Third Coast Bancshares Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to Third Coast Bank Third Quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natalie Heston.

Operator

Thank you. Ms. Hesson, you may begin.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Third Coast Bancshares

Speaker 2

we will

Speaker 1

conduct a conference call and webcast to review our Q3 2023 results. With me is Bart Carraway, 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. Ttbssb.com.

Speaker 1

There will also be a telephonic replay available until November 3, 2023, and more information on how to access these replay features was included in yesterday's earnings release. Please note that the information recorded on this call it speaks only as of today, October 26, 2023, and therefore, you are advised that time sensitive information may no longer be we are not encouraged 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 ks that was filed on March 15, 2023, to better understand those risks, uncertainties and contingencies.

Speaker 1

The comments made today will also include certain non GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures were included in yesterday's earnings release, which can be found on the 3rd Coast website. Now I would like to turn the call over to Third Coast Chairman, President and CEO, Mr. Bart Carraway. Bart?

Speaker 2

Thanks, Natalie. Good morning, everyone. Thank you for joining us today. I'll begin by highlighting the company's performance for the Q3. John will then provide a more detailed financial review and Andre will give we will continue to make progress towards our strategy of conservative loan growth, disciplined expense management and strengthening shareholder value.

Speaker 2

Total assets reached $4,220,000,000 during the Q3, an increase of 6.4% over the prior quarter and 19.9% increase over the prior year period, we booked over $226,000,000 in high quality loans, an increase of 6.8% sequentially and 19 point we have a record 7% increase over the Q3 last year. Likewise, deposits reached $3,650,000,000 a 7% increase from the linked quarter and a year over year increase of 22.2%. In response to market conditions, we took some deliberate actions to reduce our operating expenses and other overhead costs, including the previously announced winding down of our auto finance group as well as a 5% reduction in workforce. As a result, our full time employee headcount now stands at approximately 370, which is consistent with our numbers from the beginning of the year. We have been able to grow the bank by $443,000,000 in that same timeframe.

Speaker 2

During the quarter, we also booked a $2,600,000 provision for credit losses primarily driven by strong loan growth for the quarter, which Audrey will discuss in more detail in her prepared remarks. These actions were necessary to position us for the Q4 and establish a solid foundation for 2024. Deposit rates remained highly competitive for this quarter and we were able to increase our deposits by $238,000,000 or 7% the previous quarter, a notable achievement. Our success in deposit acquisition can be attributed to the deposit campaign contest held across multiple lines of business, including retail, private banking, treasury management and commercial bankers. We were able to raise deposit by an impressive $275,000,000 within a short span of 4 months.

Speaker 2

Our bankers' unwavering focus on deposits coupled with their commitment to building strong relationships with clients played a crucial role in achieving this feat. This approach combined with our commitment to providing innovative solutions and exceptional service has resulted and success across all our markets. Our insured cash suites and treasury management services have particularly proven to be innovative solutions contributing to our company's growth. As we progress, we will continue to explore new ways to deepen our relationships with existing customers and attract new ones, all while maintaining our focus on deposits and loans. Additionally, we were able to increase book value and tangible book we expect to be able to execute on our shareholder value and increasing tangible book value per share, we have made significant progress in enhancing our balance sheet and maintaining a strong financial we are confident that we will continue to drive increased shareholder value and achieve sustainable success long term.

Speaker 2

With that, I'll turn the call over to John for a more detailed financial review. John? 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 as Bart mentioned, loans were up $226,000,000 Deposits were up slightly more at $239,000,000 And total assets reached $4,220,000,000 a new all new records for the company.

Speaker 2

Net interest margin for the quarter was down 11 basis points, slightly more than expected due primarily to higher than expected loan growth. Spreads on new loans tend to average less than the bank's current net interest margin. Loan growth is expected to be less in the 4th quarter, which should result in less margin pressure. Additionally, the bank has $100,000,000 treasury security maturing in October, yielding 2.25%. If the proceeds were used to pay down wholesale funding, the net interest margin would improve 2 to 3 basis points.

