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spk08: Greetings and welcome to the Third Coast Bank fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
spk01: Thank you, Operator, and good morning, everyone. We appreciate you joining us for Third Coast BankShares 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 investor 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 recorded 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 Thirst Coast Chairman, President, and CEO, Mr. Bart Caraway. Bart?
spk09: 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 future growth. These include a credit delivery platform to efficiently process loans for corporate and community banking, an 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 CNI and CRE. 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?
spk10: 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 a record fourth quarter net income of $9.7 million, resulting in a 10% return on equity and record diluted earnings per share of 57 cents. 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 have 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 $360 and receive Fed funds floating, which today is about $533. 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.
spk00: 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's 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. A loan to the same borrower with a 75% SBA guarantee remains on the books. Additionally, charge-offs have remained low at four 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 with non-owner-occupied medical office accounting for another 1.3%, while owner-occupied office and medical office total 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 half a percent. 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, CNI, and construction and development loans. Out of the 145 loans reviewed, there was only one recommended downgrade from past to watch. With that, I'll turn the call back to Bart. Bart?
spk09: 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 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 risks that could impact our capital position. By prioritizing our capital position, we're able to provide our investors with a strong return on their investment. 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 and 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.
spk08: Operator? Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Brady Galey with KBW. Please proceed with your question.
spk03: Hey, thanks. Good morning, guys. Good morning. I know last quarter we talked about expectations for loan growth in 24 of roughly 300 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.
spk09: Yeah, relatively unchanged on our side. Still $300 million to $400 million consistently what we're looking at. You know, obviously, I put the qualifier in of what the economy does, may affect it, as well as the timing. But we still see some pipeline of demand. And so we're going to remain with our, you know, estimate of $300 million to $400 million.
spk03: And do you think... Yep. Yep.
spk09: Yeah, 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 initiatives working, actually.
spk10: Yeah, 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 prizes, if you will, for people that produce the most deposits. I mean, even though that has expired, we still have a lot of deposits coming in from that. It's been very promising.
spk03: 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?
spk10: Yeah, so last quarter we had guided to 5% to 10% non-interest expense growth, and we're still pretty comfortable with that number. You know, most of our staff received salary increases in the first quarter, so we'll see a lot of it 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. And, you know, kind of net interest income while we're talking about it. You know, 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.
spk03: That's great to hear. Thanks for the color, guys.
spk06: Thank you.
spk08: Our next question comes from the line of Bernard Von Zicke with Deutsche Bank. Please proceed with your question.
spk02: Hi, guys. Good morning. Just on expenses, wanted to dig in there a little bit. You were 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? Yeah.
spk10: Yeah, 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, you know, those two line items combined probably in the, I don't know, 3,000 to 500,000 range that was excess expense that we won't see going forward, at least specific to those things.
spk02: Okay, perfect. And 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, you know, 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 call you can add there?
spk10: Yeah, 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, you know, swaps to our customers. And, you know, with the expectation now of 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.
spk06: Okay, great. Thanks for the comment.
spk08: Our next question comes from the line of Graham Dick with Piper Sandler. Please proceed with your question.
spk04: Hey, everyone. Good morning.
spk08: Morning.
spk04: Good morning. So 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 looked like. Just anything you could do there to help us understand the level of granularity or what or type of deposits that came on this quarter would be helpful.
spk10: Yeah, you know, we talked before about the deposit campaign that we did in the summer, and, you know, we were incenting particularly the retail staff to, you know, be salespeople, to ask for deposits, and you know, it has worked exceedingly well, better than I would have expected. They've done a fantastic job for us. I mean, they're taking money from, you know, for the most part, it's existing customers that have money at multiple banks and they're bringing, you know, consolidating more of their money with us. So it's really been a bright spot and, you
spk09: You know, we expect that to continue. And the community bankers as well, all of our bankers actually, we've changed up the incentive plan. And, you know, that takes a little while to roll out. But they've all been, you know, hunting for deposits. And so that, along with Treasury, has had a more outward-bound sales focus that's been bringing on more commercial accounts. And some of this, too, is just as we brought business on, you know, sometimes the loan comes first and it takes a while to onboard the customer for a full wallet relationship. And what's been nice towards the end of last year was, you know, a lot of those deposits finally came on.
spk04: Now, that definitely makes sense and is helpful. And I guess just looking more so at the margin, I heard the NII guidance, and I guess you can kind of back into this, given your loan growth outlook as well. But with the NIM, obviously, I guess loan growth is probably coming on at a dilutive margin relative to where it is today. Where do you see the margin, I guess, sort of bottoming out or settling out in 2024? And then assuming we get no rate cuts, where would it go? And then I guess the second part of the question would be, If we do get rate cuts, what's sort of the initial reaction? I know you guys are very neutral on the balance sheet side, but I just want to know if there's something I might be missing there.
