Third Coast Bancshares Q4 2022 Earnings Report

Third Coast Bancshares EPS Results

• Actual EPS: $0.44
• Consensus EPS: $0.42
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: N/A

Third Coast Bancshares Revenue Results

• Actual Revenue: $33.90 million
• Expected Revenue: $33.95 million
• Beat/Miss: Missed by -$50.00 thousand
• YoY Revenue Growth: N/A

Third Coast Bancshares Announcement Details

• Quarter: Q4 2022
• Date: 1/26/2023
• Time: N/A
• Conference Call Date: Friday, January 27, 2023
• Conference Call Time: 11:00AM ET

Third Coast Bancshares (NASDAQ:TCBX) operates as a bank holding company for Third Coast Bank, SSB that provides various commercial banking solutions to small and medium-sized businesses, and professionals. The company's deposit products include checking, savings, individual retirement, and money market accounts, as well as certificates of deposit. It also offers commercial and industrial loans, equipment loans, working capital lines of credit, guaranteed loans, auto finance, letters of credit, commercial and residential real estate, and construction, development, and other loans. In addition, the company provides retail and commercial online banking platforms, mobile banking apps, mortgage, treasury management solutions, merchant card services, and customer digital solutions, as well as debit and credit cards. Third Coast Bancshares, Inc. was founded in 2008 and is headquartered in Humble, Texas.

Third Coast Bancshares Q4 2022 Earnings Call Transcript

Key Takeaways

• Record Annual Growth: In 2022 Third Coast reported a >50% increase in gross loans to $3.1 billion, deposits to $3.2 billion, and total assets to $3.8 billion, setting a strong foundation for future periods.
• Strong Q4 Financial Performance: Q4 net interest margin held at 3.75%, net interest income rose 2.5% quarter-over-quarter, and net income increased to $7.5 million, outperforming internal expectations on ROA and asset sensitivity.
• Asset Quality Remains Robust: Year-end nonperforming assets fell 29% year-over-year to $12.3 million, NPL ratio stayed low at 0.39%, and annual net charge-offs declined from 15 bps to 4 bps, underscoring strong credit discipline.
• 2023 Outlook and Targets: Management aims for $500 million in net loan growth, maintaining flat expenses into Q1, and achieving a 1.0% ROA in the second half by sourcing low-cost deposits and expanding digital revenue streams.
• Rising Expense Base: Headcount increased 9% year-over-year and Q4 non-interest expenses included higher occupancy, legal/professional and regulatory costs, challenging expense efficiency.

Presentation

[Operator]

Greetings, welcome to the Third Coast Bank fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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 with Dennard Lascar Investor Relations. Thank you, Natalie. You may begin.

[Natalie Hairston, Senior VP at Dennard Lascar Investor Relations]

Thank you, operator. Good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our fourth quarter and fiscal year 2022 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. 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 3rd, 2023. More information on how to access these replay features was included in yesterday's earnings release.

[Natalie Hairston, Senior VP at Dennard Lascar Investor Relations]

Please note that the information reported on this call is fixed only as of today, January 27th, 2023. 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 U.S. 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 company's prospectus or the annual report on Form 10-K that was filed on March 17th, 2022, to better understand those risks, uncertainties, and contingencies. The comments made today will also include certain non-GAAP financial measures.

[Natalie Hairston, Senior VP at Dennard Lascar Investor Relations]

