Third Coast Bancshares Q1 2023 Earnings Call Transcript

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April 27, 2023

Key Takeaways

  • Q1 loans grew $106M (3% QoQ) and deposits rose 3%, driving a 4 bp increase in net interest margin to 3.79% due to strong core funding and reduced FHLB borrowings.
  • Efficiency ratio improved to 63% from 67% in Q4 and 75% in Q1 2022, with noninterest expenses expected around $23M per quarter as new branches and hires come online.
  • Net income rose to $8.1M ($0.55 EPS) in Q1, up from $6.1M ($0.44 EPS) in Q4, translating to a 1.02% return on average assets and roughly 1.4% pre-tax pre-provision ROA.
  • Credit quality remained robust with nonperforming assets down 16% to $10.3M (0.27% of assets), nonperforming loans at 0.32%, and allowance coverage at 1.12% post-CECL adoption.
  • Full-year 2023 loan growth guidance was moderated to $300M–$400M as Third Coast Bancshares prioritizes efficiency gains, credit discipline, and digital enhancements amid economic uncertainty.
AI Generated. May Contain Errors.
Earnings Conference Call
Third Coast Bancshares Q1 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Third Coast Bancshares First Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

Speaker 1

Session. As a reminder,

Operator

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.

Speaker 2

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast will be answered by the SEC. Thank you, sir. Thank you, sir. Thank you, sir.

Speaker 2

Thank you, sir. And Chief Executive Officer John McWhorter, Chief Financial Officer and Audrey Duncan, Chief Credit Officer. First, a few housekeeping items. There session will be available by webcast on the Investors section of our website at ir.tcb session will be available at ssb.com. There will also be a telephonic replay available until May 4, 2023, and more information on how to access these replay session was included in yesterday's earnings release.

Speaker 2

Please note that information reported on this call speaks only as of today, April 27, 2023, session, and therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the The comments made by management during this conference call may contain forward looking statements within the meaning of the United States Federal Securities Laws. Session. 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.

Speaker 2

Session will be recorded. The listener or reader is encouraged to read the company's prospectus or the annual report on Form 10 ks that was filed on March 15, 2023, session 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 are included in yesterday's earnings release, which can be found on the 3rd Coast website. Session.

Speaker 2

Now I would like to turn the call over to 3rdcoat's Chairman, President and CEO, Mr. Bart Carraway. Bart?

Speaker 3

Session. Thanks, Natalie, and good morning, everyone. Thank you for joining us today. I'll begin by highlighting the company's performance for the Q1. John will then provide a more detailed financial review and Audrey will give a credit update.

Speaker 3

Then before we take your questions, I'll return to discuss our outlook. 3rd Coast continued to build on momentum from the Q4 2022 and our Q1 results only validated the company's strategic direction and market positioning. Loans grew $106,000,000 to $3,200,000,000 or 3% when compared to the Q4 of 22 and deposits were also up 3% over the 4th quarter to 3,320,000,000 session. Responded quickly to market events and implemented a plan that included distributing information about the company's strong liquidity and capital position. This, coupled with the efforts of our lenders and relationship managers who proactively reached out to depositors, Ship team demonstrated a strong commitment to managing the impact of the liquidity crisis on the bank and its stakeholders.

Speaker 3

This approach helped to increase relationships with the bank's depositors and grow the bank's reputation for stability and trustworthiness during a time of industry volatility. We made significant strides in our business operations for the quarter With progress being made across virtually every financial measure such as margin, income, expenses and earnings per share. We also surpassed our target of 1% return on average assets in the quarter, accomplishing this goal team, we can approach any obstacle with confidence and strength, inspiring and motivating employees to perform at their best. The positive first quarter results for 3rd Coast can be attributed to our talented employees, innovative and timely solutions and our exceptional leadership. Session will be recorded.

Speaker 3

With that, I'll turn the call over to John for a more detailed financial review. John? Thank you, Bart,

Speaker 4

and good morning, everyone. Session. 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 Q1. As Bart mentioned, we made great progress in the Q1.

Speaker 4

Not only were loans up $106,000,000 but deposits were up $86,000,000 On an average quarterly basis, we did even better with deposits up $201,000,000 while loans were up $129,000,000 This growth included no broker deposits or public comes. For the same time period, our net interest margin improved 4 basis points to 3.79. This improvement was primarily due to decreased Federal Home Loan Bank borrowings due to our strong deposit growth. Session. We continue to be slightly asset sensitive with new business being put on at lower spreads resulting in a slight drag.

