Third Coast Bancshares, Inc.TCBXNASDAQ
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Operator: Greetings, and welcome to the Third Coast Bancshares Fourth Quarter and Full Year 2025 Financial Results Conference Call. [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 Third Coast Bancshares conference call and webcast to review our fourth quarter and full year 2025 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McWhorter, Chief Financial Officer; and Audrey Spaulding, 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.thirdcoast.bank. There will also be a telephonic replay available until January 29, and 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 22, 2026, 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 5, 2025, 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's Founder, Chairman, President and CEO, Mr. Bart Caraway. Bart?
Bart Caraway: Good morning, everyone, and thank you, Natalie. I'm pleased to begin by highlighting our company's robust performance in the fourth quarter, as well as the entire year. Following my remarks, John will discuss the financials. Audrey will provide an update on our credit quality. Finally, I will discuss the progress of our merger with Keystone and share management's outlook for 2026. Our recent results demonstrated the company's commitment to growth, profitability and long-term shareholder value. This performance reaffirms our strategic priorities and highlights our ability to deliver lasting outcomes that benefit our customers, employees and stockholders. First, we saw significant growth in our balance sheet in the fourth quarter and throughout the entire year. Gross loans increased by $230 million, or 5.5% compared to the third quarter, reaching $4.39 billion. This marks a 10.8% rise compared to the previous year, surpassing our targeted run rate of 8%. Total assets mirrored this upward trend, ending the year at $5.34 billion, reflecting a 5.5% increase over the third quarter, and an 8.1% rise compared to the previous year-end. Similarly, total deposits grew by over $254 million in the fourth quarter, reaching $4.6 billion, a 5.8% increase from the third quarter, and a 7.3% rise compared to a year ago. Second, the increase in service charges and fees is noteworthy, with an approximately 24% increase over the third quarter and an impressive 55% year-over-year rise. This is due to the effectiveness of our relationship banking model and our appealing platform, which have resonated powerfully with our customers. Meanwhile, loan interest income and fees grew by about 7% compared to the previous year as we effectively expanded our overall loan portfolio through the hard work of our talented bankers. We were also able to lower our interest expense by approximately 4.2% from the third quarter and 5.2% when compared to a year ago. This was possible by dynamically pricing a portion of our deposit portfolio and capitalizing on the evolving interest rate landscape. Last but not least, we reached significant milestones. Book value and tangible book value rose to $33.47 and $32.12, respectively, reflecting a year-over-year increase of 16.8% and 17.7%. Our return on average assets remained robust, achieving an annualized 1.33% for the full year of 2025, returning a year-over-year enhancement of more than 26%, as we continue to operate efficiently and serve our customers well. Overall, our 2025 performance reflects the incredible dedication and talent of our team and underscores the effectiveness of our strategy. These achievements go beyond mere figures. They embody our vision and passion. We outpaced our peers, exceeded expectations and have set new standards for our company, all while sustaining growth and maintaining profitability to support long-term value for our stakeholders. With that, I'll turn the call over to John for the company's financial update. 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 and full year. We reported net income of $17.9 million for the fourth quarter, leading to a record total annual net income of $66.3 million, reflecting a 39% increase year-over-year. This resulted in an annual return on equity of 14%, marking a 24% increase from last year. As a result, our earnings per share exceeded expectations, reaching $1.02 per diluted share for the quarter, and totaling $3.79 for the year, representing a 36% increase from the prior year and setting a record for the company. Net interest income was $52.2 million in the fourth quarter and $195.2 million for the year, an increase of 21% from the previous year. This increase was due primarily to an increase in earning assets. Investment securities decreased $7.5 million during the fourth quarter, ending the period at $575 million. This modest decline primarily reflects normal portfolio runoff and active balance sheet management as the company continued to prioritize prudent liquidity, capital efficiency and disciplined deployment of earning assets. Deposits rose by $254 million in the fourth quarter, totaling $4.6 billion, which marks a 7.3% increase compared to the previous year. This growth maintains our loan-to-deposit ratio of 95%. Our cost of funds stood at 3.33% in the fourth quarter, reflecting a 23 basis point improvement from the third quarter, and a 50 basis point improvement from a year ago. And as Bart highlighted, we've surpassed expectations with our stable asset liability model even during a fluctuating interest rate environment. Net interest margin remained consistent at 4.10% for the quarter, exceeding expectations. This performance resulted from higher-than-expected loan fees due primarily to robust loan growth. We believe the core net interest margin was 3.90% for the quarter, up about 10 basis points from the prior quarter. That completes the financial review. At this point, I'll pass the call to Audrey for our credit quality review.
