfolio. Loans decreased 191 million during the year that were partially replaced with securities, which increased 75 million and by cash during the year, which increased 57 million. Total deposits in 2024 increased 59 million. And we also paid down nearly 150 million in federal home loan bank advances and other borrowings. Total equity increased during 2024 by 15.3 million, resulting primarily from our net income of 31.5 million. We had some stock options that exercised for about 2.3 million. And that was offset by an increase in other comprehensive loss in the securities portfolio of 1.8 million. We also had stock repurchases of 6.4 million and we paid dividends during the year of 11 million or 96 cents per share. On the income statement during the fourth quarter, the company earned 10 million in net income, which equates to 88 cents per basic share and is up from 65 cents in the linked quarter, up from 51 cents in the fourth quarter of 2023. Our earnings were largely boosted by an improvement in net interest income from the linked and prior quarters. Non-interest income and expense also improved, which I'll discuss here in a minute. And then total net income for the year was 31.5 million or $2.75 per basic share. Our return on average assets was .2% for the quarter compared to 0.96 in the prior quarter. And our return on average equity was .68% for the quarter compared to .58% at the end of Q3. Net interest margin improved quite a bit. It was .54% in the fourth quarter, which is an increase from .3% at the end of third quarter and .11% during the same quarter last year. And as you all know, the Fed lowered rates by 50 basis points during the quarter and we benefited from that on the cost of deposits, while our loan and securities portfolios continued to reprice upward. The average yield on loans increased seven basis points to .42% during the quarter, while our AFS securities increased six basis points to .81% during the quarter. The average rate of costing liabilities, however, decreased 27 basis points from 3.36 on September 30th to 3.09 at the end of Q4. For the year, our net interest margin increased 17 basis points from .15% to .32% as the yield on interest earning assets increased 47 basis points, while the cost of liabilities increased only 35 basis points. Non interest income increased by 572,000 during the fourth quarter compared to the third quarter. This was primarily due to a gain on sale of 467,000 that is included in other non interest income on the income statement. That gain is from the sale of the ORE property in Austin that had a book value of 14 million after we reserved 900,000 for that property back in the second quarter of 2024. So we recovered some of that allowance expense during the fourth quarter. Non interest expense decreased by 798,000 during the fourth quarter compared to the third quarter. A large portion of the decrease was due to ORE holding costs of 371,000 in the third quarter that we did not have in the fourth quarter. So 371,000 of the decrease is from costs that we booked in the third quarter. The remaining decrease resulted mostly from employee benefit costs declining. We're partially self insured for healthcare, so the expense can fluctuate somewhat based on actual claims from our employees. And thankfully, we've had lower claims throughout the year, which meant lower accruals were needed during the quarter. We also had some notable retirements of longtime senior employees during the year and did not have any real growth in the number of employees. So that's resulted in lower salary and benefit costs overall. And then finally, because of the higher income and lower expenses, our efficiency ratio improved this quarter to 62.23%. All right, on to the loan portfolio and credit quality. Gross loans decreased 5.4 million during the fourth quarter and decreased 191.4 million year to date. Primarily in our CNI, C&D, and CRE loan segments. We've mentioned several times on these calls that we strategically shrunk the balance sheet over the past year or two to really position ourselves for future growth. And to limit exposure to possible losses from economic uncertainty we've had over the past couple of years. And our loan portfolio was certainly a part of that. We tightened underwriting and we also allowed some transactional loan accounts from back in 21 and 22 to move elsewhere. However, during the fourth quarter, we did continue to originate new loans. We originated 103.1 million in new loans at an average rate of 7.36%. So our new loan yield remains pretty good. Non-performing assets also continue to remain at very low levels. Our non-performing assets to total assets were .16% at year end compared to .66% at the end of Q3. Those percentages include both ORE and non-accrual loans. So of course the sale of the ORE property in Austin during the quarter helped lead to the improvement there. Our net charge-offs are very, very low. We essentially had no net charge-offs during the fourth quarter. And for the year, we had a net charge-off to average loans ratio of 0.02%. For the ORE, we currently have one single-family property remaining and we're hopeful that we can sell that with minimal or any losses before the end of the quarter. I'll also mention that we manage our C&D and CRE concentrations closely, including the office-related loans. We have a diverse portfolio and don't have any significant concerns in those areas. CRE represents about .7% of our total loan portfolio. And of that 40.7%, only .9% is office-related. And those are mostly smaller loans that have an average balance of only $530,000. Finally, our non-accrual loans were $3.7 million as of December 30th, which is down from $5.7 million in the prior quarter and represents only .17% of our total loans. Our substandard loans were $2.4 million at year end, which is down from $12.3 million at the end of September 30th, 2024. The decrease is primarily the result of upgrading the risk rating for a relationship that was never passed to you and didn't really have any financial stress, but had some loan terms that it was non-compliant with. So we worked out the non-compliance with the borrower, got the loan back in compliance with all of the loan terms, and then the $10.9 million loan was upgraded. It's no longer on substandard. We don't anticipate any losses on that loan either. We did have a reverse provision for credit losses of $250,000 during the quarter, resulting really from lower loan balances, lower problem assets, and stable overall credit trends. To the next slide, we've got deposits, liquidity, and capital. As I mentioned previously, our total deposits grew during the quarter by $23.3 million. Money market and savings balances increased $29.1 million. DDA balances increased $3.4 million. And CDs decreased $9.2 million during the quarter. For the year, our total deposits are up $59.9 million. -interest-sparing deposits continue to represent a good percentage of our total deposits, although they're down slightly for this quarter. They ended at .1% for Q4. And with respect to overall deposit risk, Guarantee has a very granular and historic stable core deposit base. At the end of the year, we had nearly 90,200 deposit accounts that have an average account balance of 29,842. So lots of smaller, granular deposit account balances. Our unsecured deposits also remain relatively low, excluding public funds and guarantee-owned accounts. Our uninsured deposits were about .3% of total deposits at year end. Liquidity also remains good. As Ty mentioned, we ended the quarter with a liquidity ratio of .5% compared to .2% at the end of 2023. As I also mentioned previously, we used some of those cash flows from loan payoffs and maturing securities and also from increased deposits during the year to invest in new -for-sale securities and to pay down the advances in borrowings of about $150 million during the year. We also have total contingent liability of about $1.3 billion available through various sources, including the Federal Home Loan Bank, the Federal Reserve Bank, and some lines of credit with correspondent banks. With respect to unrealized losses, unfortunately they have gone up a little bit during the fourth quarter, but our total net unrealized losses on investment securities remains reasonable at $52.2 million, of which $20.7 million is attributable to our AFS securities and included in the equity section within accumulated other comprehensive income. Capital is also strong. We used a portion of our excess capital in the fourth quarter to pay a $0.24 per share dividend. We also paid a dividend for the year of $0.96 per share. During 2024, we also repurchased a little less than 211,000 shares, or .8% of the outstanding shares of the company. And that of course continues to add intrinsic value for our shareholders. And as Ty mentioned, we're looking to continue those repurchases into 2025. Our total equity to average assets at the end of the year was 10.2%. And that concludes my prepared remarks, so I will turn it back over to Nona for Q&A.