Additional details and reconciliation to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the Third Coast website. Now, I'd like to turn the call over to Third Coast's Chairman and President and CEO, Mr. Bart Caraway. Bart?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Thanks, Natalie. Good morning, everyone. Thank you for joining us today. I'll begin by highlighting significant events for the full year and fourth quarter. John will then provide a more detailed financial review, and Audrey will give a credit update. Before we take your questions, I'll return to discuss our outlook. Third Coast had a remarkable first full year as a public company. Throughout 2022, we were successful in executing the company's business strategy, both financially and operationally. Financially speaking, here are some highlights. Third Coast reported record level growth of over 50% in gross loans, deposits, and total assets during 2022 when compared to 2021. Specifically, gross loans increased to $3.1 billion, our best year yet. We believe the steps taken during 2022 to grow the loan portfolio have set up for a strong foundation for future periods.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Deposits also reached record levels, increasing to $3.2 billion, fueled by extremely strong business development efforts from our newly hired and existing lenders. Total assets grew to $3.8 billion, despite the changing economic conditions and aggressive interest rate hikes. Likewise, we reported excellent fourth quarter results. We exceeded internal expectations on net interest margin and return on assets and net income. Asset quality remained strong, demonstrated by overall excellent asset quality ratios and metrics. We significantly increased liquidity at year-end with strong deposit growth. From an operational perspective, we successfully opened four new branch locations in Georgetown, Fort Worth, Kingwood, and San Antonio, Texas, bringing our total to 16. The company added incredible bench strength in operations, risk, and compliance with the additions of Michael Deckert as Chief Operations Officer and Vicki Alexander as Chief Risk and Compliance Officer.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We promoted top talent internally with the promotion of Bill Bobbora to Chief Banking Officer. Together with other Third Coast leaders, the extensive experience and deep industry knowledge of our management team highlights the bank's ability to drive significant efficiencies as we continue to scale operations, compliance, and commercial banking. The bank advanced its commitment to environmental, social, and governance with campaigns geared towards eStatements adoption and sustainable corporate habits. Third Coast also commemorated Arbor Day by planting over 340 trees to honor each of our talented employees. Finally, Third Coast furthered its commitment to diversity, equity, and inclusion by providing unconscious bias training for managers and staff, launching a Women in Banking employee resource group, and establishing the bank's diversity council.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Third Coast's 2022 performance is the direct result of the bank's talented staff and experienced leaders, each of whom are dedicated to and engaged in the company's strategic vision. In addition to our employees, I'd like to take a moment to sincerely thank everyone involved with the bank's continued success, especially the bank's customers, investors, directors, and management. Third Coast pledges to give future and existing clients the personal service they deserve while assuring our commitment to maintain exceptional asset quality. I'll turn over the call to John for a more detailed financial review. John?

[John McWhorter, CFO at Third Coast Bancshares]

Thank you, Bart. Good morning, everyone. We provided the detailed financial tables in yesterday's earnings release, so today I'll review select balance sheet and profitability metrics for the fourth quarter and the full year 2022. As Bart mentioned, we experienced strong loan growth in the fourth quarter and full year 2022. Gross loans increased to $3.1 billion at year-end, an increase of $135 million or 4.5% from $2.97 billion in the third quarter, and an increase of $1.04 billion or 50.2% from $2 billion in the fourth quarter of 2021. Sequentially, our loan growth was well-diversified, with real estate loans up $72 million from September 30th and commercial loans up $29.7 million from the same period.

[John McWhorter, CFO at Third Coast Bancshares]

On a full year basis, real estate loans were up $526 million, and commercial loans were up $448 million. Deposits totaled $3.2 billion at year-end, representing a sequential increase of 8.4% from $2.98 billion, and an increase of 51% from $2.1 billion in the prior period. Net interest margin for the fourth quarter of 2022 was 3.75%, compared to 3.77% for the third quarter of 2022. This better than expected performance resulted from continued asset sensitivity, improved mix, and higher average quarterly non-interest-bearing balances. Net interest income totaled $32.2 million for the current quarter, an increase of 2.5% from $31.4 million for the third quarter of 2022.

[John McWhorter, CFO at Third Coast Bancshares]

Accretion on purchased loans for the quarter declined $771,000, and loan fees for the quarter declined $104,000. On a full year basis, net interest income totaled $116.5 million, an increase of 28.6% from $90.6 million in 2021. Non-interest income totaled $1.8 million in the fourth quarter, compared to $2.5 million in the third quarter of 2022. Gains on sales of the guaranteed portion of SBA loans decreased sequentially from $729,000 to $123,000 for the fourth quarter. In addition, derivative fees decreased from $313,000 to $117,000 in the fourth quarter.

[John McWhorter, CFO at Third Coast Bancshares]

Non-interest expense totaled $22.6 million for the fourth quarter, down from $22.7 million in the third quarter. Declines in salary expenses were offset by increases in occupancy, legal, and professional. The employee headcount increased 9% over the past year, and in addition to the year-over-year increase in legal and professional fees related to increased costs associated with doing business as a public company, as well as increased regulatory assessment expenses resulting from increased rates and total asset growth. Net income totaled $7.5 million in the fourth quarter, compared to $6.8 million in the third quarter. Dividends on Series A preferred stock totaled $1.4 million for the fourth quarter. Due to the timing of closing of our preferred offering, we declared two dividends in the fourth quarter, one at the very beginning and one at the very end.

