Q4 2023 Third Coast Bancshares Inc Earnings Call
Yeah.
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 thank.
Thank you operator, and good morning, everyone. We appreciate you joining us for <unk> Bancshares conference call and webcast to review, our fourth quarter and full year 2023 results with me today is Bard 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 Dot T. C. P SSP dot com and we're off.
So be a telephonic replay available until February 2nd 2020 for more information on how to access. These replay feature was included in yesterday's earnings release.
Please note that information reported on this call speaks only as of today January 26 two.
2024, and therefore, you are advised that time sensitive information may no longer be accurate at 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 Dennis or expressed in the statements made by management.
Or reader is encouraged to read the annual report on Form 10-K that was filed on March 15th 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 test website.
Now I would like to turn the call over to our.
Chairman, President and CEO, Mr. Bart Caraway art.
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.
Nine zero percent.
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.
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.
To outperform our peers with a well balanced loan mix of C&I 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.
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.
Noninterest expenses were down 4% or $1 1 million in the fourth quarter and were up only 13% or 11, and a half million dollars 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.
Current yield on the portfolio was $6 four 2% and we have a gain of 933000 and 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 received fed funds bloating, which today is about 533.
This will give us good margin protection in the event that rates are down less than car current market expectations.
That completes the financial review and at this point I will turn the call back to Audrey for our credit quality review.
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 tests, one portfolio has proven to be resilient and Sean. This is due to our conservative underwriting extensive.
Ongoing monitoring and diversity in the loan mix to mitigate segments specific risks non.
Nonperforming assets to total assets remained at 39 basis points net.
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 alone to the same borrower with a 75% SBA guarantee remains on the books.
<unk> charge offs 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 1.0% to 2% and remains at the high end of that range.
The loan portfolio mix is well balanced with commercial and industrial loans accounting for 75% of total loans construction development and land loans at 19% now.
Non owner occupied CRE at 14% and owner occupied CRE at 16%.
Non owner occupied office represents one 8% of the loan portfolio with non owner occupied medical office accounting for another one 3%.
Owner occupied office and medical office totaled two 3% of total loans.
The office portfolio generally consistent class b with some owner occupied.
These days and it's all located within our Texas footprint.
Non owner occupied retail accounts for three 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.
<unk> family consistent 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.
There's only one recommended downgraded from past to watch.
With that I'll turn the call back to Bart Barthes.
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 too.
To achieve our goals, we have identified several key priorities for the coming year.
<unk>.
Maintaining pristine credit quality is paramount we.
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 worked 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 frame.
Work 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 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 minimized.
[noise] 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.
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 Inc.
In closing their 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 challenge.
These are 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.
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 one on your telephone keypad.
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Our first question comes from the line of Brady Gailey with K B W. Please proceed with your question.
Hey, Thanks, good morning, guys.
Good morning.
But I know last quarter, we talked about our expectations for loan growth and 24.
Roughly 300 to 400 million, but maybe just an update on how you guys are thinking about loan growth in 'twenty, four and on the flip side deposit growth as well.
Yeah relatively unchanged on our side still three to 400 million consistently what we're looking at obviously put the qualifier and of what the economy does may.
May affect it as well as the timing, but we still see some pipeline of demand and so we're going to remain with her.
Estimated $3 million to $400 million.
And do you think Obama.
No.
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 that.
Posit 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.
Contingencies of those those skill or those initiatives working actually.
We are forecasting deposits has certainly been harder, we werent 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 in the deposit campaign, where we were you know give.
Giving out.
Prices, if you will for for people that produce the most deposits I mean, some of them, even though that has expired we still have a lot of deposits coming in from that it's been it's been very promising.
Alright, and then on the expense side.
I heard one of our 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 how should we think about expense creep in 'twenty four.
Yeah.
Yeah, So last quarter, we had guided to 5% to 10%.
Noninterest expense growth and we're still pretty comfortable pretty comfortable with that number.
In our most of our staff were seen salary increases in the first quarter. So we'll see a lot of that immediately.
Immediately I would say that December was probably are.
Our best months for noninterest expense, if you will in the fourth quarter and it was because of the the risk that we had done late in the third quarter that was kind of fully realized in the in the fourth quarter.
