Third Coast Bancshares Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Third Coast Bancshares Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Natalie Hairston from Investor Relations.

Operator

Thank you, Natalie. You may now begin.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bankshares conference call and webcast to review our Q3 2024 results. With me today 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.

Speaker 1

3rdcoast. Bank. There will also be a telephonic replay available until November 1, and more information on how to access these replay features was included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, October 24, 2024, 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.

Speaker 1

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 7, 2024 to better understand those risks, uncertainties and contingencies. The comments made today may 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.

Speaker 1

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

Speaker 2

Good morning, everyone, and thank you, Natalie. Welcome to the TCVX 3rd quarter earnings call. I'll start by giving the highlights for the quarter, followed by John's financial review and Audrey's credit quality review. Then I will discuss our outlook for the Q4. I'm pleased to highlight that we've achieved another record setting earnings quarter with diluted earnings per share reaching $0.74 In addition, it was a strong quarter for loan production with 131,000,000 in net loan growth over the prior quarter, all while demonstrating improving credit quality trends, which are already better than average.

Speaker 2

I'd like to recognize the entire bank team for the outstanding progress in our 1% efficiency campaign. Your drive for continuous improvement has led to a much improved return on assets of 1.14% and the efficiency ratio of 59.57% and a return on equity of better than 12%. We also paid down debt, expanded capital ratios and improved asset quality. We had net recoveries of $57,000 for the quarter and are on pace to achieve our annual goal of less than 10 basis points in charge offs. I also would like to congratulate the team for its 11 basis points improvement in net interest margin for the quarter resulting from superior balance sheet planning and execution.

Speaker 2

The bank has achieved 13 consecutive quarters of net interest income growth, showcasing the continual progress of our original strategic plans. Our goal has always been to become a high performing company and we believe last quarter's results are no anomaly, but in fact are the outcome of multiple initiatives working together reflecting the careful planning and execution of our strategy. We expect the current and future company performance will continue to prove that our exceptional team talent and thoughtfully calculated and implemented business plan are building a company of an extraordinary quality. With that, I'll turn the call over to John for the company's financial update. John?

Speaker 3

Thank you, Bart, and good morning, everyone. As Bart mentioned, we made significant progress this quarter towards our goal of becoming a high performing bank. Loans grew $131,700,000 in the quarter, primarily in the commercial category, which grew $137,900,000 dollars Loan mix also improved as lower yielding municipal loans declined $39,000,000 Notably, much of our loan growth occurred late in the quarter as evidenced by period end loans being $87,900,000 more than our quarterly average. Investment securities grew $5,900,000 even though we sold $15,600,000 in low yielding mortgage backed securities for a loss of 480,000 dollars Yield on investment securities declined slightly to 5.99 percent. Accumulated other comprehensive income improved to a gain of $7,800,000 Deposits increased $138,800,000 with quarterly average non interest bearing demand up $14,800,000 and ending balances up $25,300,000 Turning to the income statement, net interest income was up 1 point $5,000,000 or 3.9 percent.

Speaker 3

This increase was driven primarily by better loan mix, better deposit mix and balance sheet growth previously mentioned. This was our 13th consecutive quarterly increase in net interest income. Non interest expenses declined $75,000 to $25,600,000 This was our 4th consecutive quarter of declines in non interest expense. Additionally, we paid down $5,000,000 in senior debt for the quarter and another $4,000,000 in October and have now paid down a total of $16,000,000 That completes the financial review. At this point, I'll pass the call to Audrey for our credit quality review.

Speaker 4

Thank you, John, and good morning, everyone. Credit quality remains strong this quarter and the loan portfolio remains well diversified. Classified assets declined $3,200,000 or 8% during the Q3, primarily from the payoff in full of a $3,100,000 substandard loan. Nonperforming loans to total loans improved slightly to 0.62% from 0.65% the previous quarter. The bank reported net recoveries of $57,000 compared to net charge offs of $1,800,000 the previous quarter.