Speaker 4

At quarter end, our uninsured deposits totaled approximately $932,000,000 or 28%, well below industry average. Our available borrowing lines are approximately $2,000,000,000 resulting in a 2 to 1 coverage. Session. Additionally, our accumulated other comprehensive income was a negative $2,000,000 at March 31 or approximately 1 half session of 1% of shareholders' equity. Non interest expense totaled $22,000,000 for the Q1 of quarter that non interest expenses were down from the previous quarter.

Speaker 4

It was also likely the last quarter for lower non interest expenses due to the new branches, new employees and inflation finally catching up. And I think the next two quarters will be in the range of $23,000,000 for non interest expense. The efficiency ratio was 63% for the Q1 of 2023 compared to 67% in the 4th quarter and 75% in the Q1 of 2022. This significant improvement resulting from session will be recorded in the quarter. Net income available to common shareholders totaled is $8,100,000 for the Q1 of 2023 compared to $6,100,000 for the 4th quarter.

Speaker 4

Diluted earnings per share were $0.55 in the Q1 compared to $0.44 in the 4th quarter, an improvement of 25%. This performance resulted in returns on average assets of 1.02% and returns on average common Additionally, our pre tax pre provision ROA was approximately 1 point session. In late March, we entered into a 5 year swap agreement with a notional amount of 200,000,000. We will pay fixed at 3.16 and receive Fed funds floating, which today is about 4.83. We have floors on 58% of our loans and additionally 21% of our loans are fixed.

Speaker 4

While the Texas economy remains strong, we anticipate and are prepared for more difficult conditions. Rising rates, session. Inflation and economic uncertainty continue to be a concern. In closing, we continue to manage through this rate cycle and compete for deposits and believe our unique positioning will allow us to be nimble, innovative and maintaining a focus on safety and soundness. Session.

Speaker 4

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

Speaker 5

Thank you, John, and good morning, everyone. Once again, credit performance for the quarter was strong with nonperforming assets decreasing session by 16% to $10,300,000 at the end of the Q1. Nonperforming assets session. Total assets was 0.27 percent in the Q1 2023, down from 0.32% for the Q4 of is expected to be in 2020 2 and 0.41 percent from the Q1 of 2022. Nonperforming loans to loans held for statement remains low at 0.32%, which decreased from 0.39% session as of year end and from 0.44 percent as of the prior year period.

Speaker 5

On January 1, session. 2023, we adopted the current expected credit loss methodology or CECL and recorded an increase of $4,000,000 session to the allowance for credit losses for the cumulative effect of adopting ASC 326. Statement and GDP. We also recorded a provision for the quarter of $1,200,000 which related to provisioning for new loans. Session is now open.

Speaker 5

This compared to a $2,000,000 $4,000,000 loan loss provision during the Q4 of 2022 session and Q1 of 2022, respectively, under the incurred loan loss methodology. During the Q1 of 2023, session. Our ACL has increased from $30,400,000 to $35,900,000 The ACL to total loans was 1.12%, up from 0.98% in the 4th quarter and from 0.95% session in the same period last year. We're especially pleased to report net recoveries in the Q1. Session during the 3 months ended March 31, 2023, 2022, the company recorded net recoveries of 364,000 session and 17,000 respectively.

Speaker 5

We continue to closely monitor the portfolio for the impact session of rising rates and the likelihood of a recession, and we continue to underwrite conservatively. Our asset quality remains strong. Our loan portfolio continues to perform well and remains well diversified. With that, I'll turn the call back to Bart. Call.

Speaker 3

Thank you, Audrey. Moving forward, the goals we've set are still relevant as we progress through the next few quarters of 2023. We remain focused on 2 key strategic priorities, Increasing efficiencies and maintaining a healthy credit culture. We are committed to improving efficiencies across our company through the following bank wide initiatives: implementing technology to optimize our internal processes enhancing our digital capabilities for our customers and increasing communication and collaboration. We will continue to monitor the loan portfolio to ensure that we maintain strong credit quality while updating the session will be recorded.