And it all kind of net interest income and what 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%. So we still expect that positive operating leverage.
That's great to hear thanks for the color guys.
Thank you.
Our next question comes from the line of Bernard bonds Vickie with Deutsche.
So it's your bank. Please proceed with your question.
Hi, guys. Good morning, just on expenses wanted to dig in there a little bit.
We're slightly above the guide, but just wondering on the legal and regulatory expenses.
Those are big sequential uptick.
Was that mostly like a year end cleanup just anything how would you think about that and how that could trend in <unk>.
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 three to 500000.
Range that was excess expense that we won't see going forward.
At least specific to those things.
Okay, Perfect and then maybe maybe on the fee income side, there is that nice lift sequentially.
And in part due to the derivative fee income you guys called out just for activity purposes, a was that just much better at yearend.
You know some sort of seasonality or anything youre seeing kind of as the as the year starts and how it pertains to like say <unk> would you expect that to continue any any color you can add there.
Yeah, I mean, a year ago I thought that we would not have much in derivative income for 2023, just because everyone thought that rates would be going up but what we did we continued selling.
And our 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.
You know I would expect fee income to be relatively flat for the next quarter or two there's there's nothing special that we expect and we'll probably have some pressure on things like derivatives and N S. P. A sales because both.
Both of those lines of business or just a little bit slow right now.
Speaker Change: Okay, great. Thanks for the color.
Speaker Change: Our next question comes from the line of Graham <expletive> with Piper Sandler. Please proceed with your question.
Graham: Everyone. Good morning.
Graham: Good morning, good morning.
Graham: 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 deposit fees were or what the customers looked like just anything you could do there to help us understand like the level of granularity or or type of deposits that came on this quarter would be helpful.
Operator: 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.
Speaker Change: Yeah, you know we talked before about the deposit campaign that we did in the summer and even though we were we were in sensing, particularly the retail staff to be salespeople to ask for deposits in.
Operator: A question and answer session will follow the formal presentation. If anyone should require operator assistance during a 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, Director of Investor Relations. Thank you. You may begin.
Speaker Change: You know it has worked exceedingly well better than I would have expected they've they've done a fantastic job for us I mean, they're taking money from.
Speaker Change: You know for the most part its existing customers that have money at multiple banks and theyre, bringing consolidating more of their money with us. So it's really been a bright spot and.
Thank you, Operator, and good morning, everyone. We appreciate you joining us for 3rdCoast Bankshare's conference call and webcast to review our fourth quarter and full year 2023 results. With me today is Bart Carraway, 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.tcbsfb.com. There will also be a telephonic replay available until February 2, 2024.
Speaker Change: We expect that to continue in the community bankers as well all of our bankers actually we've changed the incentive plan and you know that takes a little while to roll out that they've all been hunting for deposits and so that.
Speaker Change: That along with Treasury has had a more outward bound sales focus.
Speaker Change: That's been bringing on more commercial accounts and some of this too is just as we bought the business on 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.
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.
Speaker Change: All of those deposits finally came on.
Speaker Change: No that definitely makes sense and is helpful. I guess, just looking more so at the margin I heard the NII guidance I guess, you can kind of back into this given your loan growth outlook as well, but.
Speaker Change: With the NIM.
Speaker Change: Obviously, I guess loan growth probably coming on it 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 you know assuming we get no rate cuts wherever they go and then I guess the second part of the question would be.
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 Thirsk Coast Chairman, President, and CEO, Mr. Bart Carraway. Bart?
Speaker Change: If we do get rate cuts, what's sort of the initial reaction I know you guys are are very neutral on the balance sheet side, but I just wanted to know if there's something that might be missing there.
Speaker Change: Yeah, So new loan growth has a slightly lower spread than our margins. So we have some pressure there and then specifically in the fourth quarter, we saw noninterest 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 noninterest bearing demand.
Speaker Change: And a year after the liquidity crisis would would still be going down and some of that may come back by the way.
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.
Speaker Change: And then.
Speaker Change: I lost my train of thought.