Thank you, Shalane. It is now time for our Q&A, and our first question will be from Woody Lay with KBW.

Hey, good morning, guys. Good morning, Woody. The NIM expansion was really nice to see in the quarter. I wanted to start off on the loan yields. They were actually up quarter over quarter. Just wanted to make sure there wasn't any sort of one-time interest benefit in the quarter. And assuming not, how do you think about that loan yield going forward?

So, Woody, I believe we did have a small amount of non-accrual interest that came back on, but it was less than 500,000. I think it was probably around 260 or 270, so it wouldn't have been real meaningful to the NIM. You know, we, depending on what the Fed does, if they keep rates flat, we'll probably not move our cost of deposits a whole lot in the near future. But we have about 450 million of variable rate loans that reprice at certain terms. And those 450, I'm sorry, we've got more than that, but we've got about 450 that will reprice during 2025 that are on term repricing. So we continue to think that if rates stay where they're at, our deposit costs will stay flat, maybe go down a little bit. But we'll continue to see loans repricing at higher rates than we have on books now.

Got it. And then I guess looking at the overall NIM, is the expectation that it can continue to expand from the fourth quarter level?

Yeah, Woody, I'll speak to that. Yes, we're modeling continued growth in our NIM throughout 2025. We're not going to get specific guidance on that, but we're modeling expanding NIM through 2025.

Got it. And

actually modeling that in different rate environments, whether rates go up a little bit, rates go down, or rates stay flat. So we've modeled it in different rate scenarios, pretty moderate scenarios up or down, and we still see expansion in our NIM.