Speaker 2

We therefore believe that for the Q4, the net interest margin will be down less than 5 basis points. Non interest expense was materially higher than expected due to several non recurring items, including severance expenses, broad losses and legal fees associated with those items. As previously mentioned, severance expense totaled $460,000 We reduced headcount to roughly where we started the year. And as a result, we expect 4th quarter salary and benefit expense to be less than 16,000,000 all other non interest expenses were up $1,350,000 in the 3rd quarter versus the 2nd quarter. This increase was primarily due to the fraud losses and legal fees as previously mentioned.

Speaker 2

Even though net interest margin was down 11 basis net interest income was up $1,200,000 to $35,300,000 due to strong loan debt, we have shown consistent growth in net interest income since going public in the Q4 of 2021 when our net interest income was only $24,600,000 The 3rd quarter performance also resulted is in both book value per share, which reached $24.57 and tangible book value per share, which reached $23.17 This is up 11% or 2.23 From $20.94 since going public in 2021. This compares very favorably to our peers we over the same period saw an average decrease in tangible book value of 9.3%. Also as a reminder, we use the if converted method to calculate earnings per share. For the Q3, this resulted in anti And therefore, the preferred shares were excluded from our diluted share count. We expect this to flip back

Operator

in the 4th quarter.

Speaker 2

That completes the financial review. And at this point, I'll pass the call to Audrey for our credit quality review.

Speaker 3

Thank you, John, and good morning, everyone. 3rd Coast's credit performance for the Q3 was again strong. Our total non performing assets currently stand at $16,400,000 which is 0.39 percent of total assets and our net charge offs have stayed extremely low we expect to be approximately $24,000 for the quarter. The $6,400,000 increase in non performing loans is primarily due to the placement of a $2,300,000 loan on non accrual and a $2,000,000 loan that was over 90 days matured and still accruing, both loans are well secured and no losses are anticipated. In October of 2023, the $2,000,000 loan was renewed it is correct.

Speaker 3

The remaining loans placed on non accrual this quarter consist of 2 relationships totaling $2,000,000 and minimal losses are expected as those loans are worked out. The remaining loans that are over 90 days past due at quarter end we are well secured and in the process of renewal. Overall, we remain confident in our asset quality, which continues to remain strong. Provisions for credit losses totaled $2,600,000 and related to provisioning for new loans and commitments. The ACL remains at the high end of the range calculated under the new CECL methodology.

Speaker 3

Consistent with our prior quarters, loan growth of $226,000,000 continues to be well diversified from a loan category standpoint. Commercial loans were up $123,700,000 and real estate loans were up $106,000,000 from the previous quarter. The loan portfolio mix is well balanced with commercial and industrial loans accounting for 36% of total loans we have owner occupied and non owner occupied commercial real estate at 15% 16%, respectively. Non owner occupied office represents 1.8 percent of the loan portfolio with non owner occupied medical office accounting for an additional 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 Class C space it is all located within our Texas footprint.

Speaker 3

Performance for the quarter is a testament to our solid business model and our commitment to prudent risk management, we are pleased to see continued loan growth across a diverse range

Speaker 1

we are confident of loan categories,

Speaker 3

which further strengthens our position in the market. At the same time, we are mindful of the potential risks that may arise from the changing economic environment, we will continue to closely monitor our credit quality we continue to be conservative in our lending practices to maintain our strong credit performance. Overall, we are confident in our ability to we will continue to evaluate our long term financial results. With that, I'll turn the call back to Bart. Bart?

Speaker 2

Thanks, Aldrich. As we move into the Q4 and end of the year, we are confident in our goal to achieve operating leverage, which we'll translate into increased shareholder value. We will maintain an active focus on managing expenses by carefully analyzing we are confident in our budget and identifying areas where we can reduce costs without sacrificing customer quality or operational efficiencies. At the same time, we will continue to invest in key areas of our business that are critical to our future growth. Our commitment to 4 wallet relationship banking remains a top priority.

Speaker 2

We will continue to leverage our treasury management and other services, deepen existing customer relationships and attract new ones. In addition, our innovative custom digital solutions such as banking as a service and embedded finance platforms will play a larger role in 2024. We have successfully transitioned from the proof of concept stage to fully operational with live partnerships. Our bankers and branches are strategically located in Texas' best markets, providing access to some of the highest quality deals available, allowing us to remain conservative in our deal approach and choose the most promising opportunities. Looking ahead, we will remain optimistic about our ability to continue to grow our business.

