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 Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
It is now my pleasure to introduce Natalie Hairston of Investor Relations. Thank you, Natalie you may now begin.
Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our third 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 November 1 and more information on how to access these replay features was included in yesterday's earnings release.
Please note that the information reported on this call speaks only as of today, October 24, 2024, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities Laws. 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 may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures were included in yesterday's earnings release, which can be found on the Third Coast's website.
Now I would like to turn the call over to Third Coast's Chairman, President and CEO, Mr. Bart Caraway. Bart?
Good morning, everyone, and thank you, Natalie. Welcome to the TCBX third quarter earnings call. I'll start by giving the highlights for the quarter, followed by John's financial review and Audrey's credit quality review. Then I will discuss our outlook for the fourth quarter.
I'm pleased to highlight that we've achieved another record-setting earnings quarter with diluted earnings per share reaching $0.74. In addition, it was a strong quarter for loan production with $131 million in net loan growth over the prior quarter, all while demonstrating improving credit quality trends, which are already better than average.
I'd like to recognize the entire bank team for the outstanding progress in our 1% efficiency campaign. Your drive for continuous improvement has led to a much improved return on assets of 1.14% and the efficiency ratio of 59.57% and a return on equity of better than 12%.
We also paid down debt, expanded capital ratios and improved asset quality. We had net recoveries of $57,000 for the quarter and are on pace to achieve our annual goal of less than 10 basis points in charge-offs. I also would like to congratulate the team for its 11 basis points improvement in net interest margin for the quarter, resulting from superior balance sheet planning and execution. The bank has achieved 13 consecutive quarters of net interest income growth, showcasing the continual progress of our original strategic plans.
Our goal has always been to become a high-performing company, and we believe last quarter's results are no anomaly, but in fact, are the outcome of multiple initiatives working together, reflecting the careful planning and execution of our strategy. We expect the current and future company performance will continue to prove that our exceptional team talent and thoughtfully calculated and implemented business plan are building a company of an extraordinary quality. With that, I'll turn the call over to John for the company's financial update. John?
Thank you, Bart, and good morning, everyone. As Bart mentioned, we made significant progress this quarter towards our goal of becoming a high-performing bank. Loans grew $131.7 million in the quarter, primarily in the commercial category, which grew $137.9 million. Loan mix also improved as lower-yielding municipal loans declined $39 million. Notably, much of our loan growth occurred late in the quarter as evidenced by period-end loans being $87.9 million more than our quarterly average.
Investment securities grew $5.9 million even though we sold $15.6 million in low-yielding mortgage-backed securities for a loss of $480,000. Yield on investment securities declined slightly to 5.99%. Accumulated other comprehensive income improved to a gain of $7.8 million. Deposits increased to $138.8 million with quarterly average noninterest-bearing demand up $14.8 million and ending balances of $25.3 million.
Turning to the income statement. Net interest income was up $1.5 million or 3.9%. This increase was driven primarily by better loan mix, better deposit mix and balance sheet growth previously mentioned. This was our 13th consecutive quarterly increase in net interest income.
Noninterest expenses declined $75,000 to $25.6 million. This was our fourth consecutive quarter of declines in noninterest expense. Additionally, we paid down $5 million in senior debt for the quarter and another $4 million in October and have now paid down a total of $16 million.
That completes the financial review. At this point, I'll pass the call to Audrey for our credit quality review.
Thank you, John, and good morning, everyone. Credit quality remained strong this quarter, and the loan portfolio remains well diversified. Classified assets declined $3.2 million or 8% during the third quarter, primarily from the payoff in full of the $3.1 million substandard loans. Nonperforming loans to total loans improved slightly to 0.62% from 0.65% in the previous quarter.
The bank reported net recoveries of $57,000 compared to net charge-offs of $1.8 million in the previous quarter. The loan portfolio remained well diversified with percentages similar to previous quarters. C&I loans increased slightly to 38% of total loans. Construction, development and land loans increased slightly to 21%, while owner-occupied and nonowner-occupied CRE represented 12% and 16% of total loans, respectively. Office represented 3.5% of total loans with approximately 55% of that being owner occupied. Medical office was another 1.4% of total loans.
Consistent with previous quarters, 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 59%. Multifamily represented 3.3% of total loans and has an average LTV of 59%. With that, I'll turn the call back to Bart. Bart?
Thank you, Audrey. Before we take your questions, I'd like to provide some additional color on our outlook and strategic focus. Our 1% improvement initiative continues to enhance our operational efficiency, positioning us well to navigate the evolving interest rate environment. This program has delivered tangible benefits in streamlining processes, reduce cost and improve productivity, all the while driving revenue growth.
In the face of changing interest rates, this increased efficiency has proved invaluable, allowing us to adapt quickly and maintain our competitive edge.
Regarding loan growth, we're maintaining our target of $50 million to $100 million per quarter. This quarter, we exceeded that target with $131 million in growth while also improving our loan mix by reducing exposure to certain sectors. This conservative approach, coupled with our improved deposit mix has contributed significantly to the enhanced net interest margin.
In terms of credit quality, we expect it to remain strong. Our charge-offs for the year are currently at about 9 basis points, well below industry averages. We anticipate maintaining the strong performance in asset quality moving forward.