That's helpful. Maybe shifting over to loan growth, you all sound a little bit more bullish about the outlook from here. Do you think we begin to see loans growing in the first quarter of 2025, or is it going to take some time and just any expectations towards the overall level of growth you're expecting in 2025?

Yeah, we're definitely seeing more opportunities for quality loan growth in the markets. Certainly post-election, the overall environment has been very positive, and we do anticipate some loan growth. We're just not at this point sure exactly how that's going to net out for us and where that's going to fall during the year. But the main thing is we have the capacity in our buckets and our liquidity position to grow the loan book as we see quality opportunities come our way. We're in a position in the markets we're in to see those. We're much more optimistic on loan growth in 2025 than certainly we have in the last two years. We'll just have to see what happens with rates in the overall environment, but it's definitely more positive out there.

Yeah, and as it relates to deposits, the -to-deposit ratio is sitting at 79%. How does that impact your view on deposit growth in the year ahead with the potential for loan growth to pick up?

As far as focusing on deposit growth as a core strategy for growth itself, that's not a focus for us in 2025. But we are always focused on building core deposit relationships. I've mentioned this before, we generally open about 10,000 new deposit accounts a year. We continue to see that as a core driver of franchise value. That's always been a focus of ours in any environment and will continue to be this core granular deposit relationships. But we're not in a position where we have to go out and raise marginal funds to fund the balance sheet, which again puts us in a strong position from the standpoint of optionality we have and how the year unfolds.

Woody, we also have, just to mention the funding of that growth, about $165 million in cash flows from bond portfolio expected during 2025.

All right, Atul, thanks for taking my questions. Congrats on the nice quarter.

Thanks, Woody.

Next question today will be from Matt Olney with Stevens.

Hey, thanks. Good morning, everybody. Good morning, Matt. Going back to the loan growth commentary, I want to drill down a little bit more on the CNI. We saw a little bit of CNI growth in the fourth quarter. Any color on that specifically, new customers or just more utilization of existing customers? Matt,

that's going to be primarily utilization of existing customers. There's not, you know, we haven't had a specific targeted program for CNI growth, but our customers definitely, last quarter, we saw more utilization of existing lines that we have.

And within that, Ty, any theme that you can identify? Was it some seasonality? Anything specifically that was driving the utilization increase? Nothing that we've been, I mean,

nothing that I can really speak to specifically, no. We typically see that at year end and going into the spring, but nothing specific that I could point to. Okay.

And then back on the deposit growth, really good deposit growth, especially towards the end of the fourth quarter. Just remind me of any seasonality there or any outlook for deposit growth in the near term?

We do have some seasonality in fourth quarter with some of our public fund money that comes in in our East Texas region. That's, I don't know, Shalene probably has the exact number on that. But other than that, I mean, just, you know, our core deposit growth has been kind of, you know, again, one of our primary strategies. And so we're planning for core deposit growth in 25. And again, that's just a, that's part of how we look at building our franchise. But fourth quarter typically has some public funds in these Texas region that will be in there. Some of that stays during the year. Some of it moves out as we get into Q1, Q2, which typically we replace with other deposit growth.

Okay. And then on the operating expenses, I think you mentioned some lower health care costs and then retirements throughout the year. Any color for us for the expense growth in 2025? Shalene, you want to do that one?

Yeah, I mean, really very little expense growth in 2025. Yeah, we're shooting for that two and a half percent target that we we've told you guys about several times before two and a half percent of total assets. So we're really expecting expenses to be up only about one or two percent next year.

Okay. Thanks for that, Shalene. I guess this year,

2020.

Yeah, understood. And then just lastly, I guess on the M&A theme, would love to hear your opinion and thoughts around consolidation in Texas. It just seems like the bank is in a really nice position to participate in that consolidation. Just curious about your conversations you've been having with potential merger partners.

I mean, Matt, we're continuing to have conversations and know about a lot of different conversations. We're certainly open to anything that makes sense for our shareholders long term. Like I've said, we're primarily focused on organic growth and but we're we're continuing to have conversations and we we're in a position with our capital position and overall balance sheet where we could be acquisitive if the right opportunity came along. And it was a good culture fit and the metrics made sense. So we're continuing to have conversations along those lines and we'll see how that kind of plays out in 25. Okay, guys, thanks for taking my questions.

Congrats on the year. Thanks, man. Appreciate it.

Our next questions will be from Michael Rose with Raymond James.