Speaker 3

Full year 2023 loan growth guidance to a more moderate level at $300,000,000 to $400,000,000 compared to the full year of 2022. We acknowledge that our achievements to date are largely attributed to the exceptional team of professionals is working for our organization, the company's sound business strategy and the fact we operate in the most favorable markets in Texas. And while none of us are entirely immune to becoming headwinds, we are better positioned than most to adapt and capitalize on these core strengths as we navigate the ever changing landscape of the financial services industry amid continued economic uncertainty. This concludes our prepared remarks. I would like to now turn the call back over to the operator to begin the question and answer session.

Speaker 3

Operator?

Operator

Session. Thank you. We will now be conducting a question and answer session. And confirmation tone will indicate your line is in the question Our first question comes from the line of Thomas Wendler with Stevens, please proceed with your question.

Speaker 1

Hey, good morning, everyone.

Speaker 3

Good morning.

Speaker 1

I just want

Speaker 3

So we've had a focus of actually with our treasury products. I I think we've mentioned it in a couple of other calls and we're getting some progress in growing that core, what I call commercial treasury products. So these are mostly granular deposits that are coming through. And We actually believe with some of our custom and digital offerings that are kind of enhancements to that treasury product that we are seeing some more accounts coming on. In fact, We've got one new account that is maybe fairly significant in non interest bearing DDAs that has already been opened and will start funding.

Speaker 3

So we think this is going to be a trend that you will see for the next few quarters. Obviously, it's a volatile market, but we're seeing quite a bit of progress In selling commercial treasury products with a good DDA component to it.

Speaker 1

That was great color. Thank you. And then moving on to loan yields. Loan yields saw a nice step up in 1Q 2023. Was there anything Unusual there driving the strong 1Q 2023 increase.

Speaker 1

And then can you give us any color of what we should be thinking about for loan yields moving forward?

Speaker 4

Tom, most of our loan portfolio about 80 Tense is floating. So as rates go up, I mean, certainly we expect them to go up again next week assuming the Fed increases rates. But See for the month of March, it was probably our best spread month that we've had in quite some time. Our average yield on new loans in the month of March was a little over 8%. So we had a really good month there.

Speaker 3

And if I could add on to that, we are revising down our projections for loan growth, again, more to that 300 to 400 range. And part of that is intentional and that we are just looking more at credit quality and yield. So we're just being more selective on the loan side And that's you're going to continue to see the same trends going forward.

Speaker 1

All right. Thanks for answering my question, guys, and great quarter.

Speaker 6

Session. Thank you. Thanks.

Operator

Thank you. Our next question comes from the line of Bernard Von Bosecki with Deutsche

Speaker 7

Declined as noted, and you had some recoveries instead of charge offs during the quarter. The potentially weaker backdrop mentioned in the prepared remarks Or at least some uncertainty in the macro, are there any areas in the portfolio that you would expect to see some pickup in charge offs or have higher reserving against over the next several quarters?

Speaker 3

Not really. I mean, we monitor the portfolio so closely. I mean, we actually have implemented over the last couple of years monitoring groups for our verticals. And so what we are seeing is a lot of companies have either canceled or decided not to go forward with some capital expenditures to expand their business. We're seeing Some customers that have pipelines where they've worked through their backlog and perhaps their pipelines are is smaller than what we've seen in the past.

Speaker 3

So that slowdown is impacting folks, but most of our customers have addressed that With either expense reductions or their sales or just forecasting where their business is going to be and pivoting to the new environment. So we're not seeing Credit erosion as much as just a general slowdown. Is that fair to say, Audrey?

Speaker 8

Yes.

Speaker 1

Yes.

Speaker 4

Bernie, what I was going to say is Our comment was more general in nature just because everyone's expecting a recession. It's nothing specific to our portfolio.

Speaker 7

No, understood. It was good color. Maybe, John, just as a follow-up, you gave that details And I think in the press release, you're talking about expectations that the NIM could rise in 2Q. Just any color, anything that you can provide for the 2Q NIM guide and what are you assuming for the Fed hikes and or cuts?

Speaker 4

Yes. So we're assuming we get the 25 basis point increase next week. And session. If that does happen or assuming it happens, we will be in the money on that swap by about 192 basis points. So it's paid probably a significant amount of money for this next quarter.

