Guaranty Bancshares - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered a clean beat on internal drivers: net earnings rose to $10.0M ($0.88 basic EPS) with FTE NIM expanding 21 bps QoQ to 3.54%, ROAA 1.27% and efficiency ratio improving to 62.23% as deposit costs fell and noninterest expense declined.
• Credit tightened further: nonperforming assets fell to 0.16% of assets (from 0.66% in Q3) after selling a large ORE property; ACL/loans held steady at 1.33% and net charge-offs were effectively zero in Q4.
• Management outlook: modeling continued NIM expansion through 2025 (baseline ~2 bps per month), more aggressive share repurchases, modest 1–2% expense growth with a 2.5% of assets OpEx target, and a more constructive loan growth stance supported by ~$165M of bond portfolio cash flows in 2025.
• Catalysts into 1H25: further NIM lift as liabilities reprice lower, cleanup of last ORE in Q1 2025, and accelerated buybacks; risks include continued loan shrinkage and AOCI sensitivity (Q4 OCI impacted equity by ~$8.1M) if rates retrace.

What Went Well and What Went Wrong

What Went Well

• Margin/pricing power: FTE NIM rose to 3.54% (up 21 bps QoQ; 43 bps YoY) as deposit costs declined and earning assets repriced higher; net interest income increased $2.0M QoQ to $26.2M.
• Credit quality normalization: NPA/Assets fell to 0.16% (from 0.66% in Q3) following sale of Austin ORE; net charge-offs were ~0.00% annualized; ACL coverage remained 1.33% of loans.
• Expense discipline: Noninterest expense fell $0.8M QoQ (driven by lower healthcare/salaries and absence of prior ORE holding costs), driving efficiency ratio improvement to 62.23%.
  • Management: “We are very satisfied with our fourth quarter and year-end 2024 financial results... net interest margin... 3.54% for the fourth quarter... We believe we are well positioned for loan growth... during 2025.” — Ty Abston.

What Went Wrong

• Loan contraction: Gross loans declined $5.4M QoQ and $191.4M YoY as tighter underwriting and softer demand persisted, pressuring asset balances despite stronger NIM.
• AOCI headwind: Equity dipped slightly QoQ as ~$8.1M higher unrealized securities losses offset $10.0M net income and $2.7M dividends.
• Mix/Deposit dynamics: Noninterest-bearing deposits fell to 31.1% (from 31.5% in Q3), and total loan interest income was down YoY; deposit costs, though improving, remain elevated versus 2023.

Transcript

Operator (participant)

Good morning. Welcome to Guaranty Bancshares' fourth quarter 2024 earnings call. My name is Nona Branch, and I will be your 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.

Ty Abston (Chairman and CEO)

Thank you, Nona. Good morning and welcome, everyone, to Guaranty Bancshares' 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 had 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 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 accretive 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 of 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 $3 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?

Shalene Jacobson (EVP and CFO)

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 $0.24 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 $0.96 per share.

On the income statement during the fourth quarter, the company earned $10 million in net income, which equates to $0.88 per basic share, and is up from $0.65 in the linked quarter, up from $0.51 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 1.2% for the quarter compared to 0.96% in the prior quarter, and our return on average equity was 12.68% for the quarter compared to 9.58% at the end of Q3. Net interest margin improved quite a bit.

It was 3.54% in the fourth quarter, which is an increase from 3.3% at the end of the third quarter and 3.11% during the same quarter last year. 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 7 basis points to 6.42% during the quarter, while our AFS securities increased 6 basis points to 3.81% during the quarter. The average cost of 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 3.15% to 3.32%, 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 is 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 long-time senior employees during the year and did not have any real growth in the number of employees, so that 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 to $191.4 million year to date, primarily in our C&I, 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. Our loan portfolio was certainly a part of that. We tightened underwriting, and we also allowed some transactional loan accounts from back in 2021 and 2022 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 0.16% at year-end compared to 0.66% at the end of Q3. Those percentages include both ORE and non-accrual loans.