Audrey Duncan: Thank you, John, and good morning, everyone. The fourth quarter and full year credit performance highlights the strength and stability of our asset quality, a result of our disciplined risk management practices and underwriting standards. Nonaccrual loans saw continued improvement for the fourth consecutive quarter, decreasing by $603,000 in the fourth quarter and $16.7 million for the full year. Loans over 90 days and still accruing totaled $11.36 million. However, subsequent to year-end, a loan totaling approximately $5.5 million was renewed and is now current. Quarter-over-quarter, nonperforming loans saw an improvement of $259,000, contributing to a total annual improvement of $6.5 million when compared to the same period last year. The ratio of nonperforming loans to total loans improved by 3 basis points from the prior quarter and improved by 21 basis points year-over-year. The allowance for credit losses represented 1% of total loans, which is a slight decline from 1.02% at the third quarter and previous year-end. Net charge-offs were 8 basis points for the year, representing a 1 basis point improvement over the same period last year. Our loan portfolio remains well diversified with allocations consistent with the previous quarter and throughout the year. Commercial and industrial loans were 43% of total loans, while construction development and land loans were 19%, owner-occupied CRE was 10%, and nonowner-occupied CRE was 16%. Overall, the quality of our assets is a key highlight. Our strategic blend of conservative credit underwriting and prudent risk management not only drives growth but also ensures long-term value for our stakeholders. With that, I'll turn the call back to Bart. Bart?
Bart Caraway: Thank you, Audrey. Third Coast's history has been consistently defined by our remarkable growth as a company, which has been a key factor in our success. Throughout our journey, we have achieved several transformative milestones, including surpassing $5 billion in total assets, successfully expanding our commercial lines to corporate and specialty products, enhancing our core and treasury management solutions, and completing two securitizations in 2025. These accomplishments are a tribute to our strategic vision and well-executed decisions, solidifying our status as a high-performing public company. As we begin 2026, we are excited to build on the positive momentum generated in the fourth quarter and throughout 2025. By executing our strategic initiatives, we are confident that we will drive our company forward and continue to deliver substantial value to our shareholders. A focal point this year will be the integration of our merger with Keystone Bancshares, Inc. announced last October. Once complete, this strategic partnership will unite us as a combined $6 billion entity with 22 locations across Texas. Three locations in Austin, with its dynamic economic growth and vibrant community, serve as a perfect backdrop for Third Coast's expansion. Together, we expect to merge two culturally aligned community banks, leveraging our shared commitment to relationship banking and customer service, and reinforcing Third Coast's presence in the Texas Triangle. Looking beyond the merger, we also have set our strategic and financial outlook for 2026 including, achieving loan growth targets of $75 million to $100 million per quarter, establishing an annualized growth rate of approximately 8%, maintaining disciplined underwriting and portfolio management practices to ensure high-quality loan growth, enhancing our operational efficiency while scaling our organization for even greater success. In closing, I want to again recognize the outstanding work of the Third Coast team. Their commitments and execution have enabled us to deliver growth that differentiates us from our peers and strengthens our franchise in Texas' most dynamic markets. We remain focused on proven banking model that supports sustainable growth, strong profitability and long-term value for our shareholders. We entered the new year with confidence in our strategy and ability to continue delivering for all of our stakeholders. I'd like to now 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 Woody Lay with KBW.