Speaker 4

What's a little harder to know was what the offset session may be on the bank's portfolio. Now with that said, with rates going up one more time, we are asset sensitive. I mean, The second quarter may very well be the high watermark for our margin and I think it'll be up at least 5 basis points. It's hard for me to say any more than that.

Speaker 7

Understood. Appreciate it. Thank you.

Operator

Our next question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.

Speaker 8

Session. Hey, good morning.

Speaker 4

Hey, Brad. Good morning.

Speaker 8

Appreciate you guys taking my question. You guys have Address most everything. Bart, you touched on this a little bit on the deposit growth that you saw in the quarter, specifically around DDA. And you guys have been talking about a large deposit pipeline for a couple of quarters. I was just curious how big that might be right now sort of relative to your loan growth aspirations of $300,000,000 to $400,000,000 this year.

Speaker 8

Just trying to think about how you'll fund that going forward and sort of kind of where the cost may come in to do so. Yes.

Speaker 4

Hey, Brad, if I could start that And let Bart add on to it. So as we were in the Q4, we knew we had an exam coming up in the session. Over the previous couple of years, we've been trying to fund the loan growth kind of just in time funding, But we thought it was important to have more on balance sheet liquidity. So we had a hard push in the Q4 and early in the Q1, Really long before there was any liquidity crisis that people were talking about. So as you saw, our average balances And our demand deposits were up materially.

Speaker 4

And the reason was the push that we had started some number of months ago. And Since the liquidity crisis mid March, I mean, we've continued to push hard. And session. If I had to say now, I would say our deposit growth would exceed our loan growth comfortably over the next couple of quarters that the pipeline just looks real strong.

Speaker 3

And if I could just tell add on to the tail end of that too is that we're really looking at growing it as granular as we possibly can. So I'm very proud that our retail team has been bringing on consumer deposits as well as small business deposits. They've been very successful at that. And indeed, in the last quarter, they brought on a record number of the small business and consumer deposits. And part of that is we've implemented a program and added talent to that area where we're doing a lot more Reach into our community.

Speaker 3

And then again from the treasury side, to mention again, I think all the investments we've made in the past Enhancing their treasury products is paying off and is allowing us to bring on more sophisticated customers. And again, our wealth side and private bankers have also done a great job as well in that the wealth program has been By and large, a huge success. I think John would agree both from the income side, what they're contributing, but also bringing on new customers and clients That has allowed us to cross sell both deposits and loans to them. And then even our specialty verticals have You know, really done some great base hits and brought on some new deposits as well. So it's been across the board, all of our team has had an emphasis on deposits and it isn't just one sector.

Speaker 3

It's everybody contributing to the deposit growth. And I think we'll only get better as we go on.

Speaker 8

Just curious, sticking with deposit cost, I think your total deposit costs were around 2.92% in the 1st quarter. Just kind of curious maybe where they ended the quarter and do you guys have much in the way of index money that would automatically sort of roll down session. If the Fed were to start to go the other way?

Speaker 4

We do. We have a significant amount of money that's floating. So It's floated up and I think that's why the margin pressure that we had a year ago, we were kind of ahead of most other Banks and don't have to worry about that so much now. If rates do start going down, those deposits will immediately float down also.

Speaker 8

Do you have that number by chance, John?

Speaker 4

No. As far as levels, I'd have to go look up exactly where we were, but it wasn't Materially different at the end of March. Again, we had so much deposit growth over the last 6 months. I know some banks had the issue of losing deposits and had to borrow from the home loan bank and it increased their cost of funds and we just didn't really see

Speaker 8

session. Sure. Okay. All right, great. Thank you, guys.

Speaker 8

I appreciate it. Thank you.

Operator

Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Speaker 6

Hey, good morning, everyone. Thanks for taking my questions. Just Most have been answered, but just wanted to get an update on the SBA business. Obviously, no gains this quarter, but It looks like there's a seasonal pattern, but just wanted to get a general update on SBA and maybe just more broadly, What efforts do you have ongoing to drive further fee income growth? Thanks.

Speaker 3

So just to remind that from the SBA standpoint, It's an ancillary product to our community banking, meaning that it basically is just another tool. We tend to in the past have kept a lot on our books and sometimes we sell them. We kind of make it on a case by case scenario, we're not dependent on that sales income. I mean, we generally make a loan to the on the SBA side, Primarily as an intro for a customer to come in. It's a customer acquisition or it's a tool to where I don't think we quite stretch as far from a credit quality standpoint.

