Third Coast Bancshares, Inc. (NASDAQ:TCBX) Q4 2023 Earnings Call Transcript

Third Coast Bancshares, Inc. (NASDAQ:TCBX) Q4 2023 Earnings Call Transcript January 26, 2024

Third Coast Bancshares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Third Coast Banc Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natalie Hairston, Investor Relations. Thank you, you may begin.

Natalie Hairston: Thank you, operator, and good morning, everyone. We appreciate you joining us for the Third Coast Bancshares conference call and webcast to review our fourth quarter and full year 2023 results. With me today is Bart Caraway, Chairman, President and Chief Executive Officer; John McWhorter, Chief Financial Officer; and Audrey Duncan, Chief Credit Officer. First, a few housekeeping items. There will be a replay of today’s call, and it will be available by webcast on the Investors section of our website at ir.tcbssb.com. There will also be a telephonic replay available until February 2, 2024, more information on how to access these replay features was included in yesterday’s earnings release. Please note that information reported on this call speaks only as of today, January 26, 2024, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K that was filed on March 15, 2023, to better understand those risks, uncertainties and contingencies. The comments made today will also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures were included in yesterday’s earnings release, which can be found on the Third Coast website.

Now I would like to turn the call over to Third Coast Chairman, President and CEO, Mr. Bart Caraway. Bart?

Bart Caraway: Thanks, Natalie, and good morning, everyone. Thank you for joining us today. As we wrap up the fourth quarter, we reflected on our journey since going public two years ago. In November 2021, we launched our IPO as a $2 billion bank, aware that we still had to grow into our overhead with a return on assets of just 0.55%. However, today, we’re proud to report that we have over 4.4 billion in assets, an impressive growth rate of over 100%. And we almost doubled our return on assets at 0.90%. Our success over the past two years can be attributed to our focus on strategic priorities, including reinforcing shareholder value by improving efficiencies, and maintaining our strong credit culture. In 2023, we introduced several new technologies to streamline our daily work and lay the foundation for flexible and scalable for future growth.

These include a credit delivery platform to efficiently process loans for corporate and community banking, and integrated risk and issue management software package, and an account origination solution for quick and efficient account opening for personal and business accounts both digitally and in branch. We also took proactive, decisive actions to reduce our operating expenses and other overhead costs, resulting in a 5% reduction in workforce and the winding down of our Auto Finance division. This allowed us to streamline our operations and improve our bottom line, so that we now have approximately $12 million in assets per employee. Our loan growth in 2023 continued to outperform our peers with a well-balanced loan mix of C&I and CRA. We achieved this by focusing on diversification and adding credit talent to our team.

Looking back over the past year, we’re immensely proud of our team and their hard work. We wholeheartedly believe that we have the best bankers, working with the best customers in the best markets, driving long term shareholder value and achieving success. With that, I’ll turn the call over to John for a more detailed financial review. John?

John McWhorter: Thank you, Bart. And good morning, everyone. We provided the detailed financial tables in yesterday’s earnings release, so today I’ll provide some additional color around select balance sheet and profitability metrics from the fourth quarter. We reported record fourth quarter net income of $9.7 million resulting in a 10% return on equity and record diluted earnings per share a $0.57. Net interest income growth was 19.8% for the year, but on an annualized basis was 23.2% in the fourth quarter, due to strong quarterly loan growth. Non-interest expenses were down 4% or $1.1 million in the fourth quarter, and we’re up only 13% or $11.5 million for the year resulting in better than peer operating leverage. Investment securities are relatively immaterial at $178 million, but significantly $75 million was purchased early in the fourth quarter.

Our timing was good and we had material gains on these new purchases. The current yield on the portfolio was 6.42% and we have a gain of $933,000 in accumulated other comprehensive income. Deposit growth for the quarter was $156 million, double our loan growth of $78 million. This resulted in a loan to deposit ratio of 95.7% but also resulted in a net interest margin which declined 10 basis points. In mid-December, the bank entered into a five-year swap with a notional amount of $200 million. We will pay fixed at 3.60% and received Fed funds floating, which today is about 5.33%. This will give us good margin protection in the event that rates are down, less than current market expectations. That completes the financial review. And at this point, I’ll turn the call back to Audrey for our credit quality review.