Yeah on the NIM, just click with flat versus going down I think we are pretty well a neutrally positioned I think we all agree that there may be some impact, but it's not that material yeah. Yeah. So the other thing that I was going to say sorry about that was the the loan to deposit ratio declining from you know 98.
Speaker Change: Percent down to $2 95 per cent, we weren't necessarily expecting that either so.
Speaker Change: At year end, we had I don't know if 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.
Speaker Change: The change in mix, so that the loan to deposit ratio went down there that probably affected the margin, but youre right. We are evenly matched our December numbers are going to show that were very evenly matched again, we will have a little bit of a tailwind from this swap for the first quarter and then we do have a gain in that transaction.
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-brand. We also took proactive, decisive actions to reduce our operating expenses and other overhead costs, resulting in a 5% reduction in the workforce and the winding down of our auto finance division.
Speaker Change: Action right now and at least as of today it looks to be a good trade that all our modeling shows that.
Speaker Change: 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.
Speaker Change: Okay. Good to hear so it really at the end of the day, it's more balanced driven than anything.
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 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.
Speaker Change: Our balance sheet mix at this point rather than right.
Speaker Change: And then I guess, you mentioned on noninterest bearing deposits there at the end they declined a bit I mean.
Speaker Change: They they they seemingly can't go like all that much lower or do you feel pretty good about you know maybe bounce around the bottom here, a little bit, but nothing nothing super meaningful in 2024.
Speaker Change: Yeah, we think that's a good accurate description you have folks paying.
Speaker Change: Pretty taxes and other expenses.
Tax management at the end of the year, that's fairly common that we see because we have such a large commercial accounts.
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.
Speaker Change: So theres nothing really irregular there.
Speaker Change: Okay. Okay. Good to hear and then if I could just sneak one more in on credit and more specifically the provision what I heard you say that the the loan loss reserve for the allowance for credit losses is above.
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 $0.57. Net interest income growth was 19.8 percent for the year, but on an annualized basis, it was 23.2 percent 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 they were 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.
Speaker Change: Your longer term target what does that imply for provisioning cost this year.
Speaker Change: In terms of your All's need if say the economy now there's uncertainty persisted, but not a huge huge credit cycle.
Speaker Change: Yeah, well with buyer models I'll, let Andre jump in but you know for US we're not seeing deterioration in our loan portfolio a matter of fact, it remains very strong so we're expecting more or less.
The provisioning based on the growth and what our model shows more than anything yeah, we've been carrying them.
Speaker Change: Fairly sizable unallocated portion based on the seesaw methodology.
Speaker Change: When you saw the ACL to total loans go down from 107 to 102.
Speaker Change: We did have that $1 5 million dollar charge off we didn't need to fully provision to cover that charge offs, because we already had it in the ACL.
Speaker Change: So you know where should we still have that we've kind of whittle down the unallocated.
Our timing was good, and we have made material gains on these new purchases. The current yield on the portfolio is 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 it also resulted in a net interest margin that declined 10 basis points. In mid-December, the bank entered into a five-year swap with a notional amount of $200 million.
Portion that we had but we're still well within our range on the ACL, yes. 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.
Speaker Change: Okay. Okay. Good to hear alright, Thank you guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jim Mitchell with Raymond James. Please proceed with your question.
Jim Mitchell: Hey, good morning, everyone.
Jim Mitchell: Good morning.
Jim Mitchell: 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 read where you're putting new loans on and in the fourth quarter.
We will pay sixth 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. Thank you, John, and good morning, everyone.
Speaker Change: Yeah. So what I would tell you is it's still rather difficult on the CRE side.
Speaker Change: Just because as with rates have gone high enough I'm sure all the other banks, we're seeing it too. It's it's much more difficult to find a CRE loan that gets passed approval it meets our criteria.
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.
Speaker Change: Just because of the rate environment, but we do think that we'll end up with.
Speaker Change: Yeah.
Speaker Change: Some good customers that we kind of cherry pick on that most of our growth is really going to be.
Speaker Change: On the C&I side, and then some on our specialty finance side of it.
Speaker Change: But overall I think we've just had been very fortunate we have a really strong customer base that.
Speaker Change: As we are cherry picking the rest of their business coming over is providing most of the growth to us on it.
Speaker Change: No.