Speaker 2

We will continue to prioritize we will be conducting a strategic decision to make prudent and proactive decisions relative to the current economic environment. Our dedicated team we are committed to delivering exceptional service to our customers and creating long term value for our shareholders, and we are confident that our growth strategy will enable us to navigate the challenges and opportunities that lie ahead. This concludes our prepared remarks. I would now like I turn the call back over to the operator to begin the question and answer session. Operator?

Operator

Thank you. We will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from the line of Graham Dik with Piper Sandler.

Operator

Please go ahead.

Speaker 4

Hey, everyone. Good morning.

Speaker 2

Good morning, Graham.

Speaker 4

So I just wanted to start on expenses. You've got the 460,000 in severance, 400,000 in fraud losses and then you mentioned another legal charge. What was the size of that legal

Speaker 2

Yes, we didn't detail out the legal expenses. I Anytime you have a reduction in force, there's legal fees associated with agreements to the employees. And We didn't detail that out just because we always have lots of legal fees, but it was Somewhat material, certainly non recurring.

Speaker 4

Okay. Yes, I'm just trying to get a sense for where Maybe the growth came off of the I think we had talked about $24,000,000 give or take last quarter. So just trying to get a sense for what drove the higher expense base this quarter, was it the deposit competition you guys were talking about? Or was it related to the loan growth, which was really strong this quarter? Just trying to any color there would be helpful.

Speaker 2

Yes, I mean, there were some incentives related to the deposit campaign where we were paying out prizes to people. There were bonuses are earned during the quarter, but I think probably the important number is where we think the 4th quarter And I'm pretty confident that it'll be less than $16,000,000 in total salary expense. And total non interest expense, We think it will be less than $26,000,000

Speaker 4

Okay. That's helpful. And then I guess looking into 2024, I mean, what's the it sounds like you guys are focused on expense management, but obviously you're still growing bank, having to invest where needed, what's your outlook for expense growth as you begin to budget for 2024?

Speaker 2

Yes. That's a good question. I mean, we certainly talk about it a lot. On the loan side, on the growth side, we've for the last couple of years talked about growth being lumpy, that it makes it hard to predict. We certainly weren't expecting 2 $25,000,000 in loan growth for the quarter.

Speaker 2

And it's not as if all of those deals were sourced and approved and booked all in the quarter some of them were carryover from previous quarters and the same sorts of things will happen on expenses and that's kind of what happened this Catch up on expenses that we weren't expecting. But looking ahead to next year, I mean, we I mean, our plan is to be disciplined. I mean, we're trying to grow faster than expenses. I think we've done a pretty good job with that in the past, and I think we will again next year. So if we think that Net interest income is going to continue to grow in that 10% to 15% range.

Speaker 2

Expenses will be less than that. So they'll be in the 5% to 10%. Graham, if I could add a little color to it again. I think we're in the process as we've grown and reallocating resources internally we are confident that we will continue to be more efficient. And I think you can see that from if you look at our headcount, not just the expenses, but just the headcount, We started the year at 369 employees.

Speaker 2

We probably got a little ahead up to 3 And 90 or so employees, now we're back down to about 370,000,000 and we've grown 443,000,000. So what you're seeing is we're kind of managing the employee headcount to still continue to grow. And This whole process has been what we talked about before is that we've got to grow into a little bit of the operating efficiency as well as cut costs. And I think the $226,000,000 coming in the 3rd quarter was actually fortuitous because I think the 4th quarter will be slower, But it tees up the opportunity for us to grow a little bit into our operating efficiency, control our headcount I also have an increase in revenue that's going to affect the bottom line. And I think the 4th quarter is going to look a lot better and it's certainly going to tee us up for a good 2024.

Speaker 4

Okay. That's very helpful, Bart. And then I guess you touched on it a little bit there, but the loan growth outlook, Obviously, you guys had some unexpected stuff happen. It got things got pulled forward to this quarter. What do you guys I think for next year on loan growth.

Speaker 4

I think this year before this quarter we had talked about maybe $300,000,000 or $400,000,000 in growth for the full year. Can you frame up what you expect in 2024? Do you think it will be a little bit less than that as the economy cools down? Or are you still seeing pretty good opportunities on the lending side to do something similar?