Audrey Duncan: Thank you, John, and good morning, everyone. Given the current economic climate, we understand that investors are focused more than ever on credit quality. Despite the difficulties presented by 2023, Third Coast loan portfolio has proven to be resilient and strong. This is due to our conservative underwriting, extensive ongoing monitoring and diversity in the loan mix to mitigate segment-specific risks. Non-performing assets to total assets remained at 39 basis points. Net charge-offs of $1.5 million for the quarter were primarily the result of the charge-off of one C&I revolving line of credit. The line originated in 2019. The loan to the same borrower with a 75% SBA guarantee remains on the books. Additionally, charge-offs have remained low at 4 basis points for the past two years.

Provisions for credit losses totaled $1.1 million in the fourth quarter and related to provisioning for new loans and commitments. The ACL represents 1.02% and remains at the high end of the range. The loan portfolio mix is well balanced, with commercial and industrial loans accounting for 35% of total loans, construction, development and land loans at 19%, non-owner occupied CRE at 14% and owner occupied CRE at 16%. Non-owner-occupied office represents 1.8% of the loan portfolio, with non-owner-occupied medical office accounting for another 1.3%, while owner-occupied office and medical office totaled 2.3% of total loans. The office portfolio generally consists of Class B, with some owner-occupied C space, and is all located within our Texas footprint.

Non-owner-occupied retail accounts for 3.5% of total loans and owner-occupied real estate, another 0.5%. The properties are primarily neighborhood centers and are located within our Texas footprint. Multifamily consists of 3% of total loans, Hospitality represents less than 1% of the portfolio and restaurants represent 1%. During fourth quarter 2023, Gateway Asset Management conducted our annual loan review. They reviewed 40% of the total loan portfolio, with a concentration in CRE, C&I and construction and development loans. Out of the 145 loans reviewed, there was only one recommended downgrade from past to launch. With that, I’ll turn the call back to Bart. Bart?

Bart Caraway: Thanks, Audrey. Looking ahead to 2024, Third Coast is confident in its ability to refine and execute our strategic plan, while building on the success of the past two years. Our primary objective is to continuously increase efficiencies, while maintaining excellence in our commitment to serve our customers, communities and shareholders through the execution of our key goals this year. To achieve our goals, we have identified several key priorities for the coming year. First, maintaining pristine credit quality is paramount. We prioritize credit quality and risk management to ensure the long-term success of our business. Our team of experienced underwriters, credit officers and bankers work diligently to ensure that each loan is evaluated thoroughly before it is approved.

We also regularly review our loan portfolio to identify any potential risk, and take proactive measures to mitigate them. Our focus on credit quality has helped us build a strong reputation among our customers and investors. Second, our strong capital position. We expect that future earnings will support 100% of our asset growth going forward. Having said that, maintaining a robust capital position is not just about supporting growth, but is also vital to ensuring stability in times of economic uncertainty. We have implemented a risk management framework that enables us to identify, measure and mitigate risk that could impact our capital position. By prioritizing our capital position, we are able to provide our investors with a strong return on their investment.

Third, our commitment to relationship banking. Our focus on relationship banking means that we place a premium on understanding our clients’ needs and providing them with a range of financial products that meet those needs. We aim to become our clients’ primary financial institution, offering them everything from checking to savings accounts, to loans and investment options. We are confident that our deposit strategies will continue to yield positive results, which, in turn, will lead to strengthening our relationships with our clients. Finally, balancing future growth with minimizing unnecessary expenses. We are committed to investing in our growth, while being mindful of expenses. Our team is dedicated to reviewing our processes and identifying areas where we can optimize our spending.

We prioritize investments that will generate long-term value for our company and our customers, while also seeking out cost-saving measures that don’t compromise the quality of our products or services. In closing, Third Coast is dedicated to building on our past successes and improving every day. Our ultimate goal is to remain relevant and add value to our employees, customers, communities and shareholders in 2024 and beyond. We are confident in our strategy and believe it will help us navigate any challenges or opportunities that come our way. This concludes our prepared remarks. I would now like to turn the call back over to the operator to begin the question-and-answer session. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.

See also 15 High Quality Dry Dog Food Brands in the US and Jim Cramer is Recommending These 10 Stocks.

