Third Coast Bancshares Inc

NASDAQ:TCBX

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to Third Coast Banc Third Quarter 2023 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, Ms. Hairston, you may begin.

[Natalie Hairston]

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Third Coast Bancshares conference call and webcast to review our third quarter 2023 results.

With me 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.tcbssb.com. There will also be a telephonic replay available until November 3, 2023, and more information on how to access these replace features was included in yesterday's earnings release.

Please note that the information reported on this call speaks only as of today, October 26, 2023, 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. 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 15, 2023, 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?

[Bart Caraway, executive]

Thanks, Natalie. Good morning, everyone. Thank you for joining us today. I'll begin by highlighting the company's performance for the third quarter. John will then provide a more detailed financial review, and Audrey will give a credit update. Then before we take your questions, I'll return to discuss our outlook.

During the third quarter, we achieved significant progress towards our strategy of conservative loan growth, disciplined expense management and strengthening shareholder value.

Total assets reached $4.22 billion during the third quarter, an increase of 6.4% over the prior quarter and 19.9% increase over the prior year period. We booked over $226 million in high-quality loans, an increase of 6.8% sequentially and 19.7% increase over the third quarter last year. Likewise, deposits reached $3.65 billion, a 7% increase from the linked quarter and a year-over-year increase of 22.2%.

In response to market conditions, we took some deliberate actions to reduce our operating expenses and other overhead costs, including the previously announced winding down of our auto-finance group as well as a 5% reduction in workforce. As a result, our full-time employee head count now stands at approximately 370, which is consistent with our numbers from the beginning of the year. We have been able to grow the bank by $443 million in that same time frame.

During the quarter, we also booked a $2.6 million provision for credit losses, primarily driven by strong loan growth for the quarter, which Audrey will discuss in more detail in her prepared remarks. These actions were necessary to position us for the fourth quarter and establish a solid foundation for 2024.

Deposit rates remain highly competitive for this quarter, and we were able to increase our deposits by $238 million or 7% from the previous quarter, a notable achievement. Our success in deposit acquisition can be attributed to the deposit campaign contest held across multiple lines of business, including retail, private banking, treasury management and commercial bankers.

We were able to raise deposit by an impressive $275 million within a short span of 4 months. Our bankers' unwavering focus on deposits, coupled with their commitment to building strong relationships with clients with a crucial role in achieving this feed. This approach, combined with our commitment to providing innovative solutions and exceptional service has resulted in success across all our markets. Our insured cash suite and treasury management services have particularly proven to be innovative solutions contributing to our company's growth.

As we progress, we will continue to explore new ways to deepen our relationships with existing customers and attract new ones, all while maintaining our focus on deposits and loans.

Additionally, we were able to increase book value and tangible book value per share by 1.4% and 1.5%, respectively. By delivering exceptional shareholder value and increasing tangible book value per share, we have made significant progress in enhancing our balance sheet and maintaining a strong financial position in the third quarter. We believe we can continue to drive increased shareholder value and achieve sustainable success long term.

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

[John McWhorter, executive]

Thank you, Bart, and good morning, everyone. We provided the detailed financial tables in yesterday's earnings release. So today, I'll provide some additional color around select balance sheet and profitability metrics for the quarter.

As Bart mentioned, loans were up $226 million. Deposits were up slightly more at $239 million and total assets reached $4.22 billion on all new records for the company. Net interest margin for the quarter was down 11 basis points, slightly more than expected due primarily to higher-than-expected loan growth. Spreads on new loans tend to average less than the bank's current net interest margin. Loan growth is expected to be less in the fourth quarter, which should result in less margin pressure.

Additionally, the bank has a $100 million treasury security maturing in October, yielding 2.25%. If the proceeds were used to pay down wholesale funding, the net interest margin would improve 2 to 3 basis points. We therefore believe that for the fourth quarter, the net interest margin will be down less than 5 basis points.

Noninterest expense was materially higher than expected due to several nonrecurring items, including severance expenses, broad losses and legal fees associated with those items.