spk10: Yeah, so new loan growth has a slightly lower spread than our margin. So we have some pressure there. And then specifically in the fourth quarter, we saw non-interest-bearing demand deposits decline, which was a little bit of a drag on the margin. And again, kind of one of those hard things to predict. I wouldn't have thought non-interest-bearing demand, you know, a year after the liquidity crisis would still be going down. And some of that may come back, by the way.
spk07: And then, I lost my train of thought.
spk09: you know, the NIM just flat versus going down. I think we are pretty well neutrally positioned. I think we all agree that there may be some impact, but it's not that material.
spk11: Yeah.
spk09: Yeah.
spk10: So the other thing that I was going to say, sorry about that, was the loan-to-deposit ratio declining from, you know, 98% down to 95%. We weren't necessarily expecting that either. So You know, at year end we had, I don't know, it was $350 million in cash or somewhere thereabouts, and it was just basically in Fed funds. So our spread on that was virtually nothing. So it was the decline in demand, you know, the change in mix so that the loan to deposit ratio went down that probably affected the margin. But you're right, we are evenly matched. You know, our December numbers are going to show that we're very evenly matched again. We will have a little bit of a tailwind from this swap for the first quarter. And we do have a gain in that transaction right now. And at least as of today, it looks to be a good trade that all our modeling shows that, you know, as long as we don't have a dramatic more than 200 basis point decline in rates, that we should be better off in virtually every interest rate scenario.
spk04: Okay. Good to hear. So really, at the end of the day, it's more balance driven than anything or balance sheet mix at this point rather than rate. And then I guess you mentioned on non-interest bearing deposits there at the end, they declined a bit. I mean, they seemingly can't go like all that much lower. Do you feel pretty good about, you know, maybe you bounce around the bottom here a little bit, but nothing super meaningful in 2024? Yeah.
spk09: Yeah, we think that's a good, accurate description. You know, you have, you know, folks paying, you know, property taxes and other expenses and, you know, some tax management at the end of the year that's fairly common that we see because we have such a lot of commercial accounts. So there's nothing really irregular there.
spk04: Okay. Okay, good to hear. And then if I could just sneak one more in on credit and more specifically the provision. I heard you say that the loan loss reserve or the allowance for credit losses is above your longer-term target. What does that imply for provisioning costs this year in terms of your all's need if, you know, say the economy, you know, there's uncertainty persisted, but not a huge credit cycle?
spk09: Yeah, well, with buyer models, I'll let Audra jump in, but, you know, for us, we're not seeing deterioration in our loan portfolio. As a matter of fact, it remains very strong. So, you know, we're expecting more or less, you you know, the provisioning based on the growth and what our model shows more than anything.
spk00: Yeah, we've been carrying a fairly sizable unallocated portion based on the CECL methodology. So when you saw the ACL, the total loans go down from 107 to 102, we did have that $1.5 million charge off. We didn't need to fully provision to cover that charge off because we already had it in the ACL. So, you know, we still have a, we've kind of whittled down the unallocated portion that we had, but we're still well within our range on the ACL.
spk09: Yeah, it seems like since going public, we've always said just count 10 basis points, but we've never really come close to the 10 basis points on it. And I don't see any difference this year.
spk06: Okay. Okay.
spk04: Good to hear. All right. Thank you, guys.
spk06: Thank you.
spk08: Our next question comes from the line of Tim Mitchell with Raymond James. Please proceed with your question.
spk05: Hey, good morning, everyone. Good morning. I just want to start out. You guys mentioned, you know, the loan pipeline still looks strong. I was just wondering if you get the same color on where you're seeing that. And then what kind of rate for you putting new loans on in the fourth quarter?
spk09: Yeah, so what I would tell you is it's still rather difficult on the CRE side. just because as with rates have gone high enough, I'm sure all the other banks are seeing it too. It's much more difficult to find a CRE loan that gets past approval and meets our criteria just because of the rate environment. But we do think that we'll end up with some good customers that we kind of cherry pick on that. Most of our growth is really going to be you know, on the CNI side, and then some on our specialty finance side of it. But overall, I think we've just been very fortunate. We have a really strong customer base that, as we're cherry-picking the rest of their business coming over, is providing most of the growth to us on it. So, John, do you have anything else to add?