Q&A Session

Brady Gailey : Thanks. Good morning, guys. I know last quarter, we talked about expectations for loan growth in ’24 of roughly $300 million to $400 million. Maybe just an update on how you guys are thinking about loan growth in ’24 and on the flip side, deposit growth as well?

John McWhorter: Yes, relatively unchanged on our side, still $300 million to $400 million, consistently what we’re looking at. Obviously, I put the qualifier end of what the economy does may affect it and as well as the timing. But we still see some pipeline of demand. And so we’re going to remain with our estimate of $300 million to $400 million.

Brady Gailey: And do you think deposit?

Bart Caraway: Yes. So on the deposit side, we’ve been rolling out strategies all last year on deposit growth, and we’re actually feeling better about deposit growth, matching the loan growth. So our goal is not just loan growth but to remix the deposit portfolio for better cost of funds. And we’re seeing some signs of some tendencies of those skill or those initiatives working actually.

John McWhorter: Yes, forecasting deposits has certainly been harder. We weren’t expecting the fourth quarter deposit growth to be double the loan growth. It’s hard to forecast that going forward. But I would say the fourth quarter was probably the easiest quarter of the year for us, that a lot of the initiatives that we had started earlier in the year continue to pay off, even the deposit campaign where we were giving out prices, if you will, for people that produce the most deposits, I mean some of — even though that has expired, we still have a lot of deposits coming in from that. It’s been very promising.

Brady Gailey: All right. And then on the expense side, I heard one of the priorities on the expense side is investing in growth, but at the same time, being mindful of expenses and looking for ways to optimize the expense base. How should we think about expense creep in ’24?

John McWhorter: Yes. So last quarter, we had guided to 5% to 10% non-interest expense growth, and we’re still pretty comfortable with that number. Most of our staff received salary increases in the first quarter, so we’ll see a lot of that immediately. I would say that December was probably our best month for non-interest expense, if you will, in the fourth quarter, and it was because of the risk that we had done late in the third quarter that was kind of fully realized in the fourth quarter. Kind of net interest income, while we’re talking about it. We still think that net interest income is going to grow more in the 10% to 15% range and expenses in the 5% to 10% range. So we still expect that positive operating leverage.

Brady Gailey: That’s great to hear. Thanks for the color, guys.

Operator: Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed with your question.

Bernard Gizycki : Hi, guys. Good morning. Just on expenses, I wanted to dig in there a little bit. You’re slightly above the guide, but just wondering, on the legal and regulatory expenses, those saw a big sequential uptick. Was that mostly like a year-end cleanup? Just anything, how we can think about that and how that could trend in 1Q?

John McWhorter: Yes. Those are actually the two-line items that I expect the most improvement in the first quarter. We did have some kind of unusual one-off expenses in the fourth quarter that should not be recurring. And those two-line items combined probably in, I don’t know, $300,000 to $500,000 range that was excess expense that we won’t see going forward, at least specific to those things.

Bernard Gizycki: Okay. Perfect. And then maybe on the fee income side, there was that nice lift sequentially in part due to the derivative fee income you guys called out. Just for activity purposes, was that just much better at year-end or some sort of seasonality or anything you’re seeing kind of as the year starts and how it pertains to like, say, 1Q, would you expect that to continue? Any color you can add there?

John McWhorter: Yes. I mean, a year ago, I thought that we would not have much derivative income for 2023, just because everyone thought that rates would be going up. But we did. We continued selling swaps to our customers. And with the expectation now if rates dropping, I wouldn’t think that would be a very good market for this year. I would expect fee income to be relatively flat for the next quarter or two. There’s nothing special that we expect, and we’ll probably have some pressure on things like derivatives and SBA sales, because both of those lines of business are just a little bit slow right now.

Bernard Gizycki: Okay. Great. Thanks for the color.

Operator: Our next question comes from the line of Graham Dick with Piper Sandler. Please proceed with your question.

Graham Dick : Everyone, good morning. I just wanted to circle back to the deposit growth you saw this quarter and get a little more color and idea of what kind of deposits these were or what the customers look like? Just anything you could do there to help us understand like the level of granularity or type of deposits that came on this quarter would be helpful.