Guaranty Bancshares, Inc.

Good morning. Welcome to the Guernsey Bankshare's first quarter 2025 earnings call. My name is Nona Branch and I will be your operator for today's call. I would like to remind everyone that today's call is being recorded. After I've prepared remarks, there will be a Q&A session. Our host for today's call will be Ty Abston, Chairman and Chief Executive Officer, Sheling 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, everyone. Welcome to our earnings call for Q1 2025. Guernsey achieved good results in the first quarter of this year. I'm very proud of our team and their continued effort to serve our customers and build new relationships across all of our markets in Texas. The Texas economy remains strong and growing. While there's certainly economic noise and uncertainty on a national level, so far, we are not seeing negative impacts or signs. This quarter, we did highlight the granularity of our balance sheet, both in our loan book and deposit base, similar to how we've done in past uncertain times during COVID and two years ago when there were bank failures. We continue to see the granularity of our balance sheet as offering real resilience in uncertain times for our company. Our loan book did shrink a little in Q1. However, our loan pipeline, so far in Q2, is as strong as we've seen it in the last three years. So we'll see how the quarter turns out. Our net interest margin continues to build and we're modeling for good results for the year, really regardless of whether we see rate cuts or see significant loan growth in our loan book. We did repurchase some shares in Q1 as we announced we were planning to do at the end of Q4 last year. We are currently not in the market and active in the market, but we do stand ready to reenter the market if and when we decide it makes sense. Our capital asset quality and liquidity all stand at very strong levels. We continue to be well positioned for future growth while at the same time also being well positioned for an economic slowdown, whichever we end up facing. I'm going to turn it over to Shalene to go through the investor deck and then we'll answer any questions you have. Shalene?