spk10: As far as yield on new loans, yeah, you know, prime eight and a half, I mean, we're typically – New loans are going on the books between 850 and 9%. Yeah.
spk05: Awesome. Very helpful. And then we think about like loan repricing in 24. You guys have any kind of breakdown on what your variable rate loan book is and chunky fixed rate loans that are coming due in the year?
spk10: Yeah, our floating rate loans are about 60% of the portfolio. I mean, we're very evenly matched. You know, I think the duration on the asset side of our balance sheet is 10 months or something like that for the entire balance sheet. So we're very short. And, you know, anything that we might have that's coming up for renewal, say like older CRE loans, you know, they're There are certainly loans that we were doing in the fours back two to three years ago. As those come up for renewal, they're going to be priced higher, but that's probably not going to have a big effect on the margin.
spk05: Awesome. Very helpful. And then just one last one on deposit betas, kind of as we think about those on the way down. Do you have a percentage of your book that's indexed or anything else to call out on that front, kind of your expectations related to betas?
spk10: We don't have a whole lot that's indexed, but we fully expect them to go down just as fast as they went up. That's certainly the plan. I know our competitors can sometimes make that a little bit harder, but our intent is to mimic the betas for the way it went up.
spk07: Okay, very helpful. Thanks for taking my questions, guys. Thank you.
spk08: As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Matt Olney with Stevens. Please proceed with your question.
spk11: Great. Thanks. Good morning, guys. I was going to pick up on that last line of questioning there. I think you mentioned 60% of loans are floating, but on the liability side, not a whole lot is indexed, and you obviously want to reprice deposits lower. Just Help me appreciate being industry neutral with that setup. It sounds like that'd be more of a challenge to keep everything neutral. Any more color you can provide or help us appreciate how you would be neutral with those dynamics?
spk10: Yeah, I mean, you know, the liability side of the balance sheet is it should be just as interest rate sensitive. I mean, most of our deposits are in money market accounts, and, you know, we fully expect to lower those as rates come down. You know, we may have a little higher percentage in CDs today than we did a year ago, but I'd have to go back and look what the percentages are. I don't think it's materially different, but You know, most of it's going to be in money market, and we expect it to come down immediately.
spk11: John, what about any kind of lag? I mean, is the commentary about being more rate neutral? I assume that'd be more of a full cycle or over a year or two time frame. Could there be an initial lag where the margin could be negatively impacted as the loans reset lower, faster than the liabilities could reset from repricing lower?
spk10: There certainly could, and, you know, again, back to the, you know, competitive nature of it. If our peers don't lower rates immediately, it makes it harder for us to do it. So, yeah, there could be that lag there that if the first cut, say, for instance, comes in May and is 25 basis points, you know, we can't be the only ones to lower our deposit costs 25 basis points. So, there... Yes, there could be some lag there.
spk11: Okay. And you disclosed kind of what the newer loan yields are at in the fourth quarter. Any color on incremental funding of those new loans more recently?
spk07: Yeah.
spk10: Most accounts that we're bringing over, being that they're, you know, existing accounts at other banks, we're paying generally in the, you know, 450 to, you know, 5% range.
spk11: Okay. And then thinking about loan growth and capital, I think I heard your loan growth expectations for the year. Help me think about in this scenario of a softer landing, borrowers feeling better about from their point of view, at what level could you grow loans in 24 before it would start to pressure capital? And then I guess what's the internal tolerance as far as pressuring capital. Would that be acceptable or would you have to really slow things down in that scenario?
spk09: Yeah, we're definitely mindful of the capital side of it and that we're going to grow the bank for the best allocation of capital, basically. So, you know, there is zero chance that we'd be interested in raising capital or supplementing. What we're going to do is basically grow loans as prudently as possible to fill out the operating leverage and But, you know, we think the earnings is really going to provide the ability to hit to $300 million to $400 million in loans pretty easily. So I don't see that that capital is going to be an issue for this year or next because I think we're going to be able to fully sustain our own growth going forward.
spk10: Yeah, and if you think about last year, if we made $33 million in net income last year and grew loans about We used capital doing that. But this year, we're expecting to earn more and grow less. So I think it's very likely that we'll be capital accretive this year.
spk07: Okay. All right, guys. That's all from me. Thanks for your help.
spk06: Thank you.
spk07: Thanks, Matt.
spk08: There are no further questions in the queue. I'd like to hand the call back to Mr. Carraway for closing remarks.
spk09: Thank you, Doug. Appreciate very much. Well done. And thank you all for joining us on the call and for your support of Third Coast Bank shares. We look forward to speaking with you next quarter.
spk08: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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