Speaker 4

The loan portfolio remained well diversified with percentages similar to previous quarters. C and I loans increased slightly to 38% of total loans. Construction, development and land loans increased slightly to 21%, while owner occupied and non owner occupied CRE represented 12% 16% of total loans, respectively. Office represented 3.5% of total loans with approximately 55% of that being owner occupied. Medical office was another 1.4 percent of total loans.

Speaker 4

Consistent with previous quarters, the office portfolio generally consists of Class B with some owner occupied sea space and is all located in our Texas footprint. The average LTV of our office portfolio is approximately 60%, and the average LTV for medical office is approximately 59%. Multifamily represented 3.3% of total loans and has an average LTV of 59%. With that, I'll turn the call back to Bart. Bart?

Speaker 2

Thank you, Audrey. Before we take your questions, I'd like to provide some additional color on our outlook and strategic focus. Our 1% improvement initiative continues to enhance our operational efficiency, positioning us well to navigate the evolving interest rate environment. This program has delivered tangible benefits and streamlined processes, reduced cost and improved productivity, all the while driving revenue growth. In the face of changing interest rates, this increased efficiency has proved invaluable, allowing us to adapt quickly and maintain our competitive edge.

Speaker 2

Regarding loan growth, we're maintaining our target of $50,000,000 to $100,000,000 per quarter. This quarter, we exceeded that target with $131,000,000 in growth, while also improving our loan mix by reducing exposure to certain sectors. This conservative approach, coupled with our improved deposit mix, has contributed significantly to the enhanced net interest margin. In terms of credit quality, we expect it to remain strong. Our charge offs for the year are currently at about 9 basis points, well below industry averages.

Speaker 2

We anticipate maintaining the strong performance and asset quality moving forward. While we're pleased with our performance, we remain vigilant about potential challenges in the broader economic environment. Our adaptable strategy and robust risk management practices position us well to navigate any headwinds we may encounter. Our efficiency ratio has dipped below 60%, hitting 59.57% this quarter. This achievement, which we reached ahead of schedule, underscores our commitment to operational excellence and cost management.

Speaker 2

We're confident in our ability to sustain this level of efficiency moving forward. We remain optimistic about the opportunities in our robust Texas markets. The economic energy in this region continues to provide excellent growth prospects and we're well positioned to capitalize on these opportunities. Our strong presence and deep understanding of these markets have allowed us to benefit from emerging trends and to meet the evolving needs of our customers. Looking ahead, we remain confident in our ability to deliver high performing results.

Speaker 2

This confidence is rooted in several factors. 1st, our team. We have the right people in place with the skills, experience and dedication needed to implement our strategy effectively. 2nd, our strategic focus. We're just not aiming for short term gains.

Speaker 2

Our initiatives are designed to create sustainable long term value for our stockholders. This includes ongoing investments in technology, talent development and market expansion. Lastly, our adaptability. In today's rapidly changing financial landscape, the ability to pivot quickly is crucial. Our lean operational structure, coupled with our deep market insights, position us well to navigate the challenges and seize opportunities as they arise.

Speaker 2

In conclusion, we're entering the Q4 with strong momentum. Our team's execution of our strategic plan combined with our focus on maintaining strong asset quality, managing expenses and driving loan growth positions us well for continued success. As we've demonstrated for 13 consecutive quarters of net interest income growth, our approach is sustainable and we're confident in our ability continuing to deliver strong results. I am pleased to share that we are well on our way to achieving our goal of becoming a high performing bank in creating long term value for our stockholders. This concludes our prepared remarks.

Speaker 2

Now I'd like to turn the call back to the operator to begin the question and answer session. Operator?

Operator

Thank you. We'll now be conducting a question and answer Our first question is coming from the line of Matt Olney with Stephens. Please proceed with your question.

Speaker 5

Thanks. Good morning, everybody.

