Third Coast Bancshares, Inc. Q4 FY2024 earnings call

• Achieved 14 consecutive positive quarters of net interest income growth.
• Fourth quarter net interest income was $43.4 million, up 7.6% QoQ and 16.4% YoY.
• Loan growth in Q4 was $76.6 million (2%), full-year loan growth $327.6 million (9%).
• Deposits in Q4 increased $316 million (7.9%), full-year $507.4 million (13.3%).
• Efficiency ratio improved to 58.8% in Q4, exceeding internal target of below 60%.
• Strong credit quality with non-performing loans to total loans ratio 0.7%, net charge offs $879,000 in Q4 (0.09% of average loans) vs $1.5 million (0.17%) in same period last year.
• Loan portfolio well-diversified across various segments.

Net interest income in the fourth quarter was $43.4 million, reflecting a 7.6% increase from the third quarter and a 16.4% increase from the fourth quarter of the previous year. Loan growth in the fourth quarter was $76.6 million (2% increase), and full-year loan growth was $327.6 million (9% increase). Deposits in the fourth quarter increased by $316 million (7.9%), with full-year deposits up $507.4 million (13.3%). The efficiency ratio improved to 58.8% in the fourth quarter. The loan portfolio was well-diversified: C&I loans at 38% of total loans, construction/development/land loans at 22%, owner occupied and non-owner occupied CRE at 11% and 16% respectively, office at 3.3%, medical office at 1.3%, and multi-family at 3.3%.

• Expect loan growth of approximately 8% in 2025, similar to 2024.
• Aim to maintain return on average assets target of 1% or better.
• Margin expected to improve going forward due to reduced excess cash and loan-to-deposit ratio target.
• Optimism about fee income growth from segments like treasury management, wealth management, with treasury management fee income growing 50%-60% annually.

• Market fluctuations and economic uncertainties impacting financial performance.
• Competition affecting loan spreads and deposit growth.
• Potential impact of technology conversion timing on expenses and productivity.

Q: Hey, good morning, guys. I wanted to start on the fourth quarter loan yield. I thought the beta was pretty impressive given the floating rate loan exposure. Could you just walk through that loan yield and any expectations going forward?

A: Yes. We have outperformed a little bit on both the yields on loans and the cost of funds. And I don't think, really have a great explanation for it because we are very rate sensitive, very floating on both sides of the balance sheet. But it's just the new loans that we have been putting on the books have been at better spreads and has made up the difference. And that's one of those things that's kind of hard to predict. It depends on the volumes that we have, as to whether they're enough to make a difference, but they did in the Q4. So we were very happy with both loan yields and the drop in the cost of funds. We are both a little better. I think we talked about this a little last quarter that relative to the modeling that we're doing, we outperformed on both of those sides versus our assumptions.

Q: Hi, guys. Good morning. Just on expenses, obviously, you've done improvement throughout the last several quarters and you did kind of get past the 60% efficiency ratio. How should we think about the expense growth in 2025?

A: Yes. So we did have a tick up in the fourth quarter, Bernie, to that kind of $27 million range. So we were up 4% or roughly 4% year-over-year. That's about what I would expect to see for next year. I think that $27 million number is probably pretty good for the next couple of quarters. We have recently hired a couple of relatively senior lenders and also some credit underwriters to help manage the pipeline of the loans that are coming in and the renewals and whatnot. So we have done some hiring in recent months that caused that number to go up.

Q: Hey, good morning guys. I just had a quick question around expenses and more about the additional hires. What are you guys expecting as far as making additional hires in 2025? So if you could just give any color on that, that would be great. Thanks.

A: Yes. For the last few years, we've always talked about being selective and surgical. And for us, I think we are constantly reviewing our bankers. And what we have now is a group of very high performing bankers. And I think that raises the bar on who joins us. So I think for us, we're looking at a few things. One, if there is a really good talent that's out there that you don't get a look at very often, we certainly don't mind bringing them on Board. I mean, we're always a talent magnet. But at the same time, we are also grooming bankers internally. So you have some junior bankers taking the step up as well. And then each basically division sort of has its own needs and plans. So as we grow, we may have need more PMs or junior bankers to help with that or in particular areas where we've had substantial growth and there's a talent, we'll end up adding them. So what I would say is, judiciously, we will be selective, opportunistic and maybe 1 or 2 bankers for the rest of the year is what I'm thinking. But it is also subject to whatever the opportunities are in the market as well.

Q: Good morning. I wanted to -- just want to start by circling back on some of the tech improvements that were mentioned earlier that are maybe scheduled for the second half of this year. Is there anything more you can tell us about maybe the nature of these changes and maybe a sense of their expected impacts?

A: Yes. I mean, we've elected to change course. So we're going from Jack Henry to FIS. And just the team did just an incredible job of basically, eventually negotiating contracts that's going to save us money and give us more functionality. So it's going to be a win-win for us on that. The conversion is going to be in the middle of this year. Post that, we think it's going to help with regard to deposit taking as well that our treasury products are going to have some enhanced functionality and then we're going to be able to bring on some larger corporate customers. In addition to that, the contract that we have has really substantial savings in it compared to our old contract. So we're going to see a little bit of help from the expense side, but we're also going to see some help on the productivity side as well.

Q: Hey, good morning guys. I guess, first of all, congrats on a really solid 2024. You guys have grown quarterly earnings every quarter since the third quarter of 2023. I just wanted to give you guys an opportunity to maybe comment on if you think that can continue and if that's maybe a little unclear because of some of the 1Q deposit seasonality you talked about, maybe just comment on expectations for earnings growth year-over-year in 2025.

A: Yes. Thanks, Brian. The one quarter that we didn't have earnings growth is when we had a reduction in force or we would have grown then also. So it actually would have been every quarter since we've gone public. So call it 14 quarters. And we don't see that stopping anytime soon. I mean, I think we'll continue to have good growth and I think the margin is going to be pretty stable. We've proven we can be good at expense control. I think it'll be roughly 4% we'll roughly have a 4% increase in non-interest expense for the year. So if we're growing loans 8%, the margins stable, we're pretty optimistic about the year. We think fee income will be good. It will continue to increase. So yes, we expect future quarters to be better than the fourth quarter.