As previously mentioned, severance expense totaled $460,000. We reduced headcount to roughly where we started the year. And as a result, we expect fourth quarter salary and benefit expense to be less than $16. All other noninterest expenses were up $1.35 million in the third quarter versus the second quarter. This increase was primarily due to the fraud losses and legal fees as previously mentioned.

Even though net interest margin was down 11 basis points for the quarter, net interest income was up $1.2 million to $35.3 million due to strong loan growth. We have shown consistent growth in net interest income since going public in the fourth quarter of 2021 when our net interest income was only $24.6 million.

The third quarter performance also resulted in increases in both book value per share, which reached $24.57 and tangible book value per share, which reached $23.17. This is up 11% or $2.23 from $20.94 since going public in 2021. This compares very favorably to our peers who over the same period saw an average decrease in tangible book value of 9.3%.

Also as a reminder, we use the converted method to calculate earnings per share. For the third quarter, this resulted in antidilution and therefore, the preferred shares were excluded from our diluted share count. We expect this to flip back in the fourth quarter. That completes the financial review.

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

[Audrey Duncan, executive]

Thank you, John, and good morning, everyone. Third Coast credit performance for the third quarter was again strong. Our total nonperforming assets currently stand at $16.4 million, which is 0.39% of total assets and our net charge-offs have stayed extremely low at $24,000 for the quarter. The $6.4 million increase in nonperforming loans is primarily due to the placement of a $2.3 million loan on nonaccrual and a $2 million loan that was over 90 days matured and still accruing. Both loans are well secured and no losses are anticipated.

In October of 2023, the $2 million loan was renewed in its current. The remaining loans placed on nonaccrual this quarter consists of 2 relationships totaling $2 million and minimal losses are expected as those loans are worked out. The remaining loans that are over 90 days past due at quarter end are well secured and in the process of renewal.

Overall, we remain confident in our asset quality, which continues to remain strong. Provisions for credit losses totaled $2.6 million and related to provisioning for new loans and commitments. The ACL remains at the high end of the range calculated under the new CECL methodology.

Consistent with our prior quarters, loan growth of $226 million continues to be well diversified from a loan category standpoint. Commercial loans were up $123.7 million, and real estate loans were up $106 million from the previous quarter.

The loan portfolio mix is well balanced with commercial and industrial loans accounting for 36% of total loans and owner-occupied and nonowner-occupied commercial real estate at 15% and 16%, respectively. Nonowner-occupied office represents 1.8% of the loan portfolio with nonowner-occupied medical office accounting for an additional 1.3% while owner occupied office and medical office totaled 2.3% of total loans. The office portfolio generally consists of Class B with some owner-occupied Class C space and is all located within our Texas footprint.

Performance for the quarter is a testament to our solid business model and our commitment to prudent risk management. We are pleased to see continued loan growth across a diverse range of loan categories, which further strengthens our position in the market.

At the same time, we're mindful of the potential risks that may arise from the changing economic environment. We will continue to closely monitor our credit quality and continue to be conservative in our lending practices to maintain our strong credit performance. Overall, we are confident in our ability to navigate the current economic landscape and stay committed to delivering conservative loan growth.

With that, I'll turn the call back to Bart. Bart?

[Bart Caraway, executive]

Thanks, Audrey. As we move into the fourth quarter and end of the year, we are confident in our goal to achieve operating leverage, which will translate into increased shareholder value.

We will maintain an active focus on managing expenses by carefully analyzing our budget and identifying areas where we can reduce costs without sacrificing customer quality or operational efficiencies. At the same time, we will continue to invest in key areas of our business that are critical to our future growth.

Our commitment to full wallet relationship banking remains a top priority. We will continue to leverage our treasury management and other services, deepen existing customer relationships and attract new ones.

In addition, our innovative custom digital solutions, such as Banking as a Service and embedded finance platforms will play a larger role in 2024. We have successfully transitioned from the proof-of-concept stage to fully operational with wide partnerships.