Thanks, Ty. I'll start today with the balance sheet. As Ty mentioned, total assets increased about $37 million during the first quarter. Cash was up nearly $72 million primarily due to loan and securities related cash flows, as well as we had increases in deposit balances during the quarter of $12.2 million. Our net loans decreased $23 million while our total securities portfolio decreased about $7.2 million overall. We did purchase $30.9 million in new AFS securities during the quarter, but that was offset by about $31.5 million in maturities, calls, and mortgage-backed paydowns over the entire portfolio. Unrealized losses on our AFS securities pre-tax decreased from $20.8 million at December 31st to $14.7 million on March 31st, which was an improvement of about $6 million. Of course, we're not sure exactly where that's at today, but hopefully moving in the right direction there. We also sold the one remaining ORE property that we had, which was a single-family home in the DFW market that had a balance of $1.2 million during the first quarter. Our total equity increased by $6.7 million this quarter, resulting primarily from net income of $8.6 million. We had employee stock option exercises that netted us about $1.3 million and an improvement in other comprehensive income of $4.7 million due to the decrease in unrealized losses on the AFS securities. This was offset by stock repurchases that Ty mentioned of $5.2 million, and we also paid dividends of $2.8 million during the quarter. We're happy to say that we did increase our dividend in the first quarter to $0.25 per share. Which is up from $0.24 per share for each quarter in 2024. Onto the income statement, the company earned $8.6 million in net income in the first quarter, which equates to $0.76 per basic share, down from $0.88 per share linked quarter, and up from $0.58 per share in the first quarter of 2024. Compared to the first quarter of 2024 and the linked quarter, we continue to have good improvements in net interest income. While non-interest income was down and net interest expense was a bit higher, which I'll discuss more shortly. Our return on average assets was .13% for the quarter compared to .27% last quarter, and our return on average equity was .83% for the quarter compared to .68% in Q4. Our net interest margin was .7% in the first quarter, which is an increase from .54% in the fourth quarter and .16% during the same quarter last year. The NIM increases resulted from the Fed lowering their rates by 75 basis points in the late, in the late 2024, as well as continued repricing of our loan securities and certificate of deposit portfolios. The average yield on our interest earning assets remained flat at .6% from the fourth quarter, while our cost of total deposits decreased 15 basis points from .11% in the fourth quarter to .96% in the first quarter. We also believe, and we've mentioned this the past few calls, that we've got some continued tailwinds in our NIM for the remainder of 2025, and we really expect to continue to increase a basis point or two over the next several months. The reason for our assumptions here are that, you know, aside from our $263 million in loans that float daily, we also have about $341 million in variable rate loans that reprice on different time intervals, but that we expect to reprice over the next 12 months. So $341 million that we expect to reprice over the next 12 months. Those loans currently have a weighted average rate of 6.36%. Now, assuming rates just stay where they are, and that all of that $340 million reprice according to their current loan terms and balances, the new weighted average rate 12 months from now on that pool would be 7.42%, which is an increase of 106 basis points. Now, on the cost of funds side, we also have $613 million in certificates of deposit that are repricing between April 1st and year end. They currently have a weighted rate of 4.24%. If all of those CDs were to renew into the same product at our current rates, the new weighted average rate will be approximately 3.65%. So, of course, not all of the loans or CDs may reprice at those original terms, but that really helps illustrate our expectation for the continued nintel wins over the next several months. Non-interest income decreased by $693,000 during the first quarter compared to the fourth quarter. This is primarily the result of elevated non-interest income in the fourth quarter from rental income that we were receiving on the Austin ORE property and then a gain on sale of same property, which was sold during the fourth quarter. We also had a loss on sale of $184,000 during the first quarter of 2025 from the sale of that one remaining ORE property that added to that change quarter over quarter. We also had service charges and gains on sale of mortgage and SBA loans that were down slightly really due to lower volumes during the first quarter. And then we had debit income that was up during the first quarter of 2025 compared to the fourth quarter of 2024 and the first quarter of 2024. That's due to an annual MasterCard bonus that we received of about $400,000 during the first quarter of this year. In 2024, that was recorded during the second quarter, so you'll see an elevated debit card income during the second quarter of last year. Non-interest expense increased by $1.3 million in the first quarter compared to the fourth quarter, and that was primarily due to employee comp and related benefits. During the first quarter of every year, we fund and expense the company contribution to our executive incentive retirement plan, and we also have additional payroll tax expense in the first quarter that's related to our year-end employee bonus that's paid at the end of January. Both of those expenses accounted for about $575,000 of the length quarter change, and again, those are consistently expense or make a difference during the first quarter of every year. We are also partially self-insured for health insurance, which I mentioned last quarter. We were over-accrued at the end of 2024 due to lower than expected health claims, and that resulted in a $446,000 reversal of health expense accruals in the fourth quarter of 2024, which we did not have in 2025. That resets in January of each year. We expect employee comp and benefit costs to be lower than subsequent quarters and also more consistent. Finally, our efficiency ratio this quarter was 66.78%. All right, on to our loan portfolio and allowance for credit losses. As both Ty and I mentioned, gross loans decreased $23 million in the first quarter. Ty spoke to this a little bit, but we certainly anticipated and saw a strong loan pipeline at the end of 2024, but demand for many of our borrowers has really slowed during the first quarter as a lot of them are waiting to see how the tariff uncertainty is going to impact their businesses and the overall economy. That being said, our balance sheet is really strong, and we've got very good liquidity and are ready to grow those loans when our borrowers are ready. Ty said our pipeline is very full right now, so we're really hoping we can get that going here soon. Non-performing assets continue to remain at very low levels. Our MPAs to total assets were .15% at March 31st compared to .16% at year end. The non-performing assets include both ORE and non-approval loans. So the sale of the property in Austin during the fourth quarter helped lead to the improvement there, and then the sale of our single-family ORE property in DFW helped reduce the ratio even more in the first quarter. Net charge-offs also remain low. Net charge-offs were .02% in the first quarter of 2025. They were essentially zero last quarter, and they were also .02% in the first quarter of 2024. Our non-approval loans were up slightly to $4.8 million from $3.7 million as of year end, and that represents 0.23%, less than a quarter percent of our total loans. That increase is primarily due to one single-family loan borrower that we're working on a solution for. We don't expect any losses on that loan. It's very well collateralized. Our substandard loans were up slightly, but fairly consistent with year end. We did have a reverse provision for credit losses of $300,000 during the quarter, and we didn't change our qualitative factors at all. The decrease is resulting almost entirely from lower loan balances and stable credit trends. Our quarter end ACL coverage is .32% of total loans, which is one basis point lower than our year end percentage of 1.33%. If the tariff situation is cleared up and we have some more certainty there and the economic outlook starts to improve, we do anticipate that we will adjust the qualitative factors at some point, which may result in future reverse provisions as well. Of course, that'll be offset if the loan portfolio starts to grow again. All right, on to deposits, liquidity, and capital. Our total deposits grew $12.2 million during the quarter. Money market and savings balances increased 19.6 million. Sorry about that. DDA balances increased 11.5 million during the quarter, and our certificates of deposit decreased 18.9 million. Non-interest bearing deposits continue to represent a good percentage of our total deposits. We had a ratio of .3% at quarter end, up a couple of basis points from last quarter. With respect to overall deposit risk, Guaranteed has a granular and historically stable core deposit base. At the end of the first quarter, we had just over 91,100 active deposit accounts that had an average account balance of just under $30,000. Our uninsured deposits also remain relatively low, excluding our Guaranteed-owned accounts. And insured deposits were .7% of total deposits at quarter end. As Ty mentioned, and I mentioned previously, our liquidity right now is great. We're ready for some loan growth. We ended the quarter with a liquidity ratio of .8% compared to .5% at year end. Our cash balances increased $72 million during the quarter to $217.8 million in total cash and cash equivalents. We also anticipate another $116 million in principal and interest cash flows from maturing securities between now and year end that we'll either use for loan growth or to reinvest in securities or cash. We also have total contingent liquidity of about $1.3 billion that's available through the Federal Home Loan Bank, the Federal Reserve Bank, Correspondent Bank, Fed Funds lines, and a revolving line of credit. Finally, with respect to liquidity, our total net unrealized losses on investment securities remains very reasonable at $41.7 million, of which $14.7 million is related to our AFS securities and included in AOC on the balance sheet. Capital is also strong. Like Ty mentioned, we used a portion of our excess capital in the first quarter to pay 25 cent per share dividend and we also repurchased 127,537 shares of guaranteed stock, which represented about .1% of outstanding shares. And this, of course, continues to add intrinsic value for our shareholders. Our total equity to average assets as of January 30, I'm sorry, March 31 was .5% and our TCE to total assets was strong at 9.37%. So this concludes our prepared remarks. I will turn it back over to Nona for Q&A.