Hey, good morning, everyone. Thanks for taking my questions. Maybe just back on expenses, Shalene. Certainly understand and appreciate the think you said two and a half percent is kind of the bogey for next year. But we have seen just the employee compensation line down now four quarters in a row. Is that something you I would expect that'd be part of the increase for the for non-interest expenses as a whole. But can you just give a sense for what that expense growth could look like and what it contemplates in terms of maybe potential lending hires and maybe just offset the other retirements that you're expecting. Just trying to get a better sense for how we should think about the employee compensation line.

Yeah, so we do have some some commercial loan officers built in to our budget for 2025. We don't anticipate that expense to continue to go back down. We did make some changes to our health care vendors and related other benefits vendors to hopefully get some cost savings during 2025. But I don't envision that those expenses will continue to go down. We don't have any additional retirements planned and we do expect with some growth that will probably add some additional lenders in 2025. Again, we're partially self-insured for the health insurance. So we start the year accruing to what the actuaries expect our expense to be. And then if we see that it's going to be more or less, we'll adjust that towards the end of the year. So it'll you know, the employee expenses will be back up in Q1 from where they ended in Q4.

Perfect. I appreciate that color. And then maybe just on the asset quality front, I mean, you guys are down to basically nothing at this point with your last Oreo property expected to be sold here. Is there any reason to think that you guys would have any sort of provision expense in the near term? And you guys are, I think, one thirty three of loans to reserves to loans. Should we expect that to kind of continue to come down, assuming credit holds relatively stable? I know it would be some probably some some variation quarter to quarter, but it seems like the outlook there is pretty good.

Yeah, it is. Michael, you know, our ACL model is based, our CSEL model is based primarily on qualitative factors because we really don't have any historical losses. And then, of course, looking at those forward 12 month, 24 month economic estimates, we have not changed those key factors much. I'm just being sort of conservative and waiting to see how everything plays out with the economy. But I anticipate that if the economy continues to improve, that we'll probably need to adjust those key factors down a little bit and reduce our provision even more unless we grow. Then, you know, we'll probably reduce those key factors anyway, but then our provision will will will not need extra expense. So, you know, if anything, if there's lower growth than we expect, we may end up having some additional reverse provision. If growth is where we expect it, we may not have any provision. And if we grow more than we expect, I anticipate we'll have a little provision, but not much.

OK, perfect. And then maybe just on the buyback, I hear the message that you guys are maybe looking to lean in a little bit more aggressively. I think you have a little over a million shares left. And I think the program, well, I guess the program goes through the early part of April in 2026. I mean, I think the earn back is around five years. I mean, how aggressive would you like to be with the with the buyback? Would you expect to use it all in the time frame?

Michael, I don't know if we would use all of it, but we're certainly willing to and have the capacity to. So we're just going to be more aggressive. We just we again, we just how we look at the bank and intrinsic value of the bank versus where we're trading. There's a pretty good disconnect. And so, you know, we we think we've kind of have a sense of where the credit, you know, this credit cycle is with the, you know, the rising rates the last two years. And, you know, kind of where the AOC is going to land. And that's been part of our hesitation last two years, just being cautious and seeing how that played out. But in through that period, we've also created a lot of capital and we continue monthly to create excess capital. So just from a standpoint of being able to acquire a bank, we know very well that are at a nice multiple. We're willing to we're willing to be much more aggressive. And that's kind of our plan. And if we could use that mogan share buyback plan, that'd be great. But that's we plan definitely at this point to to be more aggressive than that. And I think that makes a lot of sense based on kind of how we see the the the again, the intrinsic value of the company.

OK, great. And maybe just one final one for me. I certainly appreciate the drivers of the margin. I assume that, you know, kind of what you'd said last quarter, you know, to kind of expect to two basis points or so of of NIM expansion per month probably is not what you're looking at going forward. But but certainly understand the loans and the securities repricing tailwind that you have. Can you give us a better sense of what we could expect, at least here in the next quarter or two in terms of margin expansion? Because this quarter was obviously very, very strong. Thanks.

Well, I mean, we'd stay with the two two basis points a month as a baseline and try not to disappoint, put that way. I mean, there's obviously there's a lot of variables in that. But I guess the key point is we continue to model out expanding them throughout the year. So I think the two basis points a month as a as a baseline, you know, is pretty good place to to be. And again, hopefully we won't disappoint from there.

Perfect. Well, I appreciate you taking all my questions.

Absolutely, Michael.

Thank you. Thank you all for your questions. I would like to remind everyone the recording of this call will be available by one p.m. today on our investor relations page at .T.Y. .com. Thank you for attending. This concludes our call.