Speaker 2

Good

Speaker 5

morning. On the loan growth outlook, Bart, I know you said $50,000,000 to $100,000,000 in the 4th quarter. If we can look just beyond that, do you see anything that would slow down this loan growth momentum in that range as you look into the 2025 or at least the 1st part of 2025? I know you mentioned you're reducing exposure to certain asset classes. So just didn't know how material that was.

Speaker 2

Yes. I mean, first, I'd caution that I mean, we still will be somewhat lumpy. I mean, if you look at our history, we kind of on average, when you look over a 12 month period, we generally hit the guidance that we give you. But sometimes it comes in different waves. I'll tell you the Q4 seems to be shaping up maybe slightly on the higher side of our what we range we talked about.

Speaker 2

It's kind of hard to tell into next year. We're in the budgetary process right now where we want to be, but I think the pipelines right now are looking like a kind of a continuation of what we guided to this year.

Speaker 5

Okay, great. And then I guess specifically on those asset classes you want to reduce exposure to there, anything worth calling out specifically on those asset classes?

Speaker 3

Yes, Matt, this is John. The bond anticipation notes was the primary thing that we haven't done as much of that we've let run off and those were down to I think one loan at quarter end. So there's nothing left there. So probably you probably won't see anything more there. So obviously growth would have been a lot higher in the Q3 had we not let I don't remember what the number was 30 some odd 1,000,000 roll off on those bands.

Speaker 3

So yes, as Bart said, we may be we'll certainly, I think, be on the high end of the range for this quarter.

Speaker 2

And for the rest of portfolio, I think it's going in the direction that we want. I would just call it more of a refinement, not any kind of big levers are being pulled on that. I think it's more just continuation of directionally going where we want to do go in terms of the concentrations.

Speaker 5

Okay, great. And then on the net interest margin, some nice performance in the Q3. We've got the Fed, I guess, and the impact of the 50 bps cut from late Q3 and maybe some more Fed cuts here in the Q4. John, any thoughts on the margin more near term?

Speaker 3

Yes. I mean, this quarter surprised us a little bit and we weren't expecting to be plus 11 on the margin, but it seemed like every little piece we outperformed relative to expectations. I mean, letting all those bands roll off, we had more non interest bearing demand. I think our average loan to deposit ratio was probably a little bit higher. The increase in demand was probably the biggest thing.

Speaker 3

If I look back at the numbers, we had declines in monthly non interest bearing demand for like almost 9 months in a row and finally demand deposits are up. So not only were they up during the quarter, but they're up again in October. So I'm feeling pretty good about the margin going forward. I mean, I guide to certainly flat. I don't think it's going to be down.

Speaker 3

Even though when our Q comes out, it's going to show that we're asset sensitive. Those models are only as good as your assumptions. And I think on the first interest rate cut, we outperformed what the model assumptions were, if that makes sense. It's hard to know if that will continue going forward, but I think having one of the higher cost of funds in the industry probably gives us more room to cut rates than most. I like where we're positioned.

Speaker 3

I'm pretty comfortable with where the margin is now.

Speaker 5

Okay. And just following up on that, John, one of

Operator

the things you mentioned was

Speaker 5

the loan to deposit ratio, maybe a little higher than you expected. Just remind me kind of where your overall comfort zone is on that ratio kind of in the short term and kind of longer term?

Speaker 3

Yes, good question. I mean, we don't want to have too much as far as excess deposits go, but we do have a technology company that has a lot of seasonal deposits. And we've already seen pretty big deposit inflows here for the Q4. Remember last year, our deposits were up several $100,000,000 and we think that's probably going to be true again this year. That's maybe good for ROE.

Speaker 3

It's not necessarily good for the margin or ROA, but we expect the loan to deposit ratio. Even if we have a big quarter, it's probably going to be lower at year end than not.

Speaker 5

Okay. Okay, great. I'll step back and congrats on the quarter.

Speaker 6

Thank you.

Operator

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

Speaker 7

Hey, good morning, everyone. Thanks for taking my questions. Just wanted to touch again on the deposit side of the equation. John, as you mentioned, you have one of the higher costs in the industry out there. Some of that's reflective of the strong loan growth that you've had.

