Participants

Tyson Abston; Chairman of the Board, Chief Executive Officer; Guaranty Bancshares Inc

Shalene Jacobson; Chief Financial Officer, Senior Executive Vice President; Guaranty Bancshares Inc

Woody Lay; Analyst; Keefe, Bruyette & Woods

Matt Olney; Analyst; Stephens Inc

Michael Rose; Analyst; Raymond James

Presentation

Operator

Good morning. Welcome to the Guaranty Bancshares 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 our prepared remarks, there will be a Q&A session.
After our prepared remarks, there will be a Q&A session. 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.

Tyson Abston

Thank you, Nona. Good morning, everyone. Welcome to our earnings call for Q1 2025. Guaranty achieved good results in the first quarter of this year. I'm very proud of our team and our continued -- 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 a negative impact 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 we had, 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, inactive in the market, but we do stand ready to reenter the market if and when we decide to make 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?

Shalene Jacobson

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 pretax decreased from $20.8 million at December 31 to $14.7 million on March 31, 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 book 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. And 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.
On to 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 '24 in the linked quarter, we continue to have good improvements in net interest income. While noninterest income was down in net interest -- noninterest expense was a bit higher, which I'll discuss more shortly.
Our return on average assets was 1.13% for the quarter compared to 1.27% last quarter. And our return on average equity was 10.83% for the quarter compared to 12.68% in Q4. Our net interest margin was 3.7% in the first quarter, which is an increase from 3.54% in the fourth quarter and 3.16% during the same quarter last year.
The NIM increases resulted from the Fed lowering their rates by 75 basis points in late 2024 as well as continued repricing of our loans, securities and certificated deposit portfolios. The average yield on our interest-earning assets remained flat at 5.6% from the fourth quarter, while our cost of total deposits decreased 15 basis points from 2.11% in the fourth quarter to 1.96% in the first quarter.
We also believe, and we've mentioned this in the past few calls that we've got some continued tailwinds in our NIM for the remainder of 2025 and we really expect it to continue to increase a basis point or 2 basis points over the next several months. The reason for our assumptions here are that 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 repriced 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 fund side, we also have $613 million in certificates of deposit that are repricing between April 1 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 rig will be approximately 3.65%. So of course, not all of the loans are CDs may reprice at those original terms, but that really helps illustrate our expectation for the continued NIM tailwinds over the next several months.
Noninterest income decreased by $693,000 during the first quarter compared to the fourth quarter. This is primarily the result of elevated noninterest income in the fourth quarter from rental income that we were receiving on the Austin ORE property and then a gain on sale of that 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 '25 compared to the fourth quarter of '24 and the first quarter '24. That's due to an annual MasterCard bonus that we received at 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.
Noninterest 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 and 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 linked quarter change. And again, those are consistently expensed 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 in subsequent quarters and also more consistent. Finally, our efficiency ratio this quarter was 66.78%.
All right. On to our land 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.
Nonperforming assets continue to remain at very low levels. Our NPAs to total assets were 0.15% at March 31 compared to 0.16% at year-end.
The nonperforming assets include both ORE and nonaccrual 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 to reduce the ratio even more in the first quarter.
Net charge-offs also remained low. Net charge-offs were 0.02% in the fourth quarter -- in the first quarter of 2025. They were essentially 0 last quarter, and they were also 0.02% in the first quarter of 2024. Our nonaccrual loans were up slightly to $4.8 million from $3.7 million as of year-end and that represents 0.23%, less than 0.25% of our total loans. The 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 decreases resulting almost entirely from lower loan balances and stable credit trends. Our quarter end ACL coverage is 1.32% of total loans, which is 1 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 will be offset if the land 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% -- $19.6 million, sorry about that. DDA balances increased $11.5 million during the quarter, and our certificates of deposit decreased $18.9 million.
Noninterest-bearing deposits continue to represent a good percentage of our total deposits. We had a ratio of 31.3% at quarter end, up a couple of basis points from last quarter. With respect to overall deposit risk, Guaranty 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 remained relatively low, excluding our guarantee owned accounts, and insured deposits were 26.7% 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 19.8% compared to 16.5% 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 will 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 and 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 AOCI 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 $0.25 per share dividend, and we also repurchased 127,537 shares of Guaranty stock, which represented about 1.1% of outstanding shares. And this, of course, continues to add intrinsic value for our shareholders.
Our total equity to average assets as of year-end January -- I'm sorry, March 31 was 10.5% 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.

Question and Answer Session

Operator

Woody Lay, KBW.

Woody Lay

Hey, good morning, guys. Can you hear me?

Tyson Abston

Good morning, Woody.

Shalene Jacobson

Morning.