Speaker 3

They're usually near bankable or have some sort of color to it. But in general, the SBA program kind of comes in waves along with the community banking side of it. It's been slower in this last quarter, probably last couple of quarters. It probably will remain relatively Small and still slower over the next couple of quarters. But overall, I mean, I would say there's really been no change in what we've done.

Speaker 3

Do you You have anything to add, Audrey, on that?

Speaker 5

I agree. The portfolio as of March 31 is only $70,000,000

Speaker 3

Yes. So it's a relatively small part of our entire But key and significant in that it is a nice product. We're able to offer some benefits to a customer, sometimes on amortization Or being able to get a deal done. So it's a very complementary product.

Speaker 6

Helpful. And then the increase in other The income, I assume some of that has to do with some of the FinTech partnerships, but just wanted to see if there's kind of anything in there and then if we could get an update on The FinTech stuff. Thanks, John. And Bart?

Speaker 4

Yes. As far as the fees go, there really was no fee income From the Fintechs yet, I mean, we are hopeful that that does pan out over time. But the other category this month or this quarter, there was just Nothing special in it. It was a bunch of smaller miscellaneous stuff. If anything loan related, but Nothing significant to point out.

Speaker 3

Yes. And on the FinTech side, so we are pleased that we onboarded our first FinTech. I'd like to say that we're kind of focused on quality over quantity in this line of business. So we're being very selective. We really only want to partner with the best Fintechs that are out there.

Speaker 3

And what we're primarily looking for in a partnership is stable deposits, quality customers and an appreciation for compliance on that. And so for us, again, we're going to be Very selective in who we onboard. We expect maybe 1 to 2 more partners onboard over the next two quarters. So that kind of gives you some sort of an example of how selective we're being. I will say again on that custom and digital offering with our traditional commercial treasury products that kind of overlap a little bit.

Speaker 3

But again, we have one significant new customer there. We also have 2 more customers in the pipeline, one that could be again more significant core deposits that are coming and one that's more of a revenue generation versus deposit balances. But in general, all of these kind of work together That we believe we're going to bring in, in the aggregate, some potential positive impact to our deposit mix.

Speaker 6

Very helpful. And then maybe just one final one for me on expenses. I think, John, you said $23,000,000 or so per quarter, at least in the near term is the right way to think about it. That kind of implies for the year I'm kind of a mid single to high single digit expense growth number. If you could just kind of isolate kind of the parts Between wage inflation, hiring efforts and then maybe if there's any cost containment efforts that you have in place, just trying to kind of Math out the puts and the takes.

Speaker 6

Thanks.

Speaker 4

Sure. So over the last year, we've certainly been very mindful of expenses and done everything we can to hold expenses down. We did have layoffs over the course of the year, For people that just left for whatever reason, our headcount has not changed materially over the last 12 months. But As much as we've grown in the last year, I mean, there certainly are needs on the operation side in particular. And if we find the The sales people, I mean, we'll hire them too.

Speaker 4

But most of our bank wide salary increases were We're very pleased with the progress we made in Q1. So we'll see the effects of that going forward. And I don't know exactly what that number works out to be. I mean, 5% or 6% on salary expenses, something like that. When you can include bonus accruals and health Insurance and kind of all in is kind of what the run rate increase will be in the Q2, just specific to that.

Speaker 4

The other expenses, I mean, there's a couple of other branches that we're working to fill out and hire people, branches that we opened session. Late last year that we didn't see a big increase in expense related to those for the Q1. I mean, It was there, but it was offset by other cost saving initiatives that we had. But again, that can't happen forever.

Speaker 6

I understand. Thanks for all the insights.

Operator

There are no further questions at this time. I'd like to turn the floor over to Mr. Carraway for closing remarks.

Speaker 3

Thank you. And once again, we appreciate the questions that you'll have. Thank you for joining us Today, we think we had a fantastic Q1 and we do believe that we're going to continue to improve going forward. And this is all again part of the plan that we started whenever we went public that we're executing on. So I want to thank you for your time today.

Speaker 3

Very much appreciate you joining us and we appreciate your support for 3rd Coast Bancshares. Thank you all and have a good day. Session.

Operator

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines and have a

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