Speaker 7

Can you just remind us of some of the initiatives that you have in place? And then maybe what percentage of the deposits are either indexed or exception price that may have some leverage as the Fed cuts rates. And it was nice to see the NIB mix improve with some nice demand growth this quarter. Can you just remind us of some of the again, some of the initiatives you have in place and maybe over time where that mix could potentially migrate to? Thanks.

Speaker 2

Yes, Michael, I'll start first with some of the initiatives. I mean, we started this, if you probably remember well over a year ago that every line of business had their own goals and own initiatives on deposit side. So the nice thing is the commercial group as a whole and there's several lines of business in that commercial group all have very strong incentives for deposit growth. It's both financial because probably the biggest part of their incentive package is deposits, but it's also certain kind of even some fun goals that we have. And certainly, we want to emphasize treasury in particular to that.

Speaker 2

Treasury itself has its own goals as well as some calling initiatives that going after deposit only customers as well. So that's been those have worked very well together to give us some nice improvements. We also have a retail group that has launched several initiatives and have been very instrumental in bringing in small business and retail customers that really showed a lot of benefits last year, almost $100,000,000,000 in deposits that they brought in as well. And then in addition to that, we have this relationship with the Ameriprise that's been successful and

Speaker 8

either helping us bring in deposits

Speaker 2

to new customers or at least successful

Speaker 8

in either helping us bring in deposits to new customers or at least maintain a relationship so that

Speaker 2

we keep more customers in house. So I think altogether, it hasn't been a home run-in any particular areas, but it's been every line of business having some great particular areas, but it's been every line of business having some great base hits that made the difference. And I do think they're all spinning up to have even better year this year perhaps.

Speaker 3

Yes. And Michael, regarding how much is indexed, so we have about 12% non interest bearing demand. Our CDs are about the same. So that leaves 75% roughly this money market accounts. And there is a decent amount of that that's indexed, but all of it is certainly variable from our perspective.

Speaker 3

So we have that 75% that we can price down. I think that's probably more than peer partially because we have less in non interest bearing demand. So it didn't feel as good on the way up, but it should be good on the as rates are coming down. And that's where I was talking about being able to kind of over perform versus our modeling because we attracted deposits by paying relatively high rates. But now that everyone expects rates to be down, it hasn't been particularly hard to lower rates just as fast.

Speaker 3

So that has gone well for us.

Speaker 7

That's great color. And maybe just on the corollary to that would just be on the loan pricing side. You guys saw average loan yields tick higher. Can you just talk about where new production yields are? Just I would assume that they're going to start to come down just given that rates have come down, but not certain.

Speaker 7

It's obviously going to vary by category, things like that. But just wanted to get a sense for because I think what you're talking about is relative NIM stability at least for the next couple of quarters. So just trying to understand both sides of the equation. Thanks.

Speaker 2

Yes. We have an internal pricing model and plus we have some very seasoned bankers that understand where we're trying to go. So certainly we're looking at prime plus on new deals and there are certain margins that we try to hit internally, what we call hurdle rates. And what we're seeing is all this production is fitting in those categories. We have very few exceptions to that.

Speaker 3

And Michael, I talked about 75% money market accounts that would be floating on the deposit side and the asset side is similarly structured in that close to 80% of our loan portfolio is either floating or variable, 1 or the other. And the stuff that's floating versus SOFR, we typically don't do a deal at SOFR less than plus 300. The community bank deals are typically priced off prime and they're typically prime plus. So we're averaging in that prime sort of area, maybe plus some fees puts us a little over 8%. So when we're raising non interest bearing demand deposits, it's certainly very good for the margin and that's where we had the big uptick this month quarter.

Speaker 7

Very helpful. And then maybe just one last follow-up for me. Bart, you guys have done a really good job keeping the headcount flat to down and continuing to add assets to the balance sheet has created a really nice tailwind. You've seen the efficiency ratio come down pretty materially. But as we go forward, I assume that you're going to have to start adding bankers at some point to continue to grow at these levels or potentially higher as we move forward.

