Third Coast Bancshares Inc
NASDAQ:TCBX
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Third Coast Bancshares Inc
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Greetings, and welcome to the Third Coast Bancshares First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Natalie Hairston. Thank you. You may begin.
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 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.thirdcoast.bank. 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 website.Now I would like to turn the call over to Third Coast Chairman, President and CEO, Mr. Bart Caraway. Bart?
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, Third Coast 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.In terms of cost savings initiative, we continue to capitalize on automation, software enhancement, 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 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 advisers 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?
Thank you, Bart, and good morning, everyone. In 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 base. 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 $6.15 versus $5.36 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 1 basis point. Much of this quarter's deposit and the loan growth was seasonal. As of today, loans are down $30 million and deposits are down $175 million.On April 10, we sold our 5-year pay fixed swap realizing a gain of $5.25 million. This will be accretive to 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.
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's 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 4 relationships being placed on nonaccrual, 2 of which had 75% SBA guarantees, one of which represented our 5% portion of a Main Street loan and 1 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&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 group 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. Bart?
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?
[Operator Instructions] First question comes from Bernard Von Gizycki with Deutsche Bank.
So just wanted to discuss some of the drivers of the NIM. It came in better than expected. It just declined just 1 basis point. Obviously, there was 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 have really 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?
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 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.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 first quarter, 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. 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. That will certainly help improve the margin and all-in, net-net, I think the margin will be pretty stable.
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 is the lower and what kind of rate cut to you or if any, what are you assuming in that bullet 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 first quarter. That doesn't do anything to help us when we are thinking about full year numbers. I mean, literally most of the growth we have was in the last 2 or 3 weeks of March. So just kind of layering that in. I mean, make it a little harder get to the 15%, it just depends on -- we are still comfortable with this range of $300 million, $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 3 or 4, 5 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 we're specifically trying to guide to a lower number now. We do still think it will be over 10%.
Next question, Michael Rose with Raymond James.
Just kind of following up on that. I noticed the [ NIB mix ] continues to tick down around 10%. 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 potential 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?
Yes. 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 point, if I remember it right. So we don't expect a lot of pressure, we are not going to have a big drop and then a big uptick the way some of the other banks have had. The non-interest bearing specifically is, I mean, that's hard the 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 noninterest-bearing, but that was -- 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. 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 3 objectives that we 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, very helpful because in the last 12 months, we've seen the fruition of all 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 on business plans, and it's been relatively successful in a pretty hard market. And part of it, too, is we do have a 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, Moondeposits a slow, right? So especially when ever is bigger commercial accounts, but 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.
That's great color. I appreciate it. Maybe just as a follow-up, expenses step 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? And I know some of that is on the deposit side, as you just mention, John, or Bart, 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?
Yes. So Michael, the biggest number, of course, the salary expenses, and we do all of our annual raises in the first quarter. 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, 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. 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 that 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 expense. It's an administrative office today and will come a full branch within months, I think. But again, no big increase in expense. I think holding under that 5% unless something out of the ordinary happens, should be relatively easy.
And a little different color, taking into 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, like project management or new software. I mean we have really been surgical in our approach that we simplified our processes and any new projects have been tailored down to just a handful versus broader. 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 seeing better and better refining.And what I'd 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 in 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? 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.
No, that's great and well understood. And I think putting it all together, just last question for me. It's 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'd be in 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 going to continue to drive that efficiency ratio down, again, intermediate, longer term to somewhere below 60%. Is that just theoretically feel right as you think about the franchise over the next 3 to 5 years?
It's funny to say that. One, it's not going to take 3 to 5 years. But there's a strong emphasis internally to get our efficiency ratio to something that 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. 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.
Perfect. And like 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 onetime catch-up or anything in there?
So the service charges this quarter related more to loans or at least the increase related more to loans then 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 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 we're comfortable with that $2 million number, a little bit more than $2 million going forward.
Next question, Woody Lay with KBW.
Wanted to ask one follow-up just on expenses. As we think about next quarter, it sounds like you remain very expense focused. But is the roughly $26 million, is that a pretty good run rate going forward?
It is. It was a pretty clean number.
Okay. And then shifting over to credit. The NPAs remained stable, but I was just curious on any trends within the criticized or classified bucket that you could speak on?
Sure. This is Audrey. I can answer that. We had a few downgrades in the quarter. They don't show in the nonperformings because they are still paying and accruing. But one of them was a consumer -- kind of consumer note receivable loans. 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 below 55% LTV on that owner-occupied real estate.
All right. That's helpful color. And maybe last for me. I know there was some seasonal noise to the deposit. But if I sort of strip out that $175 million, I mean you still had 8% deposit growth. Is the goal from here to match the loan growth with the deposit growth?
It is. So if we're guiding to $300 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 always address 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.
[Operator Instructions] Next question comes from Thomas Wendler with Stephens.
We saw some build in excess liquidity towards the end of the first quarter. With the seasonal deposits running off. Can you give us an idea just where you expect the excess liquidity to shake out?
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 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 million 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 caused the seasonality. So the rest of the balance sheet is not going to be much affected by just cash.
Okay. And then can you give us an idea of what you're seeing for loan yields on new production?
Typically we don't go below [ SOFR ] plus 300.
Yes. We're kind of looking at each other, I think trying to [indiscernible]. 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'd probably say is [ SOFR plus 300 ] 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 so --
Yes, I would say so in the builder...
Within the 8.5% range, yes. 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%.
The builder group is typically around prime floating, but they have a lot of other fees enhance that.
Yes, to get it back up to that 8-some change.
Right.
There are no further questions. I would like to turn the call over to Mr. Caraway for closing remarks.
Well, thank you, Stacy, 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.
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.