Third Coast Bancshares Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Third Coast Bank First Quarter 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 Hairston.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our Q1 2020 4 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

Thirdcoast. Bank. There will also be a telephonic replay available until May 2nd, 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, April 25, 2024, and therefore, you are advised that any time sensitive information may no longer be accurate as of the time of 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 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.

Speaker 1

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

Speaker 2

Thanks, Natalie, and good morning, everyone. Welcome to the TCBX Q1 2024 Earnings Call. I'll begin with highlights from the quarter, John will cover profitability metrics in more detail, Audrey will present the credit quality review, Then I will conclude with our outlook and expectations for the Q2 through the remainder of the year. As you can glean from the earnings release, 3rdco's beat expectations in nearly every category with successive record quarterly profits attributed to a strong loan growth, enhanced operational efficiency and successful execution of the company's expense optimization plan. We do expect these factors to continue driving consistent financial improvement as per our plan.

Speaker 2

In terms of cost savings initiatives, we continue to capitalize on automation, software enhancements, staffing adjustments and workflow advances. Additionally, we have introduced a new 1% initiative to boost overall efficiencies, wherein we are encouraging every employee to suggest improvements. Altogether, we believe there is still opportunity to gain efficiency in operations and it remains a high priority for the management team. Our focus on operational leverage has also benefited from strong loan growth of over $107,000,000 in net new funds for the quarter, reflecting a trend of attracting high quality customers. Deposit growth was also strong resulting from initiatives implemented over the past year.

Speaker 2

Nearly all business segments have exceeded their deposit goals. In particular, success in deposit acquisition by our commercial and specialty groups. Treasury services have also led to solid core account expansion and kudos to our retail group and financial advisors for their significant contributions over the last year. I attribute our positive trends to a sound strategic plan, skilled management team executing well, and a group of exceptional bankers aligned with stakeholder objectives. Additionally, it certainly helps that we operate in resilient and growing markets throughout Texas.

Speaker 2

We believe our Q1 results underscore the company's long term ability to provide valuable relevant services to our markets and continues to prove out the value of our strategic model. With that, I'll turn it over to John for the company's profitability update. John? Thank you, Bart, and good morning, everyone. In yesterday's earnings release, we provided the detailed financial tables.

Speaker 2

So today, I'll offer further insights into specific profitability metrics for the Q1. We reported 1st quarter net income of 10 point $4,000,000 resulting in an 11% return on equity and record diluted earnings per share of $0.61 Net interest income was up 12.5% on an annualized days adjusted basis. The increase was primarily due to better yield on investments and higher average loans. Non interest expenses were down 1.9% or $500,000 due to cost cutting initiatives implemented in prior quarters. And investment securities are up 68 point $2,000,000 and the current yield on the portfolio is 6.15 versus 5.36 in the previous quarter.

Speaker 2

Deposit growth for the quarter was $248,000,000 more than double our loan growth of $107,000,000 dollars This resulted in a loan to deposit ratio falling to 92.5% and resulted in net interest margin pressure, which declined 1 basis point. Much of this quarter's deposit and loan growth was seasonal. As of today, loans are down 30,000,000 dollars and deposits are down $175,000,000 On April 10, we sold our 5 year pay fixed swap realizing a gain of 5 $250,000 This will be accreted into income at roughly $275,000 per quarter. That completes the financial review. And at this point, I'll pass the call to Audrey for our credit quality review.

Speaker 3

Thanks, John, and good morning, everyone. Given the current economic climate, we understand that investors are focused more than ever on credit quality. Despite the difficulties presented in 2023, 3rd Coast's loan portfolio has remained strong. Nonperforming assets increased by $4,400,000 and represented 0.47 percent of total assets. The increase was attributed to a 1 point $5,000,000 increase in non accruals and a $2,900,000 increase in loans over 90 days past due and still accruing.

Speaker 3

The non accrual increase was primarily due to 4 relationships being placed on non accrual, 2 of which had 75% SBA guarantees, one of which represented our 5% portion of a Main Street loan and one small mortgage loan. The increase in loans past due over 90 days and still accruing was a matured real estate loan that was pending renewal. Net charge offs of $742,000 for the quarter were primarily the result of the charge off of 2 C and I loans. Charge offs for the quarter totaled $839,000 and we recognized recoveries of 97,000 Provisions for credit losses totaled $1,600,000 for the Q1, which was related to provisioning for new loans and commitments. The ACL remained at 1.02 percent of total loans and was right in the middle of the range.