Wood Lay: I wanted to start on expenses. It looks like there was several moving parts as you called out, I think, $1.5 million of sign-on and severance costs. So could you just walk through some of the actions you took in the quarter?
John McWhorter: Yes. Thanks, Woody. And there certainly was more than average noise for this quarter. So a couple of things that I might point out. On -- so the legal and professional line item had about $1 million in merger-related expenses. And we think we have another probably $5 million that we'll incur in the next couple of quarters. For salary and employee benefits, it was more in the hundreds of thousands of range as far as kind of nonrecurring type expenses. We did have a little severance. We did have some signing bonus. But having a -- paying a signing bonus is not an unusual thing for us. The other thing that I might point out is we had a little tailwind from taxes this quarter. We did purchase some tax credits and had a little more in the fourth quarter than I would expect to see going forward. So the kind of salary and benefits of maybe the excess was $500 million or so for the quarter was basically offset by the extra benefit of the taxes so that -- we were kind of thinking of operating earnings as being in that $107 million sort of range. And I saw that there were a few people out there that had us at a little bit higher number adding back on salaries. But if you think about how much we grew in the fourth quarter, we did have to hire just a lot of people to help in loan ops and other support areas throughout the bank, and we'll definitely have an increase in that line item.
Wood Lay: Yes. And as you think about -- once the acquisition is closed, how do you think about additional hiring from there? Do you feel like you got most of it done in the fourth quarter? Or there's going to be more to go in 2026?
Bart Caraway: Well, again, the thing that we've talked about is us being a talent magnet, and that continues, and only gets probably better as we grow. So as there is more, I guess, disruption in the markets with bankers, we get more than our proportional share of good quality bankers. Again, we're surgical and selective. But as great talent comes available and decides to move to our shop, we're going to continue to add them. And that's going to help propel our growth and continue on the trajectory that we're at. So I think what you see is no fundamental shift as much as ongoing operations as we've been doing it for the last few years.
John McWhorter: Yes. And that's true on both the sales and the ops side. When we have these really big quarters, and we've talked a lot about our growth being lumpy over time. But when we have these particularly big quarters, we need to staff up in loan ops, in IT, in treasury and just any number of areas. So don't be surprised by our headcount going up when we have these big quarters.
Wood Lay: Got it. And then just lastly, a follow-up on the loan growth comment you made. I think you mentioned $75 million to $100 million a quarter, which is where you have been running. But once Keystone closes, do you expect that range to increase just given the bigger balance sheet? Or is that still the right growth range of the pro forma company?
Bart Caraway: I still think that's the right growth rate. So notice we've kind of bumped up the lower number a little bit just because we're seeing such good pipeline growth. I do think 2026 is going to be more favorable, if not an easier year on the production side. Plus we've -- between Keystone and some of the talent that we've onboarded, I think we're going to have a good run this year in terms of loan volume. And we'll probably have less of the headwinds of some of the big payoffs or paydowns. So I do feel like 2026 is a good year. But again, I caution everybody that it does tend to be lumpy for us. And -- so you'll see bigger quarters than others from time to time. But last year, we basically exceeded barely the target that we put out. And again, I'd see -- when you look at it year-over-year, we've been pretty consistent on what we said the growth is going to be in achieving that.
Operator: Our next question comes from the line of Michael Rose with Raymond James.
Michael Rose: Obviously, really strong loan deposit balance sheet growth this quarter. It looks like there was really strong growth in the C&I bucket. Just wanted to get some color there. And it does seem like you've kind of raised the level of expectations for loan growth moving higher from -- I think you were at $50 million to $100 million. So you've kind of raised that range to $75 million to $100 million. Just given the dislocation within some of your markets from M&A, the impacts of the deal and what that will bring, and just a better overall kind of loan environment as rates come down, how should we think about that $75 million to $100 million? I mean, is that kind of the base case? Is it conservative? It just seems like the momentum would be there to perhaps do a little bit better than that.
