Q1 2024 Third Coast Bancshares Inc Earnings Call

Participants

Natalie Hairston; Investor Relations; Dennard Lascar Associates, LLC

Bart Caraway; Chairman of the Board, President, Chief Executive Officer; Third Coast Bancshares Inc

R. John Mcwhorter; Chief Financial Officer of the Company, Senior Executive Vice President, Chief Financial Officer of the Bank; Third Coast Bancshares Inc

Audrey Duncan; Senior Executive Vice President, Credit Officer of the Bank; Third Coast Bancshares Inc

Bernard Von -Gizycki; Analyst; Deutsche Bank AG

Michael Rose; Analyst; Raymond James & Associates, Inc

Woody Lay; Analyst; KBW

Thomas Wegner; Analyst; Stephens

Presentation

Operator

Greetings and welcome to the Third Coast Bank first-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded and it is now my pleasure to introduce your host, Natalie Hairston. Thank you, you may begin.

Natalie Hairston

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our first quarter 2024 results. With me today is Bart Caraway, Chairman, President and Chief Executive Officer; John McWhirter, 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.thirdcoast.banc. There will also be a telephonic replay available until May 2 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.
These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K that was filed on March 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 reconciliation to the most directly comparable GAAP financial measures were included in yesterday's earnings release, which can be found on the Third Coast websites.
Now I would like to turn the call over to Third Coast Chairman, President and CEO, Mr. Bart Caraway. Bart?

Bart Caraway

Thanks, Natalie, and good morning, everyone, welcome to the TCBX first-quarter 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 second quarter through the remainder of the year.
As you can glean from the earnings release, three coasts beat expectations in nearly every category with successive record quarterly profits attributed to as strong loan growth, enhanced operational efficiency and successful execution of the company's expense optimization plan. We do expect these factors continue driving consistent financial improvement as per our plan.
In terms of cost savings initiatives, we continued 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 improvement 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 million 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, 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, a 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. We believe our first quarter results underscore the company's long-term ability to provide valuable relevant services to our market 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?

R. John Mcwhorter

Thank you, Bart, and good morning, everyone and yesterday's earnings release, we provided the detailed financial tables. So today I'll offer further insight into specific profitability metrics for the first quarter. We reported first quarter net income of $10.4 million, 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 yields on investments and higher average loans. Noninterest expenses were down 1.9% or $500,000 due to cost cutting initiatives implemented in prior quarters. And investment securities are up $68.2 million and the current yield on the portfolio is 615 versus 536 in the previous quarter.
Deposit growth for the quarter was $248 million, more than double our loan growth of $107 million. This resulted in a loan to deposit ratio falling to 92.5% and resulted in net interest margin pressure, which declined one basis point. Much of this quarter's deposit and loan growth was seasonal. As of today, loans are down $30 million and deposits are down $175 million.
On April 10, we sold our five-year pay fixed swap, realizing a gain of $5.25 million. 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.

Audrey Duncan

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, Third Coast loan portfolio has remained strong. Nonperforming assets increased by $4.4 million and represented 0.47% of total assets.
The increase was attributed to a $1.5 million increase in nonaccruals and a $2.9 million increase in loans over 90 days past due and still accruing. The nonaccrual increase was primarily due to four relationships being placed on non-accrual two of which had 75% SBA guarantees, one of which represented our 5% portion of the Main Street loan and one small mortgage loan.
The increase in loans past due over 90 days and still accruing was a mature 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 two C&I loans. Charge-offs for the quarter totaled $839,000, and we recognized recoveries of $97,000. Provisions for credit losses totaled $1.6 million for the first quarter, which was related to provisioning for new loans and commitments.
The ACL remained at 1.02% of total loans and was right in the middle of the range. The loan portfolio mix remained well balanced with percentages similar to the previous quarter, C&I loans represented 36% of total loans, construction development and land loans remained at 19%, while owner-occupied and nonowner-occupied CRE represented 14% and 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% of total loans. Office and medical office loans increased less than $1 million each for the quarter. The office portfolio generally consists of Class B with some owner occupied C 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% 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.
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 in 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, commercial banking, vertical monitors, covenants 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. Bart?

Bart Caraway

Thank you, Audrey. Moving forward into the second quarter and the rest of the year, as referenced earlier, our team continues to execute on the company's strategic objectives. Priorities involve diversifying our deposit portfolio, reducing the company's cost of funds, managing expenses and enhancing 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. We therefore, continue to expect growth of $300 million to $400 million for the year. This should drive net interest income growth to exceed 10%, coupled with noninterest 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 positions 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. I would now like to turn the call back over to the operator for the question-and-answer session. Operator?