Speaker 3

The loan portfolio mix remained well balanced with percentages similar to the previous quarter. C and I loans represented 36% of total loans. Construction, development and land loans remained at 19%, while owner occupied and non owner occupied CRE represented 14% 16% of total loans, respectively. Office represented 3.9% of total loans with a little over half being owner occupied. Medical office was another 1.3 percent of total loans.

Speaker 3

Office and medical office loans increased less than $1,000,000 each for the quarter. 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 55%. Multifamily represented 3.2 percent of total loans, which was a slight increase from 3% of total loans the previous quarter and had an average LTV of 59%. Our credit management practices are robust with regional credit officers dedicated to each of our verticals.

Speaker 3

The credit officers have an average of 30 years of experience and each one is highly experienced in their specific vertical. They hold regular meetings to review their portfolios, and the corporate banking and builder finance groups maintain trend cards that track financial trends and covenants on each borrower as well as comparing projections to actual performance. The commercial banking vertical monitors covenant and borrowing base compliance, tracks financial trends and reviews loans on at least an annual basis. In addition, stress testing is conducted at both the individual loan level at origination and renewal as well as annually on a portfolio wide basis. With that, I'll turn the call back to Bart.

Speaker 3

Bart?

Speaker 2

Thank you, Audrey. Moving forward into the 2nd quarter and the rest of the year, as referenced earlier, our team continues to execute on the company's strategic objectives. Priorities operational efficiencies. Additionally, we are focused on revenue generation and identifying strategic opportunities for future growth, building upon our efforts from previous years. Loan pipelines remain robust.

Speaker 2

We therefore continue to expect growth of $300,000,000 to $400,000,000 for the year. This should drive net interest income growth to exceed 10%, coupled with non interest expense growth of less than 5%, we believe the company will gain more operating leverage over the next few quarters. Our team's dedication to adaptability, innovation and strategic planning us to overcome challenges and to capitalize on opportunities as we progress through the year. We are making headway in driving quality growth, enhancing the customer experience and building excellence in our operations. This concludes our prepared remarks.

Speaker 2

I would now like to turn the call back over to the operator for the question and answer session. Operator?

Operator

Thank you. We will now be conducting a question and answer session. First question comes from Bernard Von Gazzicchi with Deutsche Bank. Please go ahead.

Speaker 4

Hey, guys. Good morning. So just wanted to discuss some of the drivers of the NIM. It came in better than expected. It just declined just one basis point.

Speaker 4

Obviously, there were some good cost controls with interest bearing deposit costs and total interest bearing liabilities declined 2 basis points. Loan yields were flat, but there was a nice uptick in securities, which I believe picked up 79 basis points. So could you just provide some color on the pricing dynamics and maybe some expectations on the NIM for 2Q?

Speaker 2

Yes. So Bernie, we sold our swap in April and that was providing a nice tailwind. And remember, that's a reduction to interest expense that we won't have as much in the Q2, but what we will have is now basically locked in guaranteed for the next 5 years. And all in everything, including the uptick in investments, I think the margin is going to be flat in the second quarter. I mean, if I had to pick a number, I'd say we're going to be exactly where we are today.

Speaker 2

I know there's a lot of moving parts. The one big drag that we had, the margin would have been up, but we had so much cash come in late in the Q1. And our spread on that was 10 basis points, 20 basis points. So that was a real drag on the margin. And while I'm thinking about it, one thing that may have been a little misleading about my comment on the seasonality, that was just concerning our deposits, not so much our loans.

Speaker 2

Our loans were down a little bit in April, but that was just because of a payoff. Nothing unusual there. We're obviously still early in the quarter, but deposits were seasonal. A lot of that money has gone out. That changes our mix.

Speaker 2

That will certainly help improve the margin. And all in net net, I think the margin will be pretty stable.