Thank you, Shalene. Our first question is from Woody Lay with KBW. Woody, can you unmute your line?

Hey, good morning guys. Can you hear me?

We can hear you. Good morning, Woody.

Good morning.

Hey, wanted to start on the loan pipeline. It's encouraging to hear it's kind of at a multi-year high. Any color on the mix of the portfolio, of the pipeline and how that compares to the loan portfolio today?

Woody, it's similar to the current composition loan portfolio. It's really across our footprint and really all four of our regions. It's pretty granular, like our portfolio. But we just, really after the November election, we just started seeing a really strong uptick in opportunities that made sense to us, loan opportunities across our footprint. And we continue to see that. That's probably muted some in the last couple of weeks, which makes sense. But as we said today, we have a very strong pipeline and we'll see how that plays out. But we're really pleased with where we are with the pipeline as of today.

Yeah. And then as you talk to your clients and try to get a sense of timing on when they could execute on these loans. And in your opening comments, you made a comment about how the Texas markets are really strong. It's kind of the national uncertainty. I guess as you talk to your clients, what are they looking for to get comfortable in this current environment?

Well, I think Woody, they're like the rest of us. There's just uncertainty. If you don't turn on CNBC, they're not seeing anything in our local markets that are really concerning at this point. But like everyone else, they look and see what's happening on the national scene and that changes their view. So I think everyone's just kind of on standby trying to see how this plays out. But you know, this whole issue with tariffs gets resolved, then the Texas economy is strong and robust and growing and that should resume. And I anticipate that will resume once that happens. But everyone, like I said, is the same boat. I mean, we're just trying to kind of see how this plays itself out. But I think the overall underlying economy is strong. And that's really the thing we can focus on from our company standpoint. We really don't bank a lot of multinational companies, obviously. So direct impact, we've been looking at that. We don't see any direct impacts from tariffs. If we stay on this track, there would certainly be indirect impacts on overall economy and all of our customers. But we haven't identified any direct impacts at this point.