Speaker 7

And then I assume that there's going to be some incentive compensation accrual, things like that as we think about next year. Can you just give us thoughts around that? And then are you expecting further improvements in the efficiency ratio or are we going to start to think about that beginning to level off here in the kind of the mid to high 50s? Thanks.

Speaker 2

Yes. So this is just our initial goal to get below 60%. So our internal goals are to get the efficiency ratio down much further. And so it's a process as you know. It takes time.

Speaker 2

Quite frankly, where we are today is probably 2 quarters ahead of where our even internal goals were. So the teams just outperformed in an infinite way. It's been quite amazing to watch them figure out ways to have savings. There's a few other things that we're working through that could help the efficiency ratio and cost reductions that's going to happen through 2025. I think as far as personnel, we've done a really good job of kind of reallocating resources internally to help manage that headcount.

Speaker 2

Naturally, we are growing and because we're growing, we're eventually going to have to add headcount. And truthfully, in terms of where that goes, we're probably down a couple of underwriters that we'll need to backfill, probably have some portfolio managers that come on board to help as these loan portfolios continue to grow. So we'll have some investment in terms of just continuing to build, but they're sort of very selective that we're doing it. And so we really believe revenue is going to grow still much faster than expenses. And while it may not necessarily be flat or it may go up a little bit, we think revenue is going to go up a lot faster.

Speaker 7

Very helpful. Thanks for the color, everyone. Thank you.

Operator

Our next questions are from the line of Woody Lay with KBW. Please proceed with your question.

Speaker 7

Hey, good morning guys. Good morning. I wanted to talk about deposit growth. It looked like time deposits were up a little bit in the quarter. Just any color you could give on the go forward deposit strategy from here?

Speaker 3

This one particular customer that I talked about, their deposits come in the form of money market because we certainly do have some wholesale funding as it's somewhat difficult to predict when the loan growth is going to happen. The last 3 years, September has been our biggest month of the year for reasons kind of unknown to even us. So some of those deposits that you saw tick up in the Q4 was on the brokered side. We did bring in some brokered CDs. And interestingly, the cost of those was probably 100 basis points less than they were 6 months ago or something like that.

Speaker 3

But those were short term set to roll off as soon as we replace it with more permanent money. But I didn't want the loan to deposit ratio to creep over 100%, didn't want to borrow from the home loan bank and still had plenty of capacity there. So that was just kind of a short term fix for the big loan growth that we had. And I think I alluded to this in my talk, but loans for the month of September were up over $100,000,000 just for the single month. So, that's it's hard to predict growth quite so fast for 1 month.

Speaker 7

Got it. That's helpful. And then maybe shifting over to the loan pipeline. It sounds like the mix is in line with historical levels. Is that the right way to think about it?

Speaker 2

I think so. Yes, I feel like it's more of a continuation of what you've seen in the last probably 3 quarters. That's fair.

Speaker 7

Yes. All right. Thanks for taking my questions.

Operator

Thank you, Woody.

Speaker 6

Thank you. Our next question is from

Operator

the line of Bernard Von Cusicki with Deutsche Bank. Please proceed with your question.

Speaker 9

Hey, guys. Good morning. Bart, in your closing remarks, you mentioned how the Texas market has been robust, has strong growth prospects and you've been able to capitalize on those opportunities. You added your 19 branch location as noted in the press release. As we think about going into 2025, anything you can share on how you're thinking about just future expansion?

Speaker 3

Yes. So most of our

Speaker 2

branches were built around bankers. And part of this is still filling out some of the needs from the hires that we had post pandemic. But we've mostly satisfied the branch needs that we have right at this point. You will not see the branch expansion based on our current strategy much past where we have right now unless there's something that's opportunistic. So true de novo branching is certainly going to slow down and we're mostly where we need to be.