[John McWhorter, CFO at Third Coast Bancshares]

As a result, we picked up an extra 16 days for a little over $200,000. If not for this, fully diluted earnings per share would have rounded up to $0.45 per share. On a full year basis, net income totaled $18.7 million in 2022, compared to $11.4 million in 2021, an increase of 64%. That completes the financial review. At this point, I'll pass the call back to Audrey for our credit quality review.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Thank you, John. Good morning, everyone. Asset quality remains strong. Year-over-year non-performing assets decreased by $5 million or 29% to $12.3 million as of December 31, 2022. For the fourth quarter of 2022, non-performing assets increased $1.9 million from $10.3 million as of September 30, 2022. As of December 31, 2022, the non-performing loans to loans held for investment ratio remained low at 0.39%, which increased slightly from 0.35% as of September 30, 2022, and decreased from 0.75% as of December 31, 2021. The provision for loan losses recorded for the fourth quarter of 2022 was $2 million. The allowance for loan and lease losses represents 0.98% of gross loans.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

During the three months ended December thirty-first, 2022 and 2021, net charge-offs were $708,000 and $2.4 million, respectively. On a full year basis, net charge-offs were $1.1 million and $2.6 million in 2022 and 2021, respectively. The annual net charge-off rate declined to four basis points for 2022, compared to 15 basis points for 2021. The bank has adopted CECL effective January one, 2023. Due to the change in methodology, we have increased reserves by $4 million. Before Bart covers our outlook, I wanted to share some additional information about the diversity council that Bart mentioned earlier. As a co-chair of the council, we plan to foster an environment of respect and acceptance, as well as build awareness and education regarding diversity issues, among other initiatives.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Each of our council members brings diverse professional experiences that will support the group's mission. We're excited to launch this initiative, one that steers us towards becoming a more diverse company and a champion of equity. With that, I'll turn the call back to Bart. Bart?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Thanks, Audrey. Turning to summarize, we enter 2023 with similar goals as 2022: to grow revenues faster than expenses and to maintain our strong credit culture. We will do this by focusing on key strategic priorities. First, we will continue our efforts in sourcing sustainable, low-cost deposits while expanding and diversifying revenue streams. Throughout 2022, the bank made several strategic partnerships with digital partners, including Treasury Prime and Alloy Labs. We expect the foundation we built to offer these services in 2022 will come into focus during 2023 with the rollout of several new programs. Second, we remain focused on retaining and attracting new commercial and retail customers. The bank continues to make important investments in technology enhancements, such as improving the new account onboarding and customer experience.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We intend to leverage these innovative digital channels to not only improve the bank's ability to retain its excellent customer base, but also attract and acquire broader relationships. We are committed to identifying innovative ways to serve the needs of our customers while facilitating cost savings through digital transaction migration. Third, we will continue to manage expenses and improve efficiencies that strengthen our company. We are pleased to report flat expenses over the last three quarters of 2022, even with our sizable growth, and we expect that expenses will remain relatively flat in the first quarter of 2023. At the same time, we continue to look for opportunities to control costs associated with our tremendous growth by streamlining and scaling business operations to further improve our efficiency ratio.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We're not yet where we want to be in terms of efficiency in our execution and processes, but we're taking decisive actions to ensure we continuously improve over the next 12 months. Finally, we will continue to be opportunistic in taking advantage of the strong markets across Texas, particularly in those markets we operate. We believe the strength of the Texas economy puts us in a better position to pursue potential growth opportunities. We are optimistic that our prudent business lending model and profitable business operating model will continue to thrive in 2023. Combined with our commitment to these strategic initiatives, we have an unwavering commitment to deliver disciplined fundamentals that drive solid loan originations, excellent credit quality, and improved efficiency.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We believe Third Coast is well positioned to deliver profitable growth in 2023 and beyond, ensuring safe and sound banking practices and focusing on generating superior customer and shareholder value. This concludes our prepared remarks. I would now like to turn it back to the operator to begin the question-and-answer session. Operator?

[Operator]

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. One moment, please, while we poll for questions. Thank you. Our first question is from Bernard von Gizycki with Deutsche Bank. Please proceed with your question.