Got it. And then last for me, just touching on the reserve, I think you called out that if we were to get clarity on the economy, you would expect some reserve release. But assuming we're in the same position we are today, 60 days from now, would you expect to build reserves just based on where the Moody's forecast is trending and any color there?

Yeah, I wouldn't expect to build reserves. I mean, we're still carrying effectively some of the COVID factors. And we kept those in from two years ago when we had some bank failures. So we would not remove those. But continuing those, I can see that if things are currently where they stand. I mean, it would take a pretty large systemic concern for us to increase our factors based on kind of where we see the quality of the loan portfolio and again, just the overall economy in Texas. I

can add on to that too. I mean, we've kept our qualitative factors at elevated levels because we wanted to be more conservative. And each time we started thinking about unwinding some of those economic factors that we put in based on situations the new event would happen. It started with COVID and then it was the bank failures and then there was the election and now these tariffs uncertainties. And so we've kind of just left those economic factors at elevated levels throughout instead of unwinding them like some of our peers did. But at some point, if we start getting some certainty, then we'll look at unwinding those a little bit. Like Ty said, that we don't anticipate increasing them.

Got it. All right. Thanks for taking my question.

Here,

Woody.

Okay. Our next questions will be from Matt Olney with Stevens. Matt, can you unmute your line?

Yeah. Thanks. Good morning, guys. Good morning,

Matt. Morning, Matt.

On the loan balances, Ty, you highlighted the stronger loan pipelines, which is good to see. Within the 1Q loan balance, I guess it was the CNI mix that drove the contractions. Any more color on that CNI book? Were these company sales? Was it lower utilization? Just any color you can give us on that portfolio?

It was really lower utilization. We just saw some paydowns in some of those CNI lines. Nothing specific. It just, in that, it very likely reversed itself. But we just, for the quarter, we saw net paydowns in some of the utilization of lines.

Okay. Appreciate that. And then, I guess, switching gears on the deposit side, we saw some positive deposit growth in the first quarter. I think most of your peers are still seeing some deposit contraction first quarter. Any color on kind of what you saw in 1Q? And appreciate any kind of commentary you may have for deposit growth for the full year.

Yeah. I mean, we continue to view core deposits as really key to franchise value in our company. And so, that's a big part of our model to focus on core deposit relationships. And we will open 10,000 checking accounts this year, like we have every year, for several years. So, it's just a big part of our model to focus on core deposits across our footprint. In every market we tier on rates. We're not, the lowest rate in the markets, we're not the highest. So, they're really relationship-based deposits. And again, it's just, I would anticipate we're probably going to see a 2 to 5% kind of net growth in the deposit book for the year. Because again, it's just a big part of our model to grow core deposit relationships. But do so in a very granular way, as we kind of outlined.

Okay. Thank you for that, Ty. And then, I think on the prepared remarks, I think it was Shalinda mentioned, expect some pretty good cash flows on the securities portfolio for the rest of the year, I think it's $116 million. Would you like to hear any kind of preliminary thoughts you have on what the plan is for those cash flows and what you could do? We,

I mean, our plan is to continue to add to the bond portfolio as it makes, as we see that there's opportunities to add to that. And in sort of a dollar cost averaging method, as we've done the last three years, we're setting with about 5% of the balance sheet in Fed funds. So, we're, we have a lot of liquidity available to grow the loan book and or add to the bond portfolio. But doing so, you know, in a systematic way each month. And again, we've been doing that. And that's also helped our loan portfolio, our bond portfolio, excuse me, total yield. And we have gains in bonds because we've been able to add the last three years with our liquidity. There's been some bond market disruptions in the last few weeks, as everyone knows, and we were able to step in and buy some bonds during that period at some really, you know, attractive pricing. So, our plan will be to continue to kind of do that each month in just a systematic way like we've been doing.

Okay, well, balance sheet liquidity looks great. So, thanks for taking my questions. Sure, Matt.

Okay, our next questions are from Michael Rose with Raymond James. Michael, can you unmute?

I am. Can you guys hear me? Yes, Michael. Good morning. All right. Good morning. Thanks for taking my questions. Maybe just to start on credit, you guys have obviously always done a really good job if I look back in history. But, you know, the longer this goes on, there's probably some risks. So, what are some areas of the portfolio that you guys are maybe doing a deeper dive on and maybe some lessons learned from COVID? Thanks.

