Third Coast Bancshares, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights:

• Bart Caraway: Highlighted robust Q4 and full-year performance, growth in balance sheet, service charges/fees up, loan interest income/fees up, interest expense lowered, and milestones reached (e.g., book value increase). Discussed merger with Keystone and 2026 outlook, including loan growth targets.
• John McWhorter: Discussed net income, net interest income, deposits, cost of funds, and net interest margin, noting net interest income increase, cost of funds improvement, and net interest margin performance.
• Audrey Spaulding: Reviewed credit quality, noting nonaccrual loans and nonperforming loans improvement, allowance for credit losses, and loan portfolio diversification.
• Operational: Emphasized disciplined risk management, underwriting standards, and strategic initiatives like merger integration and operational efficiency enhancement.

Segment Performance:

• Balance Sheet: Gross loans increased by $230 million (5.5% QoQ) to $4.39 billion, a 10.8% YoY rise. Total assets ended at $5.34 billion, a 5.5% QoQ and 8.1% YoY increase. Total deposits grew by over $254 million in Q4 to $4.6 billion, a 5.8% QoQ and 7.3% YoY rise.
• Income: Service charges and fees saw ~24% QoQ and 55% YoY growth. Loan interest income and fees grew ~7% YoY. Interest expense was lowered by ~4.2% QoQ and 5.2% YoY.
• Key Metrics: Book value and tangible book value rose to $33.47 and $32.12, respectively, YoY up 16.8% and 17.7%. Return on average assets was 1.33% annualized for 2025, up over 26% YoY. Net income was $17.9 million QoQ and $66.3 million YoY (39% increase). Net interest income was $52.2 million QoQ and $195.2 million YoY (21% increase). Cost of funds was 3.33% QoQ, improved 23bps QoQ and 50bps YoY. Net interest margin was 4.10% QoQ, with core net interest margin at 3.90% QoQ, up 10bps.
• Credit Quality: Nonaccrual loans decreased $603k QoQ and $16.7 million YoY. Nonperforming loans improved $259k QoQ and $6.5 million YoY. Allowance for credit losses was 1% of total loans. Net charge-offs were 8bps YoY.

Guidance:

• Loan Growth: Targets $75 million to $100 million per quarter loan growth in 2026, aiming for an annualized ~8% growth rate.
• Margin: Expect net interest margin to be back in the 3.90% range without one-time loan fees.
• Income: Optimistic on noninterest income, with ongoing initiatives bearing fruit, though loan fees may be lumpy.
• Expenses: Anticipate expense growth weighted towards early 2026 but expect revenue growth to exceed expense growth, maintaining strong ROA.

Risks:

• Market uncertainties and interest rate fluctuations could impact financial performance.
• Merger integration risks with Keystone.
• Uncertainties in securitization pipeline and impact on loan fees.
• Potential impact of preferred convertible instrument conversion on capital ratios.

Q: Woody Lay asked about expenses, specifically $1.5 million of sign-on and severance costs.

A: John McWhorter responded that there were merger-related legal/professional expenses, nonrecurring salary/benefit expenses, and a tax tailwind, with operating earnings expected in the $107 million range.

Q: Michael Rose inquired about loan growth range post-Keystone merger.

A: Bart Caraway stated the $75 million to $100 million per quarter range remains the base case, with favorable 2026 production and talent onboarding.

Q: Bernard Von Gizycki asked about deposit growth drivers and expense expectations.

A: John McWhorter said deposit growth was seasonal, and expense growth was expected to be ~5-7% with revenue growth outpacing it. Bart added reinitiation of the 1% initiative and core conversion efficiencies.

Q: Matt Olney asked about securitization pipeline and Keystone merger timeline.

A: John McWhorter said another securitization was likely, different from past ones; Bart stated the Keystone merger was proceeding as planned with shareholder meetings upcoming.

Q: David Storms asked about dynamic pricing and NIM timeline.

A: Bart Caraway discussed refining pricing tools and net interest margin expectations of a 'cliff' drop without one-time loan fees.