Our bankers and branches are strategically located in Texas' best markets, providing access to some of the highest quality deals available, allowing us to remain conservative in our deal approach and choose the most promising opportunities.

Looking ahead, we will remain optimistic about our ability to continue to grow our business. We will continue to prioritize asset quality and make prudent and proactive decisions relative to the current economic environment, our dedicated team is committed to delivering exceptional service to our customers and creating long-term value for our shareholders, and we are confident that our growth strategy will enable us to navigate the challenges and opportunities that lie ahead.

This concludes our prepared remarks. I would now like to turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator]

[Operator Instructions] The first question comes from the line of Graham Dick with Piper Sandler.

[Graham Dick, analyst]

So I just wanted to start on expenses. You've got the $460,000 in severance, $400,000 in fraud losses. And then you mentioned another legal charge. What was the size of that legal charge this quarter?

[Bart Caraway, executive]

Yes, we didn't detail out the legal expenses. I mean, any time you have a reduction in force, there's legal fees associated with agreements to the employees, we didn't detail that out just because we always have lots of legal fees, but it was somewhat material, certainly nonrecurring.

[Graham Dick, analyst]

Okay. Yes. I'm just trying to get a sense for where maybe the growth came off of the -- I think we had talked about $24 million, give or take, last quarter. So I'm just trying to get a sense for what drove the higher expense base this quarter? Was it the deposit competition you guys were talking about? Or was it related to the loan growth, which was really strong this quarter. Just trying to -- any color there would be helpful.

[Bart Caraway, executive]

Yes. I mean there were some incentives related to the deposit campaign where we were paying out prizes to people. They were bonuses earned during the quarter. But I think probably the important number is where we think the fourth quarter will be, and I'm pretty confident that it will be less than $16 million in total salary expense and total noninterest expense, we think will be less than $26 million.

[Graham Dick, analyst]

Okay. Okay. That's helpful. Okay. And then, I guess, looking into 2024, I mean does -- what's the -- it sounds like you guys are focused on expense management, but obviously, you're still growing bank, having to invest where needed. What's your outlook for expense growth as you begin to budget for 2024?

[Bart Caraway, executive]

Yes, that's a good question. I mean we certainly talk about it a lot. On the loan side, on the growth side, we've, for the last couple of years, talked about growth being lumpy, it makes it hard to predict. We certainly weren't expecting $225 million in loan growth for the quarter.

And it's not as if all of those deals were sourced and approved and booked all in the quarter, some of them were carryover from previous quarters. And the same sort of things will happen on expenses, and that's kind of what happened at this catch-up on expenses that we weren't expecting.

But looking ahead to next year, I mean, we I mean our plan is to be disciplined. I mean, we're trying to grow faster than expenses. I think we've done a pretty good job with that in the past, and I think we will again next year. So if we think that net interest income is going to continue to grow in that 10% to 15% range, expenses will be less than that. So they'll be in the 5% to 10% range.

Yes, graham, if I could add a little color to it, again, I think we're in the process as we've grown and reallocating resources internally to be more efficient. And I think you can see that from -- if you look at our head count, not just the expenses, but just the headcount, we started the year at 369 employees. We probably got a little ahead up to 30 and 90 or so employees, now we're back down to about 370 million, and we've grown $443 million. So what you're seeing is we're kind of managing the employee head count to still continue to grow.

And this whole process has been what we've talked about before is that we've got to grow into a little bit of the operating efficiency as well as cut costs. And I think the $226 million coming to the third quarter is actually fortuitous because I think the fourth quarter will be slower, but it tees up the opportunity for us to grow a little bit into our operating efficiency, control our headcount and also have an increase in revenue that's going to affect the bottom line. And I think the fourth quarter is going to look a lot better, and it's certainly going to tee us up for a good 2024.