Speaker Change: John do you have anything else, an <unk> yield on new loans, you know prime eight and a half I mean were typically new loans are going in the books between eight and 15, 9%.
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 were related to provisioning for new loans and commitments.
Speaker Change: Yeah.
Speaker Change: Awesome very helpful. And then just thinking about like loan repricing in 'twenty. Four you guys have any kind of breakdown on what your variable rate loan book is any chunky fixed rate loans that are coming due in the year.
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 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 The properties are primarily neighborhood centers and are located within our Texas footprint. Multifamily consists of three percent of total loans. Hospitality represents less than one percent of the portfolio, and restaurants represent one percent.
John: Yeah, our floating rate loans are about 60% of the portfolio I mean, we're very evenly matched I think the duration on the asset side of our balance sheet ages, 10 months or something like that for the entire balance sheet. So we're we're very.
Speaker Change: Sure and you know.
Speaker Change: Anything that we might have that's coming up for renewals say like older. CRE loans. You know there are certainly loans that we were doing in the four is back two to three years ago was 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.
Speaker Change: Awesome very helpful. And then just one last one on deposit betas.
Speaker Change: We think about that was on the way down and you have a percentage of your book, that's indexed or any size or anything else to call out on that front kind of your expectations as it relates to data.
Speaker Change: We don't have a whole lot that indexed but we fully expect them to go down just as fast as they went up that.
Speaker Change: That's certainly the plan I know our competitors can sometimes to make that a little bit harder, but our intent is to mimic the betas for for the way it went up.
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 PASS to WATCH. With that, I'll turn the call back to Bart. Bart?
Speaker Change: Okay very helpful. Thanks for taking my thanks for taking my questions guys.
Speaker Change: Thank you.
Speaker Change: That's very minor ladies and gentlemen, it is star one.
Speaker Change: Ask the question.
Speaker Change: Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.
Matt Olney: Great. Thanks, Good morning, guys I was going to pick up on that last line of questioning there.
Thanks, Audrey. Looking ahead to 2024, Third Coast is confident in its ability to refine and execute its 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 risks and take proactive measures to mitigate them.
Matt Olney: I think you mentioned, 60% of loans are floating.
Matt Olney: A bit on the liability side not a whole lot is indexed and you obviously want to reprice.
Matt Olney: The slower just help me appreciate being interest rate neutral with that setup. It's 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 a neutral what those dynamics.
Speaker Change: Yeah I mean.
Speaker Change: On 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 we may have a little higher percentage in Cds today than we did a year ago, but.
Speaker Change: I'd have to go back and look what the percentages are I don't I don't think it's materially different but you know most of it is going to be in money market and we expect it to come down immediately.
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.
Speaker Change: Yeah, John what about any kind of lag is the commentary about being.
John: More rate neutral I assume that would be more of a full cycle or over a year or two timeframe 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.
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 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. 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.
John: There certainly could then you know again back to the competitive nature of it if if if our peers don't lower rates immediately it it makes it harder for us to do it.
John: So yeah, there there could be that lag there that if the first cut say for instance comes in May and is 25 basis points.
John: Can't be the only ones to lower our deposit costs 25 basis points.
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're 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 product or service. In closing, Third Coast is dedicated to building on our past successes and improving every day.
John: So so there yes, there could be some lag there.
John: 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.
John: Yeah, most accounts that were bringing over being that there you know existing accounts at other banks, where we're paying generally in the you know for 52, 5% range.
John: Okay.
John: And then thinking about loan growth and kind of capital I think I heard your loan growth expectations for the year help me think about in this scenario of a kind of a softer landing borrowers feeling better about from their point of view.
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?
John: At what level could you grow loans and 24 before it would start to pressure capital and then I guess, what's the internal tolerance as far as.
John: Pressuring capital, whether that'd be acceptable would you'd have to really slow things down and in that scenario.
Speaker Change: Yeah, we're definitely mindful of the capital side of that and that we're going to grow the bank for the best allocation of capital basically so you know.
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.
Speaker Change: There is zero chance that we'd be interested in raising capital or supplementing well, we're going to do is basically grow loans as prudently as possible to fill out the operating leverage but you know.