Speaker 2

We're opening our probably our last branch with grand opening next week. And I think that's pretty well where you'll see our branches are for the next 12 months to 24 months. I think we're going to build off of that network.

Operator

Got it. No, that's helpful.

Speaker 9

Maybe just moving to fees quickly. Taking out the securities losses, it performed better than expectations. The service charges were much higher, I know loan growth was as well. Just anything seasonally higher in that line item to be mindful of? And if you could just provide some color on how you expect like fees to kind of like go forward from here?

Speaker 3

Yes. Bernie, we talked about this a little bit last quarter and at our treasury group in particular. The numbers are relatively small, but they're growing at a rate 50% to 75%. And given enough time, that really adds up. So I would probably give them credit for a lot of the fee income on the treasury side.

Speaker 3

That's been where a lot of the increase has come from in non interest bearing demand and the service charges. And then we also had a relatively big loan fee this quarter on a deal that we had led. And those are going to be a little bit lumpy. I don't know if we can say that we'll have maybe 1 a quarter, maybe it's 2 or 3 times a year. It's hard to know when those larger loan fees may come into play, but we did have one for this quarter.

Speaker 9

And then any expectations on how to think about fee income, the $2,500,000 a quarter kind of range, sounds right or anything you can provide on that?

Speaker 3

No, I think that sounds about right just because we don't know on those lumpy sort of fees. But the $2,500,000 plus, we're pretty comfortable with that number, yes.

Speaker 9

Okay, great. Thanks for taking my questions.

Speaker 2

Thank you.

Speaker 9

Thank you.

Operator

The next question is from the line of Dave Storms with Stonegate Capital Partners. Please proceed with your questions. Good morning.

Speaker 2

Good morning, Dave.

Speaker 6

Good morning. Just wanted to circle back on loans a little bit. I know you mentioned that you're targeting the $50,000,000 to $100,000,000 in growth. And it looks like commercial and industrial had a really strong quarter in growth kind of above and beyond that, as you mentioned. Is that more emblematic of some of the refinement that you highlighted earlier?

Speaker 6

Was that just one large customer? How should we think about that and how that looks going forward?

Speaker 2

Yes. I think it's growth in general. Audrey and I were just talking about it. Audrey, I don't know if you want to type in on this one, Wendy?

Speaker 4

Yes. I would say it's just growth in general primarily from our corporate lending group. It does kind of the middle market, somewhat larger loans, but it is not just one loan. It's just growth in that group.

Speaker 6

Understood. Very helpful. Thank you. Then just one more for me. You mentioned in your prepared remarks that you paid down some more debt in the quarter.

Speaker 6

How much more runway do you feel like there is there and kind of puts your comfort with that?

Speaker 3

Yes, that's a good question. It depends on growth. It depends on earnings, obviously. I don't expect we will pay down any more this year and next year is kind of yet to be determined. But given enough time, certainly we want to pay it down to 0.

Speaker 3

It's our highest cost of funds. It's about 7.5% is the a little less than 7.5% is the rate that we're paying on that. So to the extent that we have excess capital, we think that's kind of the highest and best first use. And particularly since it's a revolving line, if we decide we need more, we can just reborrow it. But I'd say no more for this year and we'll reevaluate in the Q1.

Speaker 3

And maybe it's $5,000,000 a quarter next year. It just depends.

Operator

Understood. Thanks

Speaker 6

for taking my questions and congrats on the quarter.

Operator

Thank you. Thank you. At this time, we've reached the end of our question and answer session. I'd like to turn the floor back to Mr. Carraway for closing remarks.

Speaker 2

Thank you, Rob. Very much appreciate it and thanks everybody on the call for the questions and support. We feel really good about where we're positioned and where we're going with and look forward to releasing earnings next quarter and visiting with you all again. Have a good day.

Operator

Thank you. This does conclude today's teleconference.

Speaker 3

We thank you for your participation.

Operator

You may now disconnect your lines at this time.

Powered by Quartr
Earnings Conference Call
Third Coast Bancshares Q3 2024
00:00 / 00:00