[Graham Dick, analyst]

Okay. That's very helpful, Bart. And then I guess you touched on it a little bit there, but the loan growth outlook, obviously, you guys had some unexpected stuff happened, things got pulled forward to this quarter. What do you guys think for next year on loan growth? I think this year, before this quarter, we had talked about maybe $300 million to $400 million in growth for the full year. Can you frame up what you expect in 2020? Do you think it will be a little bit less than that as the economy cools down? Or are you still seeing pretty good opportunities on the lending side to do something similar?

[Bart Caraway, executive]

Yes. I mean -- I think what -- the nice thing the position we're in is we've had some really high-quality customers that we have been onboarding. And it's just a unique market in that we can be very choosy. And so it's been very nice to get full high-quality customers from some of the competitors and establish relationships.

So with that, I mean, you'll still continue to see some growth. I think for the fourth quarter, the growth is going to be very mild, $50 million to $100 million. But when you look at 2024, we think somewhere between $300 million and $400 million is quite reasonable.

And again, you got to factor in that we're going to have some attrition in loans. So there's going to be some paydowns and payoffs with it. But I think net growth of $300 million to $400 million is very reasonable. And I think all of that is coming from just almost high grading the portfolio.

We just have such excellent clients that we're choosing that I think the portfolio is even going to get even better as we continue to grow. So we're very excited about it. I think it's an opportunity for us to gain market share in our markets with some of the best clients that are out there with, call it, again, $300 million to $400 million in net growth for 2024. John, do you have anything to add to it?

[John McWhorter, executive]

I mean rates may affect that somewhat to the extent that rates were to continue to go up, we'd be at the lower end of that scale. If they come back down, I think we'll see even more opportunities, particularly on the builder side.

[Operator]

Next question comes from the line of Michael Rose with Raymond James.

[Michael Rose, analyst]

Just wanted to start on kind of the continued negative mix shift in deposit book. I know you guys have had really strong deposit growth. It's been a welcome sight to see. But obviously, your deposit costs are fairly high relative to peer, and I think a function of that is just a strong asset growth that you've had.

But just as we think about the next few quarters in a rate environment where Fed rates are kind of at or near peak, how should we think about the progression of deposit cost betas and mix shift as it relates to kind of the ongoing asset repricing that is going to help the margin again this quarter. Just trying to kind of frame up the puts and takes as we think about the yield and margin progression into next year?

[John McWhorter, executive]

Sure. So looking at noninterest bearing balances first. As a percent of total deposits, they've certainly come down, the dollars haven't come down so much. On an average quarterly basis, our noninterest-bearing was actually up a little versus last quarter. But those deposits are certainly harder to grow when we have a quarter where we're growing $240 million in deposits, it's hard for those noninterest-bearing to keep up.

So yes, that certainly is a negative shift in the mix. And -- we will continue growing dollars, but as a percent of total deposits to the extent that we're growing fast, that's going to be harder to keep up. We're certainly seeing more deposits go into CDs than anybody would have predicted a year ago.

But the good news about being relatively high as far as cost of funds is I think we've already repriced most of the portfolio. We just don't have much left to reprice. Higher for longer is probably good for our margin, I think especially relative to peer. I just don't think we'll see much change. And from an asset liability perspective, we're almost exactly evenly matched our provider for ALM has said that we're certainly one of the most closely matched banks in their portfolio of several hundred, maybe singularly the most even fact.

So if rates stay right where they are, I don't think we'll see much change in the margin. And even if they change a little bit, I don't think we'll see much change. Yes, the numbers kind of ask, a lot of the stuff that's going on in the bank, as I think you'll see over time, really the positive net is between the commercial bankers and the really the treasury management side is that we're seeing a lot of onboarding of accounts.

We certainly have a lot more full wallet relationships than we've ever had. And we're rolling out more sophisticated products and being able to handle more sophisticated treasury customers. And they're quite busy onboarding customers, but they're keeping lower DDA balances because obviously, they want to earn as much as they can on their money, everybody is managing the money carefully.

But we did have a lot of customer acquisition is we're growing so fast, as John said, the percentage-wise, it's tough to keep up. But overall, what I would tell you, our customer base more than ever tends to have both deposit accounts and loans with us. It's very much a full wallet relationships going forward.

