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.
A side view of a traditional bank branch, its polished glass entrance indicating a secure and reliable banking experience.
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.