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. 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 40.7% of our total loan portfolio. Of that 40.7%, only 5.9% 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 0.17% 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 past due 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 trend. On 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 were at $59.9 million. Non-interest-bearing deposits continue to represent a good percentage of our total deposits, although they're down slightly for this quarter. They ended at 31.1% for Q4. With respect to overall deposit risk, Guaranty 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 Guaranty-owned accounts, our uninsured deposits were about 26.3% of total deposits at year-end. Liquidity also remains good, as Ty mentioned. We ended the quarter with a liquidity ratio of 16.5% compared to 12.2% at the end of 2023. As I also mentioned previously, we used some of those cash flows from loan payoffs and maturities and securities, and also from increased deposits during the year to invest in new available-for-sale securities and to pay down the advances and borrowings of about $150 million during the year. We also have total contingent liquidity 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 1.8% 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%.

That concludes my prepared remarks. So I will turn it back over to Nona for Q&A.

Operator (participant)

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

Woody Lay (VP)

Hey, good morning, guys. Good morning. The NIM expansion was really nice to see in the quarter. And 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?

Shalene Jacobson (EVP and CFO)

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 $260,000 or $270,000. So it wouldn't have been real meaningful to the NIM.

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 million, oh, I'm sorry, we've got more than that, but we've got about $450 million 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.

Woody Lay (VP)

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?

Ty Abston (Chairman and CEO)

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

Woody Lay (VP)

Got it.

Ty Abston (Chairman and CEO)

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. They're pretty moderate scenarios, up or down, and we still see expansion in our NIM.

Woody Lay (VP)

That's helpful. Maybe shifting over to loan growth, y'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 expectation towards the overall level of growth you're expecting in 2025?

Ty Abston (Chairman and CEO)

Yeah, I mean, we're definitely seeing more opportunities for quality loan growth in the markets. And certainly post-election, the overall environment's 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. And we're in a position to, in the markets we're in, to see those. So we're just, I mean, 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 and the overall environment. But it's definitely more positive out there.

Woody Lay (VP)

Yeah. And as it relates to deposits, I mean, the loan-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?

Ty Abston (Chairman and CEO)

I mean, as far as focusing on deposit growth as a core strategy for growth itself, I mean, that's not a focus for us in 2025, but we are always focused on building core deposit relationships, and we will. I've mentioned this before. We generally open about 10,000 new checking accounts a year, and we continue to see that as a core driver of franchise value, so that's always been a focus of ours in any environment and will continue to be just 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.

Shalene Jacobson (EVP and CFO)

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

Woody Lay (VP)

All right. That's helpful. Thanks for taking my questions. Congrats on the nice quarter.

Ty Abston (Chairman and CEO)

Thanks, Woody.

Operator (participant)

Next question today will be from Matt Olney with Stephens.

Matt Olney (Research Analyst)

Hey, thanks. Good morning, everybody.

Ty Abston (Chairman and CEO)

Good morning, Matt.

Matt Olney (Research Analyst)

Going back to the loan growth commentary, I want to drill down a little bit more on the C&I. We saw a little bit of C&I growth in the fourth quarter. Any color on that specifically? New customers or just more utilization of existing customers?

Ty Abston (Chairman and CEO)

Matt, that's going to be primarily utilization of existing customers. We haven't had a specific targeted program for C&I growth, but our customers definitely last quarter, we saw more utilization of existing lines that we have.

Matt Olney (Research Analyst)

And within that, Ty, any theme that you can identify? Was it some seasonality? Anything specifically that was driving the utilization increase?

Ty Abston (Chairman and CEO)

Nothing that we've been, I mean, nothing that I can really speak to specifically, no. I mean, we typically see that at year-end and going into the spring, but nothing specific that I could point to.

Matt Olney (Research Analyst)

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.

Ty Abston (Chairman and CEO)

We do have some seasonality in fourth quarter with some of our public fund money that comes in in our East Texas region. I don't know that Shalene probably has the exact number on that. But other than that, I mean, just our core deposit growth has been kind of, again, one of our primary strategies.