Bart Caraway: Yes. I would say the base case, I mean, it's just a confluence of lots of different factors that could have an effect on it. Obviously, rates with regard to real estate loans, but it's also just -- we've got great demographics in Texas, and there's a lot of tailwinds as well. But we do -- it also depends on the sentiment of our borrowers, whether they're using more leverage or not. So what I would tell you is there's still uncertainty in the market. I feel comfortable with where we stand right now and projecting forward that we're going to hit those numbers. So I feel like that's the base case that we have, and we'll just see where it goes from there.
Michael Rose: Okay. Helpful. And I'm sorry if I missed this in the prepared remarks, but obviously, the margin kind of holding flat was better than kind of what you talked about. Was there any loan fees or anything in the quarter that -- or was it just the excess growth, maybe mix shift? Just trying to get a better understanding of how we should at least think about the starting margin as we move into the first quarter.
John McWhorter: Yes. We had about $1.5 million of what we think of excess loan fees. Now I know I've said that 2 or 3 quarters in a row, we had the securitizations, but they're harder to predict those big loan fees. There's nothing I'm aware of today that would be similar in the first quarter. So I would expect the margin to be back down into the 3.90% range without having those kind of onetime special -- it could be a lot of different things. It could -- for the fourth quarter, we had some big originations that had loan fees associated with them. Arrangement fees, things like that. So the fees were certainly higher than we would expect there. And the prior quarters, we had the securitization. So we'll just have to wait and see.
Michael Rose: Yes, always a good thing when those come through.
John McWhorter: Yes. Michael, one thing I might say is versus the third quarter, our core margin was up about 10 basis points versus the third quarter, and that was with rates down. So we were certainly happy with that. To the extent that you think rates are going down another couple of times next year, we think we're well positioned -- because remember, we have a relatively high cost of funds, which gives us a little more room to lower rates if they do go down. So we've kind of outperformed our modeling and the margins definitely behaved better over the last 3 quarters than we would have expected.
Michael Rose: No, it's been really good to see. Maybe just finally for me. Obviously, the Keystone deal hopefully closes here soon. What's the appetite from here for additional M&A? There's clearly a lot of banks in Texas. However, it does seem like the environment, maybe some Goldilocks here, feels pretty good. So maybe that pushes out potential opportunities for a little bit. But just wanted to get a pulse of the market just in terms of your deals, some of the other ones that we've seen and kind of what the dynamic looks like in Texas?
Bart Caraway: We're certainly focused on consummating the Keystone deal and integrating them, and we have certainly our priorities. But the M&A side for us is just ongoing part of our strategic planning. And so nothing's really changed for us. We continue to build relationships. And I think we're, again, very selective and judicious in what we look for. And -- the -- I guess, the flow of M&A will come and go. But for us, it's more about relationships and having right partnerships. And when they come along, we'll take a look at them. So at this point, I don't see any large shift in any conversations that we're having.
Operator: Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank.
Bernard Von Gizycki: So deposit growth was very strong towards the end of the year. Did you hold any like year-end deposit campaigns like you've done in the past? Just wanted some color on what drove the growth.
John McWhorter: No, Bernie, this is somewhat seasonal for us. Remember, the last couple of years, we've had a big increase in the fourth, and it would carry over to the first quarter. We actually didn't have as much this year as we've seen in the past. And this is customer dependent. It wasn't anything special that we were doing. And the customer just isn't carrying the balances that they did last year. So I'm not sure that we'll see the same thing in the first quarter. But much of the growth was temporary, I guess, you would say. Now at the same time, we're doing lots of things to grow. Core deposits. And our noninterest-bearing demand has been up nicely for 6 or 7 months in a row. And our treasury group is doing a great job, and our corporate group in bringing in those accounts. And we've been encouraged by the growth that we've seen in noninterest-bearing deposits.