[Michael Rose, analyst]

I appreciate all the color. And then obviously, just on the headcount reductions this quarter, some of that's strategic. Just as we think about the next year or so, I mean, are there other businesses? Or I know you got out of the auto business, or are there other portfolios, other optimization efforts that you could look to? And maybe just on the loan side, are there areas that you're emphasizing versus kind of deemphasizing, I assume office might be one of those, but we just want some color.

[Bart Caraway, executive]

Yes. I mean, if I could start with just the headcount part of it. I think we're looking at this in exploring all kinds of efficiencies across every line of business. I think everybody in the bank has bought into the efficiency side of it. It's been very interesting how we can even utilize cross-trained employees. For instance, we have some retail employees that volunteered to learn some of the BSA side and with excess capacity, they're actually performing some of the BSA/AML tasks with it. And so it's neat that everybody's kind of pitched in and we're finding ways to utilize people to their fullest.

At the same time, as we continue to grow some functions need more resources on. So it's been we staffed as we are, we do have to continue to think about where we're going in the future and make sure we're making proper investments.

At the same time, I think John does a fantastic job of looking at every line of business and monthly, we grade that line of business. And our -- the existing lines of business that are left are very profitable, and we're very pleased with their performance. And I think they're getting with scale even more efficiency.

So I don't see at this point that there's another line of business to exit as much as we're just -- everybody is going to grow into their size. I think if you look at all of our different lines of business, they all can scale and become more accretive to us with just even a little bit more growth. As far as the loan mix, I don't know, Audrey, if you want to have any comments on...

[Audrey Duncan, executive]

As far as what we're not looking at, I would say, you mentioned office, of course. Our office is holding up really well. We only have one loan that's classified for $1 million. But we're not looking in office, I would say, not looking in retail -- and we don't do much -- wouldn't really entertain much multifamily at this time, really focusing on C&I and the full wallet relationships that we've been talking about.

[Michael Rose, analyst]

Makes sense. And John, maybe just one final one for me. Just the loss in other noninterest income. Sorry if I missed it in the release, but kind of what drove that? Was there something that's nonrecurring in there? Just would love an explanation.

[John McWhorter, executive]

Well it is nonrecurring. I don't -- you're talking about the one fraud loss -- in other non income, we had an unfavorable swing quarter-to-quarter and some of that wind of a swap between quarters there, Michael, on SBIC. I mean, we can -- we have several SBIC investments and some quarters, they make money and other quarters, they don't.

So most of it was related to SBIC having a great quarter last quarter and actually losing a little money this quarter, which we don't have big investments there. It's usually not material enough to change the line item, but it just happened to be this quarter.

[Bart Caraway, executive]

Michael, I just might add one thing on that. The SBICs, I mean, they don't often have quarters or they're selling an asset at a loss that we're needing to realize. So I certainly wouldn't expect that going forward. We didn't point it out because -- I mean, I don't guess you all would typically take out something like that. I mean we didn't highlight it last quarter that they had a good quarter, just kind of one of those fluky things that went from good to bad over consecutive quarters. And it was, I don't know -- [ 250,000 good last quarter and down 250 ]. I mean it was a swing kind of that sort of magnitude.

[Operator]

Next question comes from the line of Bernard Von Gizycki with Deutsche Bank.

[Bernard Von Gizycki, analyst]

John, I heard your comments on the drivers of the lower NIM than expected given the loan spread dynamics. What kind of spreads are you putting on to the new loans versus the portfolio average? What are your expectations on loan spreads from here?

[John McWhorter, executive]

Yes. So our margin is relatively high compared to peers, but our spreads are probably much closer. We're competing for deals every day. I mean the reason our margin is better is because we don't have the AOCI losses. We don't have the legacy investment portfolio that's relatively low yielding.