Speaker Change: We think the earnings is really going to provide.
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 Gary with KBW. Please proceed with your question. Hey, thanks. Good morning, guys. Good morning.
Speaker Change: The ability to hit the three 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.
Speaker Change: Fully sustained our own growth going forward.
I know last quarter we talked about expectations for loan growth in 24, roughly $300 to $400 million. Maybe just an update on how you guys are thinking about loan growth in 2024 and, on the flip side, deposit growth as well. Yeah, relatively unchanged on our side, still $300 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 estimate of $300 to $400 million. And do you think they're plausible?
Speaker Change: Yeah, and if you think about last year. So if we made $33 million and net income last year and grew grew loans about 550, 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 will be key.
Speaker Change: Capital accretive this year.
Speaker Change: Okay, England pool.
Speaker Change: Alright, guys Thats all from me Thanks for your help.
Speaker Change: Thanks, Matt.
Speaker Change: There are no further questions in the queue I'd like to hand, the call back to Mr. Caraway for closing remarks.
Caraway: Thank you Doug I appreciate very much well done and thank you all for joining us on the call and for your support of <unk> Bancshares, We look forward to speaking with you next quarter.
Yeah, so on the deposit side, we've been rolling out strategies all last year for 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 a better cost of funds. And we're seeing some signs of some tendencies of those skills or those initiatives working. Forecasting deposits has certainly been harder.
Caraway: Okay.
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.
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, and a lot of the initiatives that we had started earlier in the year continue to pay off. Even the deposit campaign, where we were, you know, giving out prizes, if you will, for people that made 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. All right. And then on the expense side, you know, 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 expenses? and 24.
Yeah, so last quarter we 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 rift that we had done late in the third quarter that was kind of fully realized in the fourth quarter. Okay.
And, you know, 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 percent range and expenses in the 5 to 10 percent range, so we still expect that positive operating level. That's great to hear. Thanks for the call, guys.
Our next question comes from the line of Bernard Von Zicke with Deutsche Bank. Please proceed with your question. Hi guys, good morning.
Just on expenses, wanted to dig in there a little bit. You were slightly above the guide, but just wondering about legal and regulatory expenses, those saw a big sequential uptick. Was that mostly like a year-end cleanup?
Just anything, how should we think about that and how that could trend in 1Q? Yeah, those are actually the two line items that I expect to see the most improvement in the first quarter. We did have some kind of unusual one-off expenses in the fourth quarter that should not have been recurring. And you know, those two line items combined probably in the, I don't know, three to five hundred thousand range that was excess expense that we won't see going forward and Lise Pacific. Okay, perfect.
And maybe maybe on the fee income side, there is that nice lift sequentially, in part due to the derivative fee income you guys called out just for activity purposes. Was that much better at year-end or some sort of seasonality or anything you're seeing kind of as the year starts and how it relates. So like say 1Q, would you expect that to continue? Any call you can add. 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. But with the expectation now of rates dropping, I wouldn't think that would be a very good market for this year. You know, I would expect the 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. Okay, great. Thanks for the call. Our next question comes from the line of Graham Dick with Piper Sandler. Please proceed with your question. Everyone, good morning.
Graham Dick: 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 and type of deposits that came in this quarter would be helpful. Yeah, you know, we've talked before about the deposit campaign that we did in the summer. And you know, we were incentivizing, particularly the retail staff to, you know, be salespeople to ask for deposits. 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 people.
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, it's really been a bright spot, and we expect that to continue. And the community bankers as well, all of our bankers actually, we've changed up the incentive plan, and that takes a little while to roll out, but they've all been hunting for deposits, and so, along with Treasury, they have had a more outward-bound sales focus that's been bringing in more commercial accounts. And some of this, too, is just as we brought in business: sometimes the loan comes first, and it takes Now that definitely makes sense, and it's helpful.
And I guess just looking more so at the margin, I heard the NII guidance, and I guess. 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? Settling out in 2024?
And then, you know, assuming we get no rate cuts, where would the money go? And then I guess the second part of the question. 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 anything. 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, and then. I lost my train of thought, you know, the NIM just flat versus going down. I think we are pretty well neutrally positioned. I think we all agree that, I mean, there may be some impact, but it's not that material.