Bernard Von Gizycki: And then just a follow-up, maybe just on some of the expenses. I know you alluded to, I guess, some of the merger-related expenses to maybe come in about $5 million for the rest of the year. I believe the Keystone merger is expected to close by the end of 1Q. If I just think about like total expenses, whether it's the core ex the merger-related, or total, what kind of growth are you expecting for full year '26?
John McWhorter: That's a good question, Bernie. I mean I do think that much of our expense growth is going to be weighted towards the beginning of the year that we need to make up for the growth that we just saw in the fourth quarter. There's a lot of people available now just from the M&A we've seen in our markets. So there's some really good people available. We have our annual salary increases and all that, that happened in the first quarter. So from our run rate today, I mean, we're probably going to be plus 5%, maybe 6% or 7%, but we still think our revenue growth is going to be quite a bit more than that. And that's the story that we've talked about for several years, or certainly since we've gone public that our revenue growth will continue to exceed our expense growth, and we think that's still true today.
Bart Caraway: Yes. And we have internally kind of reinitiated or kind of rebranded our 1% initiative. And that kicking in along with -- basically we're going to realize some more efficiencies from our core conversion upcoming as well as the efficiencies we get from the growth from Keystone that some of that will offset. So it's going to be a little bit noisy for the first 6 months as we kind of work through this. But as they all come together, we do feel that we're still on par for making a good ROA for this year and making progress.
Bernard Von Gizycki: No, I appreciate that. That makes sense. If I could just ask one more. Maybe just on the fee front. Obviously, the $4.3 million was a nice uptick. I think you called out the increase in the non-margin loan fees. I know some of that could be lumpy. Bart, you noted, kind of seeing the impact of clients experiencing the full benefit of the relationship model. Just any expectations on the full year, or the quarterly run rate for the rest of '26 as we think about like fees, and how they come in post the Keystone merger?
John McWhorter: Yes. We're pretty optimistic on noninterest income. We have a lot of ongoing initiatives that appear to be bearing fruit and granted, the loan fees, in particular, will be kind of choppy, kind of lumpy, harder to predict. But the all-in core deposit fees, I mean, they look strong. All the swap fees, anything like that, the more volume we have, the more money we make there. So noninterest income in that $4 million range, we feel pretty good about. And I'm still kind of excluding Keystone because we don't know exactly when the closing is going to be yet. But we feel pretty comfortable with that $4 million run rate on noninterest income.
Operator: Our next question comes from the line of Matt Olney with Stephens.
Matt Olney: John, you mentioned the two securitizations from 2025. I think we talked previously about potentially doing another one or two in 2026. Any update just on the securitization pipeline?
John McWhorter: Yes. I do think it's likely that we'll do another one this year. I think that it would look a little bit different than the ones that we've done in the past. I think it would be more likely that we would be selling assets that exist on our books into the securitization just to free up room on the concentration so that we can do more of that construction lending. The first one that we did last year was unique, I would say, that it was kind of a new customer, new deal. We added loans to the balance sheet and securitize the rest of it on a large deal. Doing something like that is probably less likely going forward. I would think that the next deal would more likely be more granular, more loans on balance sheet where we're just selling down some of the concentration. So it would actually shrink the balance sheet a little.
Matt Olney: Okay. And so it sounds like, John, the net impact to the bank may not be as significant as the securitizations from last year since you wouldn't be retaining a small piece on your balance sheet. Is that fair?
John McWhorter: Well, we would sell loans into the securitization. It's still likely that we would buy back the security that would be at a lower yield. So it may not affect the size of the balance sheet as much as the mix and the yield. We would potentially have some fees that would be booked day 1 that would kind of be bringing forward, fees associated with those loans since they're sold off our balance sheet, but it would be more a timing thing than anything else where we're booking the income upfront as opposed to over time if we would have kept the loans on the books.