But for new business going forward as we're looking at it, I mean, we typically won't do a deal that is less than Fed funds plus 300. So if it funds today or so far, however you want to look at it is 5.25, we typically don't do a deal for less than 8.25 today. There could be some exceptions to that, but for the larger floating rate deals, they're typically 300 over or so.

[Bart Caraway, executive]

And I think I would add just that with the flight quality and our chance to get some of these really high-quality deals, the margin is a little less whenever you're talking about a customer that could basically pick anything they wanted together with. Unfortunately, we've been able to get those type of customers. It is a little better margin, but it's also a fair quality deal. So obviously, there's always trade-offs that we'll try to manage.

[Bernard Von Gizycki, analyst]

Got it. And then just on the auto-finance exit. I think last quarter, you noted that you'd expect something like direct expense savings would be $500,000 plus, and you were reallocating $50 million of loans in some more strategic areas of focus. Is that still kind of like the same thought process there? Any updates?

[John McWhorter, executive]

Yes. I mean the team has been disbanded at this point. That portfolio was paying down. I don't have the numbers, but it's way less than $50 million Yes. And earning that effective September 30. So we really haven't seen any of the savings there, particularly on the salary side.

On the loan side, we have certainly stopped doing that last quarter. I think that portfolio has about a 4-year weighted average life. So it pays down several million dollars a month, and we're reallocating those proceeds to other loans, but the direct effects are -- we didn't see any of it in the third quarter. We'll see more in the for not super material, but every little bit adds up, we're certainly looking at everything.

[Operator]

[Operator Instructions] Next question comes from the line of Matt Olney with Stephens Inc.

[Matt Olney, analyst]

I want to go back to the discussion around the margin. And John, you mentioned the spreads on some of the more recent loan growth. I appreciate the commentary there. Any other color about how those spreads have changed during the course of the year. Have those maintained similar levels? Or any kind of widening that you've seen this year SOFR?

[John McWhorter, executive]

I mean -- Audrey, I mean, certainly jump in. I don't think they have changed that much. For the bigger commercial corporate type loans, I think we're in that SOFR plus 300 range. We do see deals that are at plus 200, but we're typically just not doing those.

I think we've commented before that we could be growing faster if we were willing to do those, but we're mindful of our capital positions and our liquidity position and are not often doing things that are certainly in the loan 2s, I mean there might be the occasional deal plus 2.50% or 2.75%, but those are kind of more of the exception than the rule.

Yes. I mean Audrey and I have talked that we've been very disciplined about trying to make sure we have kind of the 600 spread. They're being -- they're deals that had a story behind them that makes a lot of sense for us to do. And certainly, ones that other choose to do it all over again with it because they're good quality customers, and there's a reason that we're doing it.

So I think from the loan selection, I think we've been very selective and disciplined. I think that's what I continue to say. Yes, the exceptions are typically at least partially...

[Audrey Duncan, executive]

And there is a higher credits, may be a high past. Otherwise, we -- make sure we don't go below .

[John McWhorter, executive]

Yes. And even with that, I think we are seeing a lot of loan opportunities. And maybe we do one in out every 10 or something. I mean it is a market out there. Obviously, there's a lot more loan demand than there is looks to confront. So we're being able to see cherry-pick really good customers. And I think we'll continue to be just that disciplined as we go forward with it.

[Matt Olney, analyst]

Okay. And then I guess the -- as far as the incremental cost of funds that you're using to fund the loan growth, if we blend the growth, the dollar amount growth of the NIBs along with the interest-bearing deposits, what's the incremental cost of the total deposits that you've seen more recently?

[John McWhorter, executive]

Yes. So for this last quarter, when we had the deposit campaign that really span the last 2 quarters, our cost of funds for those deposits was less. I think it was less than 5%. Wholesale deposits that we're needing to raise to make up the difference is probably more in the 5.30% range. It's hard for us to predict what the mix is going to be going forward as to our self-generated core deposits versus what is needed on a wholesale basis to make up the difference. But self-generated it's probably averaging in the 4.5% range and then the wholesale in the $530 range.