Speaker 2

Yes. I mean, I think what the nice thing that position we're in is we've had some really high quality customers that we have been onboarding. And it's just a unique market and that we can be very choosy. And so it's been very nice to be able to pull high quality customers from some of the competitors and established relationships. So with that, I mean, you'll still continue to see some growth.

Speaker 2

I think for the Q4, the growth is going to be very mild, dollars 50,000,000 to $100,000,000 But when looking at 20 24, we think Somewhere between $300,000,000 $400,000,000 is quite reasonable. And again, you got to factor in that we're going to have some attrition in loans, there's going to be some pay downs and payoffs with it. But I think net growth of $300,000,000 to 400,000,000 it is very reasonable and I think all of that is coming from just almost high grading the portfolio. We just have such excellent clients that we're I think the portfolio is even going to get even better, as we continue to grow. So we're very excited about it.

Speaker 2

I think it's an opportunity for us to gain market share in our markets with some of the best clients that are out there, with, Again, dollars 3,000,000 to $400,000,000 in net growth for 2024. John, do you have anything to add to it? I mean, rates may affect that somewhat to the extent that rates were to continue to go up, we'd be at the lower end of that scale. If they come back down, I think we'll see even more opportunities, Particularly on the builder side.

Speaker 4

Okay, perfect. That's really helpful color. That's all for me guys. Thanks.

Speaker 5

Thank you, Graham.

Operator

Thank you. Next question comes from the line of Michael Ross with Raymond James. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for taking my questions. Just wanted to start on kind of the continued negative mix shift in deposits. Look, I know you guys have had really strong deposit growth. It's been a welcome sight to see, but obviously your deposit costs are fairly high relative And I think a function of that is strong asset growth that you've had.

Speaker 5

But just as we think about the next few quarters In a rate environment where Fed rates are kind of at or near peak, how should we think about the progression of deposit cost betas and mix shift as it relates to kind of the ongoing asset repricing that is going to help The margin again this quarter, just trying to kind of frame up the puts and takes as we think about yield and margin progression into next year. Thanks.

Speaker 2

Sure. So looking at non interest bearing balances first, as a percent of total deposits, they've certainly come the dollars haven't come down so much. On an average quarterly basis, our non interest bearing was actually up a little versus last quarter. But those deposits are certainly harder to grow when we have a quarter where we're growing $240,000,000 in deposits. It's hard for those non interest bearing to keep up.

Speaker 2

So yes, that certainly is a negative shift in the mix. And We will continue growing dollars, but as a percent of total deposits to the extent that we're growing fast, that's going to be harder to keep up. We're certainly seeing more deposits go into C and A than anybody would have predicted a year ago. But the good news about being relatively high as far as cost of funds is, I think we've already repriced most of the portfolio. We just don't have much left to reprice.

Speaker 2

Higher for longer is probably good for our margin, I think especially relative to peer, I just don't think we'll see much change. And from an asset liability perspective, we're almost exactly evenly matched. Our provider for ALM has said that we're Certainly, one of the most closely matched banks in their portfolio of several 100, maybe singularly the most evenly matched. So we're afraid to stay right where they are. I don't think we'll see much change in the margin.

Speaker 2

And even if they change a little bit, I don't think we'll see much change. Yes. The numbers kind of mask a lot of stuff that's going on in the bank. I think you'll see over time. And one of the positive notes is between the commercial bankers and the treasury management side is that we're seeing a lot of onboarding of accounts.

Speaker 2

We certainly have a lot more full wallet relationships than we've ever had. And we're rolling out more sophisticated products and being able to handle more sophisticated treasury customers and they're quite busy onboarding customers with it, but they're keeping lower DDA balances because Obviously, they want to earn as much as they can on their money. Everybody's managing money carefully. But we do have a lot of customer acquisition. We're going so fast, as John said, the percentage wise, it's tough to keep up.

Speaker 2

But overall, what we tell you, our customer base more than ever Yes. It tends to have both deposit accounts and loans with us. It's very much a full wallet relationships going forward.

Speaker 5

I appreciate all the color. Thanks. And then obviously just on the headcount Reductions this quarter, some of that strategic. Just as we think about the next year or so, I mean, are there other businesses or I know you got out of The auto business, are there other portfolios, other optimization efforts that you could book to? And maybe just on the loan side, Are there areas that you're emphasizing versus kind of deemphasizing, I assume, officer might be one of those, but we just love some color?