[Bernard von Gizycki, Equity Research Analyst at Deutsche Bank]

Hey, good morning, guys. Just wanted to dig into the NIM. It was better than expected, and John, you pointed to a few things. Obviously the reported NIM was the 3.75%. It only declined points, which is better than your guidance. You know, there was some excess loan accretion in 3Q, and I think on a core basis that NIM was closer to 3.69%. I was just wondering if you could just walk us through that improvement, you know, ex that accretion, and I know you mentioned a little bit less, I believe, accretion in this quarter. Just wondering if you could walk us through some of those components.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah, Bernie, it was just a really good quarter for the margin. It was somewhat unexpected. I mean, some of the pressures that we still have continue to exist. You know, our cost of funds is going up. Our deposit betas are high. On the flip side, you know, on the loan side, 79% of our loan portfolio is floating. We are asset sensitive. I mean, we've been saying that all year, certainly it proved true this quarter. Even though our period end non-interest-bearing demand deposits were down, our average quarterly demand was up. It was a good quarter all the way around. I mean, our average loan to deposit ratio was a little bit higher quarter-over-quarter, our spreads were good, our mix was good.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

You know, if you factor out the accretion from last quarter, the margin was actually up from last quarter. Certainly would not expect that again. We still have the same pressures that we did last quarter. I'd certainly guide to a slightly lower margin than we are today.

[Bernard von Gizycki, Equity Research Analyst at Deutsche Bank]

Got it. For 1Q, slightly lower margin. And then what are you assuming on fed hikes or anything there for 1Q? Anything you can provide for the assumptions?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. 25 basis points next week. I mean, we're just going by what the market is forecasting for that. 25 this time and 25 next time. We don't have anything else modeled in. You know, it's not gonna have a huge effect on us. If we're slightly asset sensitive and, you know, rates go up another 50 basis points or even 100, it should be a net positive that we don't explicitly have factored in.

[Bernard von Gizycki, Equity Research Analyst at Deutsche Bank]

Right. The lower NIM quarter-over-quarter is more maybe on the deposit pressure, essentially, being a little bit more than the asset side.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Correct.

[Bernard von Gizycki, Equity Research Analyst at Deutsche Bank]

Great. Thank you.

[Operator]

Thank you. Our next question is from Brad Milsaps with Piper Sandler. Please proceed with your question.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, good morning, guys.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Good morning, Brad.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Appreciate you guys taking my questions. You guys had, you know, still really good loan growth in the quarter, maybe, you know, slower than some of the recent trends. Bart, I was writing quickly during your comments, but just kind of curious if you guys could provide sort of what your appetite would be for loan growth in 2023. You know, a lot of moving parts out there, but just wanted to kind of get some additional color on what you think you can do this year?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

I think maybe the best way to convey what we're looking at is kind of give you a full year picture. What we're targeting is $500 million in net loan growth for the year. Like we told y'all before, it will be lumpy through the year. You know, we believe that, you know, $500 million in net loan growth, which is still, you know, pretty nice growth factor for us, will bring us probably the best efficiency and the best, you know, ROA that we're looking at to still get to the 1% ROA by second half of the year. For us, I think that is very manageable. We have a very strong team and a very strong pipeline.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

I will tell you, we are just more and more particular on the lending side from a risk return. I mean, we could do a lot more volume if we wanted to, but we're really, you know, making sure that we manage the asset performance, from an ROA standpoint. Does that help, Brad?

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Yeah. Yeah, that's very good. Would you expect it to be kind of a similar mix in terms of variable rate versus fixed is kind of where the current portfolio stands? I guess in what ways do you plan to fund it? You know, I know you guys have talked about a growing deposit pipeline in the past, but, obviously to bridge the gap in ROA, I would think you'd need to bring in some lower cost funding, which is a challenge for everybody in this environment.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. From the mix standpoint, I think for the next two quarters it'll be very similar. You know, I would say that the builder finance has slowed down and maybe we'll have a few payoffs in that area. The corporate banking, the community banking still remains very robust. You'll see. You know, because the portfolio's large enough now, you're not gonna see big swings on it. You'll see a lot more probably on the C&I side grow, if anything. In terms of covering the deposit side, you know, we're starting to see some of the initiatives we're working through come to fruition. Again, we talked about from the deposit side that, you know, we have a multi-pronged approach.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We're getting the entire bank involved from treasury and retail and community banking and all the specialty functions. You know, we're starting to see that begin to grow. As a matter of fact, you know, retail had a great last quarter where they, you know, contributed more than their historical % to the growth now. We feel very comfortable with the $500 million in loan growth that we'll be able to support that with the deposit gathering.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Okay, great. Remind me, I may be off on this, but do you guys adopt CECL this past January? I think that's correct, but I may be off there. Just curious if that's in fact correct and if there's any changes that you expect?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We did. Yeah.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. January 2023.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Yes, yes, January. Yes.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Yeah, this month, right.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Just kind of curious. If you could kind of give us any color on maybe what that adoption revealed? Do you expect, you know, many significant changes in the reserve, you know, going forward? Just curious your thoughts around that.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. we added four-