Matt Olney: Okay. All right. That's helpful. I appreciate that. And then going back to Keystone, I may have missed this from the call, but any update just on the merger applications and the time line of the deal closing?
Bart Caraway: Yes. So at this point, it's going along as planned. And so we don't really have any other updates other than it's proceeding kind of on our schedule.
John McWhorter: Both Third Coast and Keystone have shareholder meetings coming up for approval. I think ours is tomorrow, and Keystone's is next week and still just coming along.
Matt Olney: Okay. And then just lastly for me. I think one of the capital instruments on your balance sheet that's been there for a few years is that preferred convertible instrument. Just remind me of the mechanics of that instrument, and if and when would that be converted, and at whose discretion? And then what would be the impact to capital if and when that is converted?
John McWhorter: Yes. So we have the right to call it September 2027. And I think the likelihood is that we would convert it to common at that point. And the holder of the preferred could convert earlier if they wanted to. I'm not sure that anyone would at this point. It probably makes more sense to hold it. So we're a little over 1.5 years away from converting that to common. It won't affect most of our capital ratios, or earnings per share, or anything else because it's already included in all of those numbers.
Matt Olney: Is it already included? I mean if it's converted to common, then I would assume it would impact the CET1 ratio at the whole company?
John McWhorter: It would affect that one. Yes. So if you look at our slide deck, I think we show what the number is and what it would be if it was converted. And I think it's about 150 basis points difference to CET1. Maybe a little more than 150 basis points.
Matt Olney: Okay. And if it's the common, I assume it also would benefit the tangible book value per share?
John McWhorter: No, it's included in tangible book value already. Yes. So Page 12 of our slide deck shows that it's 125 basis points or so that it would add to CET1.
Operator: [Operator Instructions] Our next question comes from the line of Dave Storms with Stonegate Capital Partners.
David Storms: I wanted to go back to your prepared remarks where you mentioned that dynamic pricing has helped lower interest expense. How should we think about this tool going forward? And are you seeing any limits to this as you use them?
Bart Caraway: Yes. So I think that's a great question. Most go ahead and picked up on. But yes, there are several factors to this. With the new system, the core system, we have better pricing tools, better ways to understand our customers. And I think we're just now been able to utilize that to, kind of, sharpen our rate structures. So I do believe that we'll have more information at hand. But at the same time, I think as rates have changed, and as John mentioned, it's actually good for us when rates change because I think we have more capability to squeeze out more of our earnings, especially on the liability side, that we feel good that we've outperformed all of our models. So I think we are well positioned for any kind of rate changes that are there. But even ongoing basis, I think a combination of the fact that we've had this initiative for having full wallet, full relationships has been very helpful in us in basically squeezing out earnings out of the -- basically the same assets. And the fact that I think we're more of a platform for our customers now, and we've got them into more products certainly helps in a number of ways. But overall, what I would say is we just continue to refine what we're doing and get better and better at it. John, I don't know if you had anything else?
John McWhorter: I agree.
David Storms: That's perfect. I really appreciate that color. One more for me. You mentioned that you expect NIM to maybe be more in the 3.9% range. How should we be thinking about the time line for that? Are you expecting more of a cliff, or maybe a glide path as certain portions of the portfolio roll off?
John McWhorter: No, I think it would be a cliff. When I'm thinking 3.90%, I'm thinking for the quarter versus the 4.10% last quarter because the loan fees that we had in the fourth quarter were -- I mean, it is in the kind of the $1.3 million, $1.5 million range that were onetime events that added a lot to the margin. If we don't have those, the margin is just going to be lower for the entire quarter.
Operator: We have no further questions at this time. Mr. Caraway, I'd like to turn the floor back over to you for closing comments.
Bart Caraway: Well, thank you, Christine. And I just want to thank everybody for joining us for the phone call and the continued support of Third Coast Bancshares. We'll look forward to talking to you again next quarter. Thank you.
Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.