Speaker 5

Thanks.

Speaker 2

Yes, I mean, if I could start with just the headcount part of it. I think we're looking at this and exploring all kinds of efficiencies across every line of I think everybody in the bank has bought into the efficiency side of it. It's been Very interesting how we can even utilize and cross train employees. For instance, we have some retail employees they volunteered to learn some of the BSA side and with excess capacity, they're actually performing some of the DSA AML tasks with it. And so it's neat that everybody's kind of pitched in and we're finding ways to utilize people to their fullest.

Speaker 2

At the same time, as we continue to grow, some functions need more resources. So as thinly staffed as we are, we do have to continue to think about where we're going in the future and make sure we're making proper investments. At the same time, I think John does a fantastic job of looking at every line of business and monthly, we grade that line of business. And the existing lines of business that are left are very profitable and we're very pleased with their performance. And I think they're getting with scale even more efficiency.

Speaker 2

So I don't say at this point that there's another line of business to exit as much as we're just Everybody is going to grow into their size. I think if you look at all of our different lines of business, they all can scale And become more accretive to us with just even a little bit more growth. As far as the Mode mix, I don't know, Audra, if you want to have any comments on that over the next

Speaker 3

As far as what we're not looking at, I would say, You mentioned office, of course. Our office is holding up really well. We only have one loan that's classified for $1,000,000 but we're not looking in office. I would say not looking in retail and don't do much Wouldn't really entertain much multifamily at this time, really focusing on C and I and the 4 wallet relationships that What we've been talking about.

Speaker 5

Makes sense. And John, maybe just one final one for me, just The loss in other non interest income, sorry if I missed it in the release, but kind of what drove that? Was there something that's non recurring in there? Just would love an explanation. Thanks.

Speaker 2

Well, it is non recurring. I don't know if you're talking about the one clause loss, Well, no. In other non interest income, we had an unfavorable swing quarter to quarter, and Some of that is a little bit of a swap between quarters there, Michael, on SBIC. I mean, we can we have several SBIC investments In some quarters, they make money and other quarters, they don't. So most of it was related to SBIC having a Great quarter last quarter and actually losing a little money this quarter, which we don't have big investments there.

Speaker 2

It's usually not material enough to change a line item, but it just happened to be this quarter.

Speaker 5

Understood. I appreciate all the color. Thanks for taking my question.

Speaker 2

Michael, I just might add one thing on that. The SBICs, I mean, they don't often have quarters where they're selling an asset at a loss that we're needing to realize. So I certainly wouldn't expect that going forward. We didn't point it out because I mean, I don't guess you all would typically take out something like that. I mean, we didn't highlighted last quarter that they had a good quarter.

Speaker 2

It's just kind of one of those fluky things that went from good to bad over consecutive quarters. And it was, I don't know, to the tune of this, I don't know, 250,000 goods last quarter and down 250,000. It was a swing kind of that sort of magnitude.

Operator

Thank you. Next question comes from the line of Bernard Von Kiske with Deutsche Bank. Please go ahead.

Speaker 6

Hey, guys. Good morning. John, heard your comments on the drivers of the lower NIM than expected, given the loan spread dynamics, what kind of spreads are you putting on for the new loans versus the portfolio average? What are your expectations on loan spreads from here?

Speaker 2

Yes. So our margin is we're relatively high compared to peers, but our spreads are probably much Closer, we're competing for deals every day. I mean, the reason our margin is better is because we don't have the AOCI losses. We don't have the legacy The investment portfolio that's relatively low yielding. But for new business going forward, as we're looking at it, I mean, we typically won't do a deal that is less than Fed funds plus 300.

Speaker 2

So with Fed funds today or so for however you want to look at it is 5.25. We typically don't do a deal for less than 8.25 today. There could be some exceptions to that, but for The larger floating rate deals, they're typically 300 over so far. And I think I would add just that the flight quality and our chance to get some of these really high quality deals, the margin is a little less. Whenever you're talking about a customer that could basically pick anything they want it together with, unfortunately, we've been able to get those type customers.

Speaker 2

It is a little thinner margin, but it's also a fair quality deal. So obviously there's always trade offs that we try to manage.