[John McWhorter, CFO at Third Coast Bancshares]

Go ahead, Audrey.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah, go ahead, Audrey. Yeah.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Okay. Hey, this is Audrey. Yeah, we adopted it January first of 2023. We did a $4 million provision based on the new methodology. That was, you know, all based on the general reserves. Going forward, I don't see us, you know, doing any. We did what we needed to comply, and I don't see any big changes to that. It again, it was not specific reserves. It was all based on the methodology and the new way of looking at general reserves.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

If I could add a little bit more color on that, Brad, is that it really came to the macro environment. That's where, you know, the reserves came in with it from. Our own portfolio seems to be holding very steady. We're very pleased with the, you know, the quality of the loan portfolio. With the national headwinds, macro environment, that does have an effect on CECL, and that's where the one-time provision came in.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Sure. Makes total sense. That gets you up to, like, to around 110 of loans. Okay.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Exactly.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

All right. Thanks for the color. I really appreciate it.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Thank you, Brad.

[Operator]

Thank you. Our next question is from Michael Rose with Raymond James. Please proceed with your question.

[Michael Rose, Managing Director at Raymond James]

Hey, good morning, guys. Hope you're doing well.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Good morning.

[Michael Rose, Managing Director at Raymond James]

Good morning. Sorry if I missed this. I hopped on a little bit late, just wanted to get, you know, kind of general thoughts for expenses. I think you might have said... I might have heard this, you might have said kind of flattish for the year. Can you just tell us some of the puts and takes? I mean, obviously, there's inflation. You guys, you know, I think are still, you know, hiring as a, as a growth company. There's higher FDIC costs. You have the, you know, the fintech partnerships. I don't know if there's any incremental investment there. Just looking for some of the puts and takes as it relates to expenses as we move into the first quarter and then through the year. Thanks.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Sure. Michael, what Bart said is that he thought expenses would be flat for this first quarter, not for the year. I wouldn't necessarily expect that. If you think back over the last year, you know, first year as a public company, we had increased insurance, increased legal. I mean, we are growing fast, so our regulatory assessments were higher. You know, just a lot of headwinds related to being a public company. Most of those are behind us. I mean, we do have the everyday inflation that we all have to deal with, but, you know, we're squeezing things as much as we can everywhere we can, and the management team is committed to, you know, not spending money today until we get to a better profitability number.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

So this next quarter and hopefully the second quarter too, we think expenses are gonna be relatively flat, and that we're gonna continue to grow. You know, that's really the same messaging we had all of last year is that we're gonna grow revenues a lot faster than expenses, and we expect that to continue. If I could offer a few more thoughts on that. You know, we've brought on a management team that are coming from much bigger banks that have seen ways that we can be even more efficient. Still haven't gotten the full benefit of some of the technology that we're implementing, but, you know, that will happen over the year. You know, we're still fighting, as John says, inflation. You know, that's very difficult. You know, labor is, you know, expensive.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

You know, everything seems to go up some. You know, I think we've been very judicious with both adding resources, and also looking at our operations and reconfiguring them and re-engineering them to be more efficient. I do believe that we do have a strong platform to continue to grow, and that the, you know, pace of the expenses should be minimum compared to the pace of the revenue.