Yeah. Yeah. 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, 350 million in cash or somewhere around that amount, and it was just basically in fed funds. So our spread on that was virtually nothing. So it was the decline in demand, 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, we should be better off in virtually every interest rate scenario. Okay, good to hear. So really, at the end of the day, it's more balance driven than anything for the balance sheet. And then I guess you mentioned non-interest bearing deposits there at the end. They declined a bit. 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, nothing super meaningful in 2024? Yeah, we think that's a good, accurate description. You know, you have 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.
Okay, okay, good to hear. And then I could just sneak one more in on credit. 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 need if, say, the economy there's uncertainty persisted but not a huge credit cycle? Yeah, well, by our models, I'll let Audra jump in, but for us, we're not seeing deterioration in our loan portfolio. As a matter of fact, it remains very strong.
So we're expecting more or less the provisioning based on the growth and what our model shows more than anything. Yeah, we've been carrying a pretty good amount of money. We've been carrying a pretty good amount of money, a fairly sizable unallocated portion based on the CECL methodology, so when you saw the ACL, the total loans went down from 107 to 102, we did have that 1.5 million dollar charge-off. But we didn't need to fully provision to cover that charge-off because we already had it in the ACL.
So we've kind of whittled down the unallocated portion that we had, but we're still well within our range on the ACL. Yeah, 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.
Okay, good to hear. All right. Thank you, guys. Thank you.
Tim Mitchell: Our next question comes from the line of Tim Mitchell with Raymond James. Please proceed with your question. 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 are you putting new loans on in the fourth quarter? Yeah, so what I would tell you is it's still rather difficult on the CRE side, just because 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, 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 from that. Most of our growth is really going to be, you know, on the C&I 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 for us on it. So, John, do you have anything else to add? As far as yield on new loans, you know, Prime 8.5. I mean, more typically, new loans are going on the books between 8.50 and 8.50. Awesome, very helpful. And then we think about like loan repricing in 24. Do you guys have any, you know, kind of breakdown on what your variable rate loan book is? Any chunky fixed rate loans that are coming due in the year? 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 anything that we might have that's coming up for renewal, say like older CRE loans. 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 them. Awesome, very helpful.
And then one last one on deposit betas, kind of, as we think about those on the way down, you have a percentage of your book that's indexed, or any size, anything else to call out on that front, kind of your expectations related to beta. 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. Okay, very helpful. Thanks for taking my questions, guys. As a reminder, ladies and gentlemen, it is star number one to ask a question. Our next question comes from the line of Matt Olney with Stevens.
Matt Olney: Please proceed with your question. Great. Thanks. Good morning, guys.
I was going to pick up on that last kind of question there. I think you mentioned 60% of loans are floating, a bit on the liability side, not a whole lot is indexed, and you want, obviously, to reprice deposits lower. Just help me appreciate being industry neutral uh 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. Yeah, I mean, you know, the liability side 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 the money market, and we expect it to come down immediately. 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 timeframe. 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? There certainly could, and again, back to the 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 it's 25 basis points 25 basis points. So, yes, there could be some lag there.
OK, and you disclose kind of what the newer loan yields are at in the fourth quarter. Any color on incremental funding of those new loans more recently? Yeah, 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% rate. Okay. And then thinking about loan growth and the kind of capital, I think I heard your loan growth expectations for the year. Help me think about in this scenario of a kind of a softer landing, borrowers feeling better about it 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 is concerned? Would that be acceptable, or would you have to really slow things down in that scenario?
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 a zero chance that we'd be interested in raising capital or supplementing it. What we're going to do is basically grow loans as prudently as possible to fill out the operating leverage. But, you know, we think the earnings are really going to provide the ability to hit the $300 million to $400 million in loans pretty easily. So I don't see 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. Yeah, and if you think about last year, so if we made $33 million in net income last year and grew loans by about $5.50, 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. Okay, I'm going forward. Alright guys, that's all from me. Thanks for your help.
Thank you. There are no further questions in the queue. I'd like to hand the call back to Mr. Carraway for his closing remarks. Thank you, Doug. I appreciate it 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. 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.