Speaker 6

Got it. And then just on the auto finance exit, I think last quarter you noted that you'd expect something like direct expense savings would be $500,000 plus and you're reallocating $50,000,000 of loans into more strategic areas of focus. Is that still kind of like the same thought process there? Any updates?

Speaker 2

Yes, I mean, the team has been disbanded at this point. That portfolio was paying down. I don't have the numbers, Right. But it's way less than $50,000,000 Yes. And Bernie, that was effective September 30.

Speaker 2

So we really haven't seen any of the savings Yes, particularly on the salary side. On the loan side, we have certainly stopped doing that last quarter. And I think that portfolio has about a 4 year weighted average life, so it pays down several $1,000,000 a month and we're those proceeds to other loans, but the direct effects are We didn't see any of it in the Q3. We'll see more in the 4th. Not super material, but every little bit adds up.

Speaker 2

We're certainly looking at everything.

Speaker 6

Okay, great. Thanks so much.

Operator

Thank you. Next question comes from the line of Matt Olney with Stephens Inc. Please go ahead.

Speaker 7

Hey, thanks. Good morning. I want to go back to the discussion around the margin. And John, you mentioned the spreads on some of the more recent loan growth. Appreciate the commentary there.

Speaker 7

Any other color about how those spreads have changed during the course of the year? Have those maintained similar levels or any kind of widening that you've seen this year so far?

Speaker 2

Bart, Audrey, I may certainly jump in. I don't think they have changed that much. I think for the bigger commercial corporate type loans, I think we're in That's so for plus 300 range. We do see deals that are plus 200, but we're typically just not doing those. I think we've commented position and are not often doing things that are certainly in the low I mean, there might be the occasional deal, but plus $250,000,000 or $275,000,000 but those are kind of more the exception than the rule.

Speaker 2

Yes, I mean, Audra and I have talked that we've been very disciplined about trying to make sure we have kind of the 6300 spread. There have been a few, but there are deals that had a story behind them that makes a lot of sense for us to do. And certainly, once that I would choose to do it All over again with it because they're good quality customers and there's a reason that we're doing it. So I think from The loan selection, I think we've been very selective and disciplined.

Operator

I think that's why I continue to say.

Speaker 2

Yes, the exceptions are typically at least partially self funded. Exactly.

Speaker 3

And they're the higher rated credits, they'd be a high pass. Otherwise, we make sure we Don't go to the central close community.

Speaker 2

Yes. And even with that, I think we are seeing a lot of loan opportunities. And maybe we do one out every 10 or something. I mean, it is the market out there, obviously, there's a lot more loan demand than there is No, folks are confronted. So we're very able to see cherry pick really good customers.

Speaker 2

And I think we'll continue to be just that disciplined as we go forward with it.

Speaker 7

Okay. Thanks for the commentary. And then, I guess, the As far as the incremental cost of funds that you're using to fund the loan growth, if we blend the growth, the dollar amount growth NIBs along with the interest bearing deposits, what's the incremental cost of the total deposits that you've seen more recently?

Speaker 2

Yes. So for this last quarter, when we had the deposit campaign, and it really spanned the last two quarters, our cost of funds for Those deposits was less. I think it was less than 5%. Wholesale deposits that we're needing to raise to make up the difference it's probably more in the $5.30 $5.30 $1.30 $1.30 $1.30 $1.30 $1.30 $1.20 It's hard for us to predict what the mix is going to be going forward as Our self generated core deposits versus what is needed on a wholesale To make up the difference, but self generated, it's probably averaging in the 4.5% range and then the wholesale in the 5.30% range.

Speaker 7

Okay. Okay. Well, if I kind of take that and think about the margin in 2024, it feels like there's a little bit more incremental pressure beyond the Q4 we talked about, just if we assume those spreads continue, is that the right way to think about the margin for next year, low incremental pressure from the Q4?

Speaker 2

It is. If we would have grown loans $100,000,000 in the Q3, I think we would have been pretty close to our Forecast of the margin being down plus 5. So it is certainly a function of how fast we grow. Now with that said, if we grow $300,000,000 next year, it's certainly a smaller percent of the overall balance sheet. So it won't affect the margin as much as it would have this year.

Speaker 2

But it's It's going to be less than $3.71 on average, the spreads for new business.