Speaker 4

Okay. I appreciate that. And John, just maybe just following up, I believe, and Bart, when you mentioned the net interest income guide for the full year, I think you said, plus 10%. I think the previous guide was plus 10% to 15%. Just want to make sure, if you could just confirm, and if that's the case, why it's the lower and what kind of rate cuts are you or if any, what are you assuming in that

Speaker 5

forward price?

Speaker 2

Price? Yes. And we weren't necessarily trying to guide to a lower number. It's there's the uncertainty there because of the lumpiness in the portfolio. If you look at our average loan balances, much of our loan growth came late in the Q1 that doesn't do anything to help us when we're thinking about full year numbers.

Speaker 2

I mean literally most of the growth that we had was in the last 2 or 3 weeks of March. So just kind of layering that in, may make it a little harder to get to the 15%. It just depends on we're still comfortable with this range of $300,000,000 or $400,000,000 but it as far as net interest income, it is highly dependent on how early in the year we book those loans. Now we have bought a lot of investment securities over the last 3 or 4 or 5 months. We thought it was a good opportunity to do that and that's going to help offset some of the lumpiness the loan portfolio.

Speaker 2

But we're specifically trying to guide to a lower number. We do still think it'll be over 10%.

Speaker 5

Perfect. All right. Thanks for

Speaker 4

the color and thanks for taking my questions.

Speaker 2

Thanks, Bernie.

Operator

Next question, Michael Rose with Raymond James. Please go ahead.

Speaker 5

Hey, Michael. Hey, good morning. Good morning. Thanks for taking my questions. Just kind of following up on that, I noticed the NIB mix continues to tick down around 10%.

Speaker 5

As it relates to just kind of expectations for the margin and NII, you just talked about, what are you assuming there in terms of potentially reaching a trough, hopefully growing? And maybe just more broadly, if you can talk about some of the deposit growth strategies in place to help drive that percentage point higher? Thanks.

Speaker 2

Yes. On the margin, certainly, we haven't had the strain that a lot of banks have had. I mean, since the beginning of the cycle, I think we're down 17 basis points, if I remember right. So we don't expect a lot of pressure. We're not going to have a big drop and then a big uptick the way some of the other banks have had.

Speaker 2

The non interest bearing specifically is, I mean, that's hard to model. I mean, it certainly dropped more this quarter than I would have expected. I think some of that was tax related and will come back to us. So we'll, if anything, have a little bit of an increase this time, but we're bringing on new treasury customers all the time that are non interest bearing, but that was certainly a little bit of a surprise to us to see that drop so much and certainly weighed on the margin, but I don't expect that to happen again. Yes.

Speaker 2

And to follow-up on your question, Michael, with regard to what we're doing internally, What we deposits were certainly one of the top three objectives that we've had for the entire bank. And every line of business has been charged with developing a plan to help us grow those deposits. And I think it's been very helpful because in the last 12 months, we've seen the fruition of a lot of these plans helping us grow the deposit side. So, what I would tell you is we probably have a couple of other products that we're working on. Certainly, we're in the midst of executing on each one of the lines of businesses plans and it's been relatively successful in a pretty hard market.

Speaker 2

And part of it too is we do have the benefit again, we have a lot of bankers that joined us over the last, call it, 2 years and they're still moving business over. So we are fortunate that we have the benefit of kind of the pipeline of customers that we continue to work on. Moving deposits is slow, right? So especially whenever it's bigger commercial accounts. But treasury has been instrumental, as John said.

Speaker 2

We've actually had a nice uptick in those commercial accounts. And it's just more of the same executing at this point.

Speaker 5

That's great color. I appreciate it. Maybe just as a follow-up, expenses stepped down this quarter and I think you said less than kind of 5% year on year growth. Can you just talk about some of the I know you guys have done some cost cutting and you guys are highly focused on expenses. But at the same time, I mean, ongoing investments to continue to build the earnings power of the company, right?

Speaker 5

And I know some of that is on the deposit side, as you just mentioned, John or Bard, excuse me. And then can you just talk about some of the other areas that you're continuing to invest in as we think beyond kind of this year and into the next couple of years? Thanks.

Speaker 2

Yes. So Michael, the biggest number of course is salary expenses and we do all of our annual raise in the Q1. So we have a pretty good handle on that number going forward. We don't have a lot of openings. We're not looking to hire a lot of people.