Woody Lay

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

Tyson Abston

Woody, it's similar to the current composition of the loan portfolio, it's really across our footprint in 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 and 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 just see how that plays out. But that's -- we're really pleased with kind of where we are with the pipeline as of today.

Woody Lay

Yeah. And then as you talk to your clients and try to get a sense of when -- 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, like what are they looking for to get comfortable in this current environment?

Tyson Abston

Well, I mean I think there Woody, like the rest of us. I mean there's just uncertainty if you don't turn on CNBC, they're seeing -- they're not seeing anything in our local markets that are really concerning at this point. And -- 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 where this -- how this plays out. But assuming this gets -- 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, it's a 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 to some we stay on this stay on this track, there would certainly be indirect impacts on overall economy and all of our customers. But we don't see -- we haven't identified any direct impacts at this point.

Woody Lay

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?

Tyson Abston

Yeah. Woody, I wouldn't expect 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.

Woody Lay

Got it.

Shalene Jacobson

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 in 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 unlike 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 that.

Woody Lay

Got it. All right, thanks for taking my question.

Tyson Abston

Sure, Woody.

Operator

Matt Olney, Stephens.

Matt Olney

Yeah, thanks. Good morning, guys.

Tyson Abston

Good morning, Matt.

Shalene Jacobson

Good morning, Matt.

Matt Olney

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 C&I mix that drove the contraction. Any more color on that C&I book? Were these company sales? Was it lower utilization? Just any color you can give us on that portfolio?

Tyson Abston

It was really lower utilization. We just -- we saw some paydowns in some of those C&I lines. Nothing specific. It just -- in that but very likely to reverse itself. But we just -- for the quarter, we saw net paydowns and some of the utilization of lands.

Matt Olney

Okay. I 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?

Tyson Abston

Yeah. I mean we continue to view core deposits as really key to franchise value in our company. And so that -- and 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 serve, we're paying kind of kind of a mid-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 deposit book for the year, because it's just a big part of our model to grow core deposit relationships and -- but do so in a very granular way, as we kind of outlined.

Matt Olney

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

Tyson Abston

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 in sort of a dollar cost averaging method as we've done the last three years, we're sitting with about 5% of the balance sheet and Fed funds. So we have a lot of liquidity available to grow the loan book and or add to the bond portfolio. But we're doing so 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 one knows, and we were able to step in and buy some bonds during that period that made some really 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.

Matt Olney

Okay. Well, balance sheet liquidity looks great. So thanks for taking my questions.

Tyson Abston

Sure, Matt.

Operator

Michael Rose, Raymond James.

Michael Rose

I am. Can you guys hear me?

Tyson Abston

Yes, Michael. Good morning.

Michael Rose

Hi, 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 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.

Tyson Abston

I mean, like I mentioned, we're looking at any customers we had 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 outsized positions in many credits or in one particular sector or one particular region of the state.
And so we are concerned at this -- this stays on this -- 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 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 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, again, a lot of exposure to multinationals that have a direct impact, but certainly would have an indirect impact if this self-inflicted economic been happen in a way that damaged the economy overall, then we would certainly adjust to that based on what we saw on the environment that we're operating in.
But it's headed right now, nothing specific, but we're certainly being prudent and cautious in watching everything that we can to anticipate what may come down the pipe.

Shalene Jacobson

Michael, we also included some additional information in the quarterly highlights of the earnings release that talked about granularity of our two largest loan segment, CRE and real estate one to four, but I can also comment on 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 Matt, this may interest to you, but our C&I loans, we've got 1,562 C&I loans, and they have an average balance of $139,700. So again, our loan portfolio, we've got a lot of fairly low average balance loans. And so if we do have those risks that pop up, there's not as much damage hopefully.

Michael Rose

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? Obviously, banks have -- most bank stocks are down. You guys are one of the few that's actually up year-to-date. So can you just kind of discuss the ability and the willingness to repurchase shares? Thanks.

Tyson Abston

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 -- 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 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. And -- but we certainly plan -- we see the opportunity to buy our shares back. And we -- that's kind of a capital allocation priority for us and would continue to be through that plan period.

Michael Rose

Helpful. And maybe just last one for me, certainly understand and appreciate the comments on expenses this quarter. You guys have previously talked about a 2.5% 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, how much flex is there on the downside if the revenue doesn't come through?

Tyson Abston

I mean, Michael, yes, 2.5% average assets has always been probably for 20 years, has been kind of our bogey that creates a nice ROA 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 in making -- 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 will 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 2.5% bogey as a goal.

Michael Rose

All right. Thanks for taking my questions.

Tyson Abston

Absolutely, Matt.

Shalene Jacobson

Thank you.

Operator

Thank you for your questions. I would like to remind everyone that the recording of this call will be available by 1:00 PM today on our Investor Relations page at gnty.com. Thank you for attending, and this concludes our call. Have a good day.