Question and Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)
Bernard Von-Gizycki, Deutsche Bank.

Bernard Von -Gizycki

Hey, guys. Good morning. So just wanted to discuss some of the drivers of the NIM. came in better than expected. It just declined just one basis point. Obviously, there is some good cost controls with the interest bearing deposit costs and total interest bearing liabilities declined two basis points. Our 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 them for 2Q?

Bart Caraway

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 second quarter. But what we will have is now basically locked in guaranteed for the next five years, all in everything, including the uptick in investments.
I think the margin's 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. I know there's a lot of moving parts in the one big drag that we had, the margin would have been up, but we had so much cash come in late in the first quarter and our spread on that was in a 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, our loans were down a little bit in April, but that was just because of a payoff, nothing, nothing unusual. There were obviously still early in the quarter, but but deposits were seasonal. A lot of that money has gone out that changes our mix. That will certainly help improve the margin all in net-net, I think the margin will be pretty stable.

Bernard Von -Gizycki

Appreciate that. And John, just maybe just following up on, I believe and Bart, when you mentioned the net interest income guide for the full year, I think you said a plus 10%. I think the previous guide was plus 10 to 15. I'm just wanted to make sure you could just confirm if that's the case, why to the lower end now, what kind of rate cuts and you or if any of what are you assuming in that boat and we weren't necessarily trying to guide to a lower number.

R. John Mcwhorter

It's there's the uncertainty there because of the lumpiness in the portfolio know, if you look at our average loan balances. Much of our loan growth came late in the first quarter that it doesn't do anything to help us when we're thinking about full year numbers. I mean, literally most of the growth that we had was in the last two or three 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, you know, we're still comfortable with this range of $3 or $400 million. But 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 three or four or five months.
We thought it was a good opportunity to do that, and that's going to help offset some of the lumpiness in the loan portfolio, but but weren't specifically trying to guide to a to a lower number that we do still think it will be over 10%.

Bernard Von -Gizycki

Perfect, guys. Thanks for the color, and thanks for taking my questions.

Operator

Michael, Rose, Raymond James.

Michael Rose

(multiple speakers) Good morning and thanks for. Thanks for taking my questions. Just kind of following up on that, I noticed the ID mix continue to tick down around 10% as it relates to just kind of expectations for the margin that I just talked about. What are you assuming there in terms of potentially reaching a trough, hopefully growing.
And 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.

Bart Caraway

And 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. You know, we're not going to have a big drop and then a big uptick the way some of the other banks have had in 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 that was certainly a little bit of a surprise to us to see that drop so much. And certainly, it certainly weighed on the margin, but I don't expect that to happen again.

R. John Mcwhorter

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 had for the entire bank in every line of business, you know, has been charged with developing a plan to help us grow those deposits and I think has been very good, 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 and each one one's businesses plans and it's been relatively successful in a pretty hard market.
And part of that, too, is we do have the benefit. Again, we have a lot of bankers that joined us over the last, call it two years and they're still moving business over. So we are fortunate that we have the benefit of kind of a pipeline of customers that we continue to work on moving deposits is slow, right? So especially whenever it's bigger commercial accounts, but have treasury has been instrumental. As John said, we've actually had a nice uptick in those commercial accounts, and it's just more of the same executing at this point.

Michael Rose

That's great color. I appreciate it. Maybe just as a follow up, I had 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 some cost cutting and you guys are highly focused on expenses, but at the same time, I mean, you have ongoing investments to continue to build.
Yes, the earnings power of the company, right. And I know some of that is on the deposit side, as you mentioned, John, Bart excuse me. And then on, can you just talk about some of the other areas that you're continuing to invest in? Or should we think of beyond kind of this year and into the next couple of years?
Thanks.

Bart Caraway

Yeah. So Michael, the biggest number of courses is salary expenses and we do all of our annual rate in the first quarter. So we have a pretty good handle on that number going forward. We we don't have a lot of openings. We're not looking to hire a lot of people. So it helps give us confidence on 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. Some of the other things are in a little harder. Sometimes you have legal expenses, you weren't expecting or consulting or that sort of thing that I know no big expenses 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 expenses. It's an administrative office today and will become a full branch within months, I think. But but again, no big, no big increase in expense. I think holding under that 5% unless something out of the ordinary happens should should be relatively easy.