And so we're planning for core deposit growth in 2025. 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 the East 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, so.

Matt Olney (Research Analyst)

Okay. And then on the operating expenses, I think you mentioned some lower healthcare costs and then retirements throughout the year. Any color for us for the expense growth in 2025?

Ty Abston (Chairman and CEO)

Shalene, you want to do that one?

Shalene Jacobson (EVP and CFO)

Yeah. I mean, really very little expense growth in 2025. We're shooting for that 2.5% target that we've told you guys about several times before, 2.5% of total assets. We're really expecting expenses to be up only about 1%-2% next year.

Matt Olney (Research Analyst)

Okay. Thanks for that, Shalene.

Shalene Jacobson (EVP and CFO)

2025.

Matt Olney (Research Analyst)

Yeah. Understood. And then just lastly, I guess, on the M&A theme, would love to hear your updated 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.

Ty Abston (Chairman and CEO)

I mean, Matt, we're continuing to have conversations and hear 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, but we're continuing to have conversations. And 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 2025.

Matt Olney (Research Analyst)

Okay, guys. Thanks for taking my questions. Congrats on the year.

Ty Abston (Chairman and CEO)

Thanks, man. Appreciate it.

Operator (participant)

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

Michael Rose (Managing Director and Equity Research Analyst)

Hey, good morning, everyone. Thanks for taking my questions. Maybe just back on expenses, Shalene, certainly understand and appreciate the, I think you said 2.5% 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 non-interest expenses as a whole. But I need you to give a sense for kind of what that expense growth could look like and what it contemplates in terms of maybe potential lending hires and maybe just offset. Do you have any other retirements that you're expecting? Just trying to get a better sense for how we should think about the employee compensation line. Thanks.

Shalene Jacobson (EVP and CFO)

Sure. Yeah. So we do have some commercial loan officers built into our budget for 2025. We don't anticipate that expense to continue to go back down. We did make some changes to our healthcare 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 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 the employee expenses will be back up in Q1 from where they ended in Q4.

Michael Rose (Managing Director and Equity Research Analyst)

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, 1.33% reserves to loans. Should we expect that to kind of continue to come down, assuming credit holds are relatively stable? I know there'll be probably some variation quarter to quarter, but it seems like the outlook there is pretty good.

Shalene Jacobson (EVP and CFO)

Yeah, it is. Michael, our ACL model is based. Our ACL 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, 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. If we grow, then we'll probably reduce those key factors anyway, but then our provision will not need extra expense.

So 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.

Michael Rose (Managing Director and Equity Research Analyst)

Okay. 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 earnback is around five years. I mean, how aggressive would you like to be with the buyback? Would you expect to use it all in the timeframe?

Ty Abston (Chairman and CEO)

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. Again, we just, and 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 we think we've kind of had a sense of where the credit, this credit cycle is with the rise in rates the last two years and kind of where the AOCI is going to land. And that's been part of our hesitation the last two years, just being cautious and seeing how all that played out. But 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 be much more aggressive, and that's kind of our plan. And if we could use that million-share buyback plan, that'd be great. But we plan definitely at this point to be more aggressive in that. And I think that makes a lot of sense based on kind of how we see the, again, intrinsic value of the company.

Michael Rose (Managing Director and Equity Research Analyst)

Okay. Great. And maybe just one final one for me. Certainly appreciate the drivers of the margin. I assume that kind of what you'd said last quarter, to kind of expect two basis points or so of NIM expansion per month probably is not what you're looking at going forward, but certainly understand the loans and the securities for pricing 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.

Ty Abston (Chairman and CEO)

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

Michael Rose (Managing Director and Equity Research Analyst)

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

Ty Abston (Chairman and CEO)

Absolutely, Michael. Thank you.

Shalene Jacobson (EVP and CFO)

Thank you.

Operator (participant)

Thank you all for your questions. I would like to remind everyone that the recording of this call will be available by 1:00 P.M. today on our investor relations page at gnty.com. Thank you for attending this call.