I mean, like I mentioned, we're looking at any customers we have that could have a direct impact to tariffs, any manufacturing customers we have and just trying to game out any kind of concerns that they would have. I mean, at this point, I mean, we don't see anything that concerns us. Again, I think the granularity of our loan portfolio is a big part of the strength of our model. And we just don't have, you know, outsized positions in many credits or in one particular sector or one particular region in the state. And so, we are concerned if this stays on this negative track for an extended period and the impact it would have on the national economy, that ultimately would be the Texas economy and ultimately would be the markets we're in. That's no different than COVID or any other economic event that we've all faced. But, we're very confident in the strength of our portfolio, the strength of our underwriting and the quality of our customer base. We have, you know, very resilient companies that we do business with. Some of them we've done business with multiple decades. They've been through multiple cycles, economic cycles, and they're well positioned themselves to adjust. We don't have, you know, again, a lot of exposure to multinationals that have a direct impact, but certainly would have an indirect impact if, you know, this self-inflicted, you know, economic event happened in a way that damaged the economy overall. And we would certainly adjust to that based on what we saw on the environment that we're operating in. But, as of right now, nothing specific, but we're certainly being prudent and cautious and watching everything that we can to anticipate what may come down the pipe.

Michael, we also included some additional information in the quarterly highlights of the earnings release that talks about granularity of our two largest loan segments, CRE and real estate one to four. But, I can also comment on, you know, the next couple of down. Our real estate construction loans, we've got about 650 of those with an average balance of 357,000. So, it's pretty low. And then, you know, Matt, this may interest you, but our CNI loans, we've got 1,562 CNI loans and they have an average balance of 139,700. So, again, you know, our loan portfolio, we've got a lot of, you know, fairly low average balance loans. And so, you know, if we do have those risks that pop up, there's not as much damage, hopefully.

I appreciate the color. Just switching gears, you guys stepped up the buyback a little bit this quarter. I think last quarter you mentioned that you could exhaust the authorization. I think you have about 950,000 shares left at the end of the first quarter. I think the program expires in April of 26, so about a year from now. Just, can you discuss your appetite? You know, obviously, banks have, you know, most bank stocks are down. You guys are one of the few that's actually up here today. So, can you just kind of discuss the ability and the willingness to re-purchase shares? Thanks.

So, Michael, yes. I mean, like I mentioned in the fourth quarter, I mean, we do consider that to be a good utilization of our excess capital. And our balance sheet has not been, you know, we've not grown our balance sheet intentionally the last two or three years, really. So, as we're creating excess capital and we see, you know, we see opportunities to buy our stock back, we just think that's a good utilization of resources. We're not in the market currently. We were at the beginning of the quarter. But we certainly plan, we see, you know, the opportunity to buy our shares back. And that's kind of a capital allocation priority for us and would continue to be through that plan period.

Helpful. And maybe just last one for me, you certainly understand and appreciate the comments on expenses this quarter. You guys have previously talked about a two and a half percent expense to average asset ratio. Is that kind of still what you're targeting? And assuming the revenue or the loan growth doesn't come through, like we all hope, you know, how much flex is there on the downside if the revenue doesn't come through? I

mean, Michael, yes, two and a half percent to average assets has always been probably for 20 years has been kind of our bogey. That creates a nice ROA, you know, kind of going through the math. But there's times we went above that. There's times we've been 2.6, 2.7. There's times we've been 2.3, 2.4. So, we're not married to it in the sense that we'll make short-term decisions and making, you know, versus making long-term investments in the growth of the company. But that's our speed limit and we try to stay within that and always will. But there's times we'll fluctuate above or below it. With our margin, obviously, where it is and how it's building, we have some more flexibility there to continue to hit our earnings goals and be above that a little bit. But you'll never see us materially move above or below that two and a half percent bogey as a goal.

All right. Thanks for taking my questions.

Absolutely, Michael.

Thank you. Thank you for your questions. I would like to remind everyone that the recording of this call will be available by 1 p.m. today on our investor relations page at gnty.com. Thank you for attending and this concludes our call. Have a good day.