Speaker 7

Okay. Yes, that makes sense. And then just lastly, capital. Can you talk more about just capital constraints, binding ratios that you're watching for, especially in light if the pipelines do improve and loan growth at the higher end, just kind of what kind of capital ratios are you watching closely?

Speaker 2

Yes. So there's Our risk based capital ratio was flat quarter versus quarter, and that's the one that we watch most closely as a high loan to deposit ratio But as long as we're earning in that 1% ROA range, it's going to be It should be capital accretive. We may not be exactly there this next quarter, but certainly that's our bare minimum goal and we to be there and again, it will be capital accretive, so we are not planning any capital offends. Yes. And I think in 2024, we should be capital accretive to where self funding basically It's what the goal is.

Speaker 2

And John and I feel pretty good about not being there where we don't need capital. Yes.

Speaker 7

So what you're saying is I think that threshold to internally generate enough capital, the ROA needs to be pretty close to 1% to get there. Is that right?

Speaker 2

At the rate that we have been growing this year, yes. And we expect Growth rate to be a little bit slower next year. So it wouldn't have to be the 1% to be self generating, but that's the 1% is certainly the way we were looking at This year, and I think our growth is 20 plus percent. So as we go down to 12% or 15% Growth next year, it will take a little bit less to get to the same place.

Speaker 7

Yes. Okay. And just one more, I guess, I think Audrey mentioned there were 2 loans that were I think you said they were being worked out currently in your prepared remarks. What's the time line on the resolution? Is that a near term Q4 event or could that move into next year?

Speaker 3

Probably, I would say into next year, but not Probably in Q1, I'd say.

Speaker 7

Okay. And how would you characterize or describe the collateral on some of those loans relative to the cost base.

Speaker 3

Okay. Yes. So the increase in non accruals, we had $4,000,000 increase. One of them is a $2,300,000 spec house and the LTV brand new appraisal is 64%. It's in a great location in new construction.

Speaker 3

So it's We're not anticipating a loss on that. That was done in our community bank vertical. And then we also we had a small builder in Southeast Texas that we've done Honestly, nearly 100 small homes for him over the past 8 to 10 years, and we've got a couple that relationship is $1,100,000 that we put on non accrual, 3 houses And then a couple of smaller loans. I have $160,000 specific reserve on that relationship. That's our estimate At this point, so not significant.

Speaker 3

And then the 3rd non accrual was a $900,000 We're on a baseline of credit. We have a very strong guarantor with separate income on that. So we're not anticipating a loss in those Specific reserves on that either. And then on those past dues, we typically you don't see us with over 90 days past due and still accruing, we had a $2,000,000 loan This quarter, but it is clear, it is renewed and current and it's not a credit problem. It's also a Real estate deal with an LTV in the 60% range and then just 2 other smaller loans that are in the process of renewal And those aren't credit concerns either.

Speaker 7

Okay, got it. Appreciate all the color, Audrey, and thanks to everybody. And thank you. Bye.

Speaker 2

Thanks, Diane. Thanks, Ben.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Bart Calaway for closing comments.

Speaker 2

Yes, I just want to thank you, Ritu, for taking care of us as an operator. I want to thank everybody else for joining us your continued support of Third Coast Bancshares and we look forward to speaking with you next quarter. Thank you. Have a good evening.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Record balance sheet growth: Total assets reached $4.22 B (+6.4% Q/Q, +19.9% YoY), loans grew 6.8% sequentially with $226 M in new high-quality originations, and deposits rose 7% to $3.65 B.
  • Maintained strong credit metrics: Non-performing assets stood at just 0.39% of total assets with net charge-offs of only ~$24 K, and reserves remain at the high end of the CECL range.
  • Net interest margin under pressure: NIM declined 11 bps in Q3 due to rapid loan growth and lower spreads on new business, though management expects less than a 5 bps drop in Q4.
  • Higher non-interest expenses: Q3 expenses were elevated by $460 K in severance, $400 K+ in fraud losses and related legal fees tied to a 5% workforce reduction.
  • Looking ahead to 2024: Management plans modest Q4 loan growth and targets $300 M–$400 M of net loan growth next year, driving operating leverage through disciplined expense control.
AI Generated. May Contain Errors.
Earnings Conference Call
Third Coast Bancshares Q3 2023
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