[Matt Olney, analyst]

Okay. Okay. Well, if I kind of take that and think about the margin in 2024, it feels like there's a little bit more incremental pressure beyond the fourth quarter we talked about, just if we assume those spreads continue. Is that the right way to think about the margin for next year, little incremental pressure from the fourth quarter?

[John McWhorter, executive]

It is. If we would have grown loans, $100 million in the third quarter, I think we would have been pretty close to our forecast of the margin being down plus 5%. So it is certainly a function of how fast we grow. Now with that said, if we grow $300 million next year, it's certainly a smaller percent of the overall balance sheet. So it won't affect the margin as much as it would have this year. But it's going to be less than 371 on average the spreads for new business.

[Matt Olney, analyst]

Okay. Yes. That makes sense. And then just lastly, capital. Can you talk more about just capital constraints, binding ratios that you're watching for, especially in light of -- if the pipelines do improve and loan growth at the higher end? Just kind of what kind of capital ratios are you watching closely?

[John McWhorter, executive]

Yes. So there's -- our risk-based capital ratio was flat quarter versus quarter. And that's the one that we watch most closely is a high loan-to-deposit ratio. But as long as we're earning in that 1% ROA is going to be -- it should be capital accretive. And we may not be exactly there this next quarter, but certainly, that's our bare minimum goal, and we expect to be there.

And again, it will be capital accretive. So we are not planning any capital on burns. Yes.

[Bart Caraway, executive]

And I think in 2024, we should be in a capital accretive to where self-funding basically is what the goal is. And John and I feel pretty good about not being there, but we don't need capital. Yes.

[Matt Olney, analyst]

So what you're saying is, I think that threshold to internally generate enough capital, the ROA needed to be pretty close to 1% to get there. Is that right?

[John McWhorter, executive]

At the rate that we have been growing this year, yes, and we expect our growth rate to be a little bit slower next year. So we wouldn't have to be at the 1% to be self-generating, but that's -- the 1% is certainly the way we were looking at it this year, and I think our growth is 20-plus percent. So as we go down to 12% or 15% growth next year, it will take a little bit less to get to the same place.

[Matt Olney, analyst]

Okay. And just one more, I guess, for Audrey. I think Audrey mentioned there were 2 loans that were -- I think you said they were being worked out currently in the prepared remarks. What was the time line on the resolution? Is that a near-term fourth quarter event? Or could that move into next year?

[Audrey Duncan, executive]

Well, probably, I would say, into next year, but not probably in first quarter, I'd say.

[Matt Olney, analyst]

Okay. And how would you characterize or describe the collateral on some of those loans relative to the cost per...

[Audrey Duncan, executive]

Okay. So the increase in nonaccruals, we had a $4 million increase. One of them is a $2.3 million spec house and the LTV brand new appraisal is 64%. It's in a great location and in new construction. So it's -- we're not anticipating a loss on that, what was done in our community bank vertical.

And then we also had a small builder in Southeast Texas that we've done, honestly, nearly 100 small homes for them over the past 8 to 10 years, and we've got a couple -- that, that relationship is $1.1 million that we put on nonaccrual, 3 houses come in a couple of smaller loans, but have $160,000 specific reserve on that relationship that's our estimate at this point. So not significant. And then the third nonaccrual was a $900,000 borrowing base line of credit. We have a very strong guarantor with separate income on that. So we're not anticipating a loss in the specific reserves on that either.

And then on those past dues, we typically, you don't see us with over 90 days past due and still occurring. We had a $2 million loan this quarter, but it is clear, it is renewed and current, and it's not a credit problem. It's also a real estate deal with an LTV in the 60% range. And then just 2 other smaller loans that are in the process of renewal and those aren't credit concerns either.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Bart Caraway for closing comments.

[Bart Caraway, executive]

Yes. I just want to thank you, Ritu, for taking care of us as an operator. I want to thank everybody else for joining us and your continued support at Third Coast Bancshares. And we look forward to speaking to you next quarter. Thank you. Have a good evening.

[Operator]

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