Speaker 2

So it helps give us confidence on that number. We did talk about opening a branch. Obviously, we have to hire people for that, but we literally have 30 fewer employees today than we did a year ago. So we think we've done a pretty good job managing that. I'd say a pretty good confidence on salary numbers going forward, not increasing too much.

Speaker 2

Some of the other things are a little harder. Sometimes you have legal expenses you weren't expecting or consulting or that sort of thing. But no big expense that I'm aware of that we're soon to add. We do have one more branch that is kind of in process, but we already have employees there. So there's not going to be a big increase in expense.

Speaker 2

It's in the administrative office today and it'll become a full branch within months, I think. But again, no big increase in expense. I think holding under that 5 percent unless something out of the ordinary happens should be relatively easy. And a little different color taking from a different perspective, Michael, is that we kind of have decided to really focus in on priorities. So for us, particularly when it looks like project management or new software, I mean, we have really been surgical in our approach that we've simplified our processes and any new projects have been tailored down to just a handful versus broader.

Speaker 2

So we're spending more resources and focusing on the important things, which is developing deposits, developing business and less distractions from other things. And I think we're just getting better and better refining. And what I also say is there's a philosophical difference in the company that it's not just big things like staffing, it's little things. So there's a focus in just everywhere, any job position looking at how we can simplify it and do it more efficiently. And a lot of little things add up to big things, right?

Speaker 2

And so it's big and little things happening and it's kind of changing hearts and minds internally that we're all rowing in the same direction. And I think we still have a lot of efficiencies to gain as these things take momentum.

Speaker 5

No, that's great and well understood. And I think putting it all together, just last question for me, is just, Bart, you talked about operating leverage and the strength there, I think, for a growth bank, especially given the intense focus on the expense side, it being surgical, as you mentioned. As we think kind of intermediate to longer term, balancing the growth and investment together, I mean, do you think ultimately the goal at this point in your life cycle is to continue to drive that efficiency ratio down, again, intermediate, longer term to somewhere below 60%. Does that just theoretically feel right as you think about the franchise over the next 3 to 5 years?

Speaker 2

It's funny you say that. 1, it's not going to take 3 to 5 years, but there's a strong emphasis internally to get our efficiency ratio to something starts with a 5. So that's what I've been said. And everybody in the organization knows it and everybody has been just great supporters of trying to get us there. So I'm not going to predict exactly when we get to something that starts with the 5, but I will tell you internally there's a heavy emphasis of us finding our way there.

Speaker 2

And part of that will be a little growth, but it's also more focused on the expense side and the 2 is going to marry up. And hopefully we get there a lot sooner than what you all think.

Speaker 5

Perfect. I lied, maybe one last one. Just for John, what drove the increase in service charges this quarter? And is that a decent run rate to think about? I'm just curious if there's any kind of one time catch up or anything in there?

Speaker 5

Thanks.

Speaker 2

So the service charges this quarter related more to loans or at least the increase related more to loans than deposits, which is something we haven't necessarily seen in the past, but it's just all the little things. I mean, charging customers for not using unfunded lines and things like that. So that line item itself may tick down just a little bit. But I mean, for the most part, I think it's a good number. I mean that same $2,000,000 run rate is pretty good.

Speaker 2

We don't expect a lot of swaps income like we've had in years past, But I think there's other little things making up for it. We're comfortable with that $2,000,000 number, a little bit more than $2,000,000 going forward.

Speaker 5

Perfect. I appreciate all the color. Thanks. Thank you.

Operator

Next question, Woody Lay with KBW. Please go ahead.

Speaker 6

Hey, good morning guys.

Speaker 2

Good morning, Dave.

Speaker 6

Wanted to ask one follow-up just on expenses. As we think about next quarter, it sounds like you remain very expense focused. But it's the roughly $26,000,000 is that a pretty good run rate going forward?

Speaker 2

It is. It was a pretty clean number.

Speaker 5

Okay.

Speaker 6

And then shifting over to credit, the NPAs remain stable. But I was just curious on any trends within the criticized or classified bucket that you could speak on?

Speaker 3

Sure. This is Audrey. I can answer that. We had a few downgrades in the quarter. They don't show in the non performing because they are still paying and accruing.