R. John Mcwhorter

And a little different color taken from their perspective, Michaels that, you know, we kind of decide to really focus in on priorities. So for us, particularly when it looks like 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.
So we're spending more resources in focusing on the important things, which is developing deposits, developing business and less distractions from from other things. And I think we're just getting better, better refining. And what I'll 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 positions looking at how we can simplify it and do it more efficiently. And a lot of little little things add up to big things, right? And so it's big and little things happening in. It's kind of change in 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 and as these things take momentum.

Michael Rose

No, that's great and well, understood. And I think putting it all together. Just last question for me. It's just you, Bart, you talked about operating leverage and the strength there. I think for a growth bank, especially given the intense focus on the on the expense side, it being surgical, as you imagine, 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 three to five years?

Bart Caraway

It's funny, you say that one, it's not going to take three to five years, but there's a strong emphasis internally to get our efficiency ratio to something to start with the five. So that's what I've been said. And everybody in the organization knows that and everybody has been just great supporters of trying to get us there.
So you know, I'm not going to predict exactly when we get to start with the five, but I will tell you internally, there's a heavy emphasis of us finding our way there and part of that will be a little growth, but it's also more focus on the expense side and two is going to marry up and hopefully we get there a lot sooner than what you'll think.

Michael Rose

Perfect. And I lied, maybe one last one just on 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. Thanks.

R. John Mcwhorter

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. I mean, for the most part, I think it's a good number. I mean that same $2 million run rate is pretty good. 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 to you are comfortable with that $2 million number, little bit more than $2 million going forward.

Michael Rose

Perfect. I appreciate all the color. Thanks.

Bart Caraway

Thank you.

Operator

Woody Lay, KBW.

Woody Lay

Good morning.

Bart Caraway

Good morning, Dave.

Woody Lay

I wanted to ask one follow-up just on expenses. As we think about next quarter, it sounds like you remain very expense focus, but it but it's the roughly $26 million. Is that a pretty good run rate on going forward?

R. John Mcwhorter

It is it was a pretty clean number.

Woody Lay

And then shifting over to credit, you know, the NPAs remain stable, but was just curious on any trends within the credits that are criticized or classified bucket that you could have because And sir, this is Audrey.

Audrey Duncan

I can answer that. We had a some a few downgrades in the quarter. They don't show in the nonperformings because they are still some paying and accruing, 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.

Woody Lay

That's helpful color. And maybe last for me, and I know there is some seasonal some seasonal noise, 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 to match the loan growth with deposit growth?

R. John Mcwhorter

It is so, you know, if we're guiding to $3 million or $400 million 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. We can always adjust our wholesale funding to not get too terribly far ahead of ourselves but in our loan-to-deposit ratio and kind of that, we now have 94% to 98%. What you should probably expect us to run that for the rest of the year.

Woody Lay

All right. thank you for taking my questions.

Bart Caraway

Thank you.

Operator

(Operator Instructions)
Thomas Wegner, Stephens.

Thomas Wegner

Hey, good morning, everyone. I'll pay more than we saw some build in excess liquidity towards the end of the first quarter with the seasonal deposits running off, can you give us idea of just where you expect that excess liquidity, the shakeout?

Bart Caraway

So most of the excess liquidity we just kept in cash because we knew it was somewhat seasonal just based on the customers that we're sending 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 million already this month roll-offs, which is tax-related sort of stuff for a couple of our customers. Those are relatively few customers that that caused the seasonality. So the rest of the balance sheet is not going to be much, much affected by just cash.

Thomas Wegner

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

Audrey Duncan

Typically we don't go below [so for plus 300].

Bart Caraway

We're kind of looking at each other. I think trying to have not have a direct connection, but you're right. So I mean, I think as we think about we have covered barge divisions within each one of them operates a little differently and some more fee income based versus those.
But I think, yes, I mean, the best thing we could probably say is [so for plus 300] is sort of like the decision point, you know if it goes below that and has to be at a special reason for it and but I think we're probably averaging just a little above that a few basis points or

R. John Mcwhorter

(multiple speakers) that's an 8.5 range. Yeah, some of the fixed rate deals that we're doing of which there's not many may be a little bit lower than that, but we're averaging over 8%.

Audrey Duncan

builder group is typically around prime prime floating, but they have a lot of other fees then enhance that you have to give it back to get out of that eight and make some change?

Thomas Wegner

All right. Thanks for answering my questions.

Operator

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

Bart Caraway

So thank you, Stacey, and thank you all for joining us on the call and your continued support of Third Coast Bancshares. We look forward to speaking with you next quarter.

Operator

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