[Michael Rose, Managing Director at Raymond James]

That's helpful. I appreciate the context and color there. Just moving back to deposits. You know, a couple quarters ago you guys had some big outflows, the mix changed. Looks like it's stabilized here around, you know, 15% DDA. You know, I know there's some puts and takes, and last quarter you kind of talked about a 95%-ish loan-to-deposit ratio. You know, is that still kind of the context? From a mix perspective, I mean, would you, would you expect things to kind of stabilize here, or is there maybe some more, more degradation in, into the mix? Thanks.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. I would say if anything, it'll improve, Michael. You know, if you think about, you know, over the last year, it's a lot easier to bring over loans than deposits. There's just a much longer lead time to bring deposits over. We were working on deposits, I think, much sooner than most of our peers that. You know, everybody's working hard on deposits today, but I think we have a good head start. The next couple of quarters, I'm pretty optimistic about our deposit growth. Even on the demand side, I don't see that number getting worse by any stretch. If a few things break our way, it could be a lot better. Yeah, I kinda echo that I'm pretty optimistic.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

We have a lot of areas where kind of relationship overlap technology that we're getting to get some very nice, desirable customers that are coming on board. Some with some fairly large non-interest-bearing accounts, but if nothing, very good core accounts regardless, one way or other. We're getting a few wins here and there that as that continues to build, I think it will help us change our deposit mix. Of course, we wanna grow non-interest-bearing. That is our goal to do that and continue to grow core as fast as we can. I'm starting to see some nice pipelines of deposits that are coming in.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

As John says, I do believe we have room for improvement, and we're gonna start seeing those improvements, despite the fact that it's probably one of the hardest times, you know, to raise deposits.

[Michael Rose, Managing Director at Raymond James]

Helpful. Then maybe just finally for me, I feel like I ask this every quarter, but any updates on, you know, kind of the ROA target that's out there? I know it's a challenging environment and just wanted to get, you know, any sort of updated, you know, color and thoughts there. Obviously, the flat expenses will help, but, you know, a slower pace of loan growth obviously is somewhat of a detractor too. Just wanna look for any updated thoughts you guys have. Thanks.

[John McWhorter, CFO at Third Coast Bancshares]

Yeah, I mean, we're still targeting that 1% ROA in the second half of the year. You know, to get there, we need to improve, you know, 6 to 8 basis points a quarter. I think we're on track to do that.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah, I feel good about it as well. I think it's a for us, it's, again, a multipronged approach for us. It's, you know, a little improvement in cost of funds, some more revenue growth, and then keeping expenses low. I believe that, as we said, you know, a year and a half ago, where we think second half of this year, I think is very achievable.

[Michael Rose, Managing Director at Raymond James]

Okay. Thanks for taking my questions, guys.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Hey, appreciate ya.

[Operator]

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Our next question is from Matt Olney with Stephens Inc. Please proceed with your question.

[Matt Olney, Research Analyst at Stephens Inc]

Hey, thanks. Good morning, guys. Just a few follow-up, modeling questions here. John, I think you mentioned the preferred dividend was a little bit elevated this quarter. Just remind me what the normal quarterly preferred dividend will be from here.

[John McWhorter, CFO at Third Coast Bancshares]

Yeah. I think it's, $1,197,000 a quarter, if I remember right.

[Matt Olney, Research Analyst at Stephens Inc]

Okay. Then on FHLB, it looks like you had some advances in the average balances in the fourth quarter. Looking at the end of period, looks like you may have paid these off. Is that right? Any more color on how much you plan to utilize FHLB in 2023?

[John McWhorter, CFO at Third Coast Bancshares]

You know, we'll use it as we need it. At the end of the year, we didn't. We had good deposit growth, particularly in December, so we paid off all our borrowings. Any of our borrowings are gonna be very short term, either overnight or maybe just for a week or two. You know, it depends on the lumpiness of our loan growth. You know, as you can imagine, managing it over the last year, we knew we were gonna grow loans fast. Deposits are harder to predict exactly when they're gonna come in, so we have had to borrow from time to time from the Home Loan Bank to fund the loan growth. You know, we could see some of that this year too. It just depends on how lumpy the loan growth is and.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Timing of deposits too, right?

[John McWhorter, CFO at Third Coast Bancshares]

Yeah.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

I mean, sometimes those deposits can be a little lumpy as well.

[John McWhorter, CFO at Third Coast Bancshares]

I mean, the Home Loan Bank borrowings today are more expensive than anything else out there, so it's definitely our last choice.

[Matt Olney, Research Analyst at Stephens Inc]

Okay. Any color on the yields on some of the newer, originations, on the loan side?

[John McWhorter, CFO at Third Coast Bancshares]

Yes. In the month of December, we booked about $113 million in new loans with a yield of 5%, and that was before loan fees. After fees, we're certainly averaging well into the 7%.

[Matt Olney, Research Analyst at Stephens Inc]

Okay. I may have missed this, but did you disclose what the accretion amount was in the fourth quarter or of any expectations of kind of what's remaining from here?