Speaker 3

But one of them was a consumer kind of consumer notes receivable loan. We've got a 60% LTV on that. We have a few assisted living facilities, brand new appraisals on those with a 69% LTV. And then another kind of discretionary consumer goods manufacturer. We have an owner occupied building and a line of credit and we've got a below 55% LTV on that owner occupied real estate.

Speaker 6

All right. That's helpful color. And maybe last for me, I know there was some seasonal noise to the deposits. But if I sort of strip out that 175%, I mean, you still had 8% deposit growth. Is the goal from here to match the loan growth with the deposit growth?

Speaker 2

It is. So if we're guiding to $300,000,000 or $400,000,000 in loan growth, which is what we expect, the deposits are going to be about the same thing that we'll manage around it that we can always adjust our wholesale funding to not get too terribly far ahead of ourselves. But a loan to deposit ratio and kind of that 94% to 98% is what you should probably expect us to run at for the rest of the year.

Speaker 5

All right. Thanks for taking my questions. Thank

Operator

you. Next question comes from Thomas Wendler with Stephens. Please go ahead.

Speaker 7

Hey, good morning everyone.

Speaker 2

Good morning.

Speaker 7

We saw some build in excess liquidity towards the end of the Q1. With these seasonal deposits running off, can you give us an idea of just where you expect the excess liquidity to shake out?

Speaker 2

So most of the excess liquidity we just kept in cash because we knew it was somewhat seasonal just based on the customers that were sending it to us. So it was literally just in cash at the Fed or maybe one of our correspondents. And as I've mentioned, we've had about $150,000,000 already this month roll off. So it's tax related sort of stuff for a couple of our customers. Those are relatively few customers that cause the seasonality.

Speaker 2

So the rest of the balance sheet is not going to be much affected by it, just cash.

Speaker 7

Okay. Thanks for that. And then can you give us an idea of what you're seeing for loan yields on new production?

Speaker 3

Typically, we don't go below sulfur +300.

Speaker 2

Yes. We're kind of looking at each other. I think trying to answer this right.

Operator

Sorry. It kind of depends on the deal

Speaker 2

too, right? So I mean, the thing is, if you think about we have kind of large divisions within and each one of them operates a little differently and some are fee income based versus those. But I think what I mean the best thing we can probably say is, so for plus $300,000,000 is sort of like the decision point. If it goes below that, it has to be a special reason for it. And but I think we're probably averaging just a little above that a few basis points, right?

Speaker 2

Yes, I would say so. And the builder That's in the 8.5% range. Some of the fixed rate deals that we're doing of which there's not many, maybe a little bit lower than that, but we're averaging over 8%.

Speaker 3

The builder group is typically around prime floating, but they have a lot of other fees that enhance that.

Speaker 5

Yes, to get it

Speaker 2

back up to that 8% right some change.

Speaker 7

All right. Thanks for answering my

Speaker 5

questions. Thanks, Tom.

Speaker 7

Yes, that was great. Thank you.

Operator

There are no further questions. I would like to turn the call over to Mr. Carraway for closing remarks.

Speaker 2

Well, thank you, Stacy, and thank you all for joining us on the call and your continued support of 3rd Coast Bancshares. We look forward to speaking with you next quarter.

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Key Takeaways

  • Third Coast delivered record Q1 profits with net income of $10.4 million, an 11% return on equity and diluted earnings per share of $0.61, driven by higher loan volumes and investment yields.
  • The bank saw robust balance-sheet growth, adding $107 million in net new loans and $248 million in deposits in Q1, though some seasonal deposits have since rolled off.
  • Non-interest expenses fell 1.9% year-over-year thanks to the company’s cost-savings initiatives—automation, staff optimization and a new “1% initiative” encouraging employee efficiency ideas.
  • Credit quality remained sound with nonperforming assets at just 0.47% of total assets and an allowance for credit losses of 1.02% after modest increases in nonaccruals and delinquencies.
  • Looking ahead, Third Coast expects $300–$400 million in loan growth for 2024, net interest income growth exceeding 10%, expense growth under 5% and plans to drive its efficiency ratio into the mid-50s.
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Earnings Conference Call
Third Coast Bancshares Q1 2024
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