[John McWhorter, CFO at Third Coast Bancshares]

It was actually zero, and maybe even less than zero. I think we marked it up $9,000. We had a net swing from the third quarter to the fourth of $771,000, I think was the number. I would not expect much accretion going forward. We've recognized most of it, and what we do have left to recognize will be relatively immaterial and spread over a period of years. There's just not much left there.

[Matt Olney, Research Analyst at Stephens Inc]

Okay. I wanna get Audrey some more airtime here on credits. Audrey-

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Okay.

[Matt Olney, Research Analyst at Stephens Inc]

What you're thinking about now with the Feds trying to slow the economy and put some more pressure on some of the borrowers out there, what loan categories or what kind of markets are you most focused on right now?

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

We're, you know. Fortunately, even with that, we're in a great state. Things are still really looking good here. We're still focusing on the C&I, you know, C&I growth. We're still well diversified, really not concerned with one particular area. I think, as John said, the builder group is gonna you know, probably slow a little bit. Things are still, you know, from an asset quality perspective, looking good for us.

[Matt Olney, Research Analyst at Stephens Inc]

Okay.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Bart, did you wanna add anything there?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. I mean, Matt, I guess what I'd add is that, you know, we tend to try to look ahead in our underwriting with it and Audrey calls it recession protection. Essentially.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Yeah. Mm-hmm.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

... what she's gone through is, has an entire process where she kind of layers on top of that, where the lenders have to answer, you know, what's the impact of a potential recession to any of our customers and, you know, some additional monitoring as well. I think, you know, we've been in contact, you know, frequently with, you know, our customers and, certainly in the underwriting side. You know, she's added a few more questions and maybe a few more calculations that they have to do to make sure that we're in good shape. Thus far, you know, even that more detailed enhanced due diligence that we're doing on it, you know, our portfolio's in really good shape.

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Yeah. We're in the, we're in the process of going through that process now. As, as Bart said, the recession, protection and, you know, looking at the portfolios, kind of, grading them, so to speak, high, medium, and low risk for a protected recession and contacting customers, getting updated projections, doing some additional, stress testing of our loans. To this point, not, you know, seeing anything that's greatly concerning.

[Matt Olney, Research Analyst at Stephens Inc]

Any migrations that you saw during the fourth quarter into special mention or classifieds?

[Audrey Duncan, Chief Credit Officer at Third Coast Bancshares]

Our classifieds actually for the quarter really remain low. It's below 4%. You probably noticed we had a increase in NPAs of $1.9 million. That was actually five loans that we placed on nonaccrual. The largest was an $800,000 SBA loan, so it's got a 75% guarantee. Then the other 4 were, you know, $300,000 average balance. you know, very, very granular there. Not any big individual loans.

[Matt Olney, Research Analyst at Stephens Inc]

Mm-hmm. Mm-hmm. Okay. Well, that's all from me. I appreciate the color, and thanks for taking my questions.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Okay. Thanks for the questions.

[Operator]

Thank you. Our next question is from Brad Milsaps with Piper Sandler. Please proceed with your question.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, thanks for taking a follow-up. just wanted to point of clarity on the ROA target. I noticed in the release you present the ROA excluding the preferred dividend. I was curious, the 1% that you're talking about, should we think about that inclusive or exclusive of that preferred dividend that you guys have each quarter?

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah. I was thinking of it exclusive.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

A 1% ROA before the dividend. Okay.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Yeah.

[Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler]

Makes sense. Okay. Just wanna make sure I was on the same page. Thank you very much.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Sure. Thank you.

[Operator]

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mr. Caraway for any closing comments.

[Bart Caraway, Chairman, President, and CEO at Third Coast Bancshares]

Thank you, Paul. Thank you all for joining us on the call and for your continued support of Third Coast Bancshares, we look forward to speaking to you again next quarter. Y'all have a good weekend.

Participants

Executives

• Audrey Duncan, Chief Credit Officer
• Bart Caraway, Chairman, President, and CEO
• John McWhorter, CFO

Analysts

• Bernard von Gizycki, Equity Research Analyst at Deutsche Bank
• Brad Milsaps, Managing Director and Senior Research Analyst at Piper Sandler
• Matt Olney, Research Analyst at Stephens Inc
• Michael Rose, Managing Director at Raymond James
• Natalie Hairston, Senior VP at Dennard Lascar Investor Relations