While we're pleased with our performance, we remain vigilant about potential challenges in the broader economic environment, our adaptable strategy and robust risk management practices position us well to navigate any headwinds we may encounter. Our efficiency ratio has dipped below 60%, hitting 59.57% this quarter. This achievement, which we reach ahead of schedule, underscores our commitment to operational excellence and cost management. We're confident in our ability to sustain this level of efficiency moving forward.
We remain optimistic about the opportunities in our robust Texas markets. The economic energy in this region continues to provide excellent growth prospects, and we're well positioned to capitalize on these opportunities. Our strong presence and deep understanding of these markets have allowed us to benefit from emerging trends and to meet the evolving needs of our customers.
Looking ahead, we remain confident in our ability to deliver high-performing results. This confidence is rooted in several factors. First, our team. We have the right people in place with the skills, experience and dedication needed to implement our strategy effectively. Second, our strategic focus. We're just not aiming for short-term gains. Our initiatives are designed to create sustainable long-term value for our stockholders. This includes ongoing investments in technology, talent development and market expansion.
Lastly, our adaptability. In today's rapidly changing financial landscape, the ability to pivot quickly is crucial. Our lean operational structure, coupled with our deep market insights, position us well to navigate the challenges and seize opportunities as they arise.
In conclusion, we're entering the fourth quarter with strong momentum. Our team's execution of our strategic plan, combined with our focus on maintaining strong asset quality, managing expenses and driving loan growth positions us well for continued success. As we've demonstrated for 13 consecutive quarters of net interest income growth, our approach is sustainable, and we're confident in our ability to continuing to deliver strong results. I am pleased to share that we are well on our way to achieving our goal of becoming a high-performing bank in creating long-term value for our stockholders.
This concludes our prepared remarks. Now I'd like to turn the call back to the operator to begin the question-and-answer session. Operator?
[Operator Instructions] Our first question is coming from the line of Matt Olney with Stephens.
On the loan growth outlook, Bart, I know you said $50 million to $100 million in the fourth quarter. If we can look just beyond that, do you see anything that would slow down this loan growth momentum in that range as you look into the 2025 or at least the first part of 2025. I know you mentioned you're reducing exposure to certain asset classes, just didn't know how material that was?
Yes. I mean, first, I'd caution that -- I mean, we still will be somewhat lumpy. I mean, if you look at our history, we kind of -- on average, when you look at over a 12-month period, we generally hit the guidance that we give you, but sometimes it comes in different ways. I'll tell you, the fourth quarter seems to be shaping up maybe slightly on the higher side of our -- what range we talked about. It's kind of hard to tell into next year. We're in the budgetary process right now of where we want to be, but I think the pipelines right now are looking like a kind of a continuation of what we guided to this year.
Okay. Great. And then I guess, specifically on those asset classes you want to reduce exposure too there. Anything worth calling out specifically on those asset classes?
Yes, Matt, this is John. The bond anticipation notes was the primary thing that we haven't done as much of that we've let run off and those were down to, I think, 1 loan at quarter end. So there's nothing left there. So probably -- you probably won't see anything more there. So obviously, growth would have been a lot higher in the third quarter had we not let. I don't remember what the number was. $30-some-odd million roll off on those bands, so yes, as Bart said, we may be, we'll certainly, I think, be on the high end of the range for this quarter.
And for the rest of the portfolio, I think it's going in the direction that we want. I would just call it more of a refinement, not any kind of big levers are being pooled on that. I think it's more just continuation of directionally going where we want to go in terms of the concentrations.
Okay. Great. And then on the net interest margin, some nice performance in the third quarter. We got the Fed, I guess, the impact of the 50 bp cut from late third quarter and maybe some more Fed cuts here in the fourth quarter. John, any thoughts on the margin more near term?
Yes. I mean this quarter surprised us a little bit, and we weren't expecting to be plus 11% on the margin, but it seemed like every little piece we outperformed relative to expectations. I mean letting all those bands roll off, we had more noninterest-bearing demand. I think our average loan-to-deposit ratio was probably a little bit higher.
The increase in demand was probably the biggest thing. If I look back at the numbers, we had declines in monthly, noninterest-bearing demand for like almost 9 months in a row. And finally, demand deposits are up. So not only were they up during the quarter, but they're up again in October. So I'm feeling pretty good about the margin going forward. I have guide to certainly flat. I don't think it's going to be down. Even though when our Q comes out, it's going to show that we're asset sensitive. Those models are only as good as your assumptions. And I think on the first interest rate cut, we outperformed what the model assumptions were, if that makes sense. It's hard to know if that will continue going forward. But I think having one of the higher cost of funds in the industry probably gives us more room to cut rates than most. I like where we're positioned. I'm pretty comfortable with where the margin is now.
Okay. And just following up on that, John, one of the things you mentioned was the loan-to-deposit ratio, maybe a little higher than you expected. Just remind me kind of where your overall comfort zone is on that ratio kind of in the short term and kind of longer term?
Yes, good question. I mean we don't want to have too much as far as excess deposits go, but we do have a technology company that has a lot of seasonal deposits. And we've already seen pretty big deposit inflows here for the fourth quarter. Remember last year, our deposits were up several hundred million dollars, and we think that's probably going to be true again this year, that's maybe good for ROE. It's not necessarily good for the margin or ROA, but we expect the loan-to-deposit ratio, even if we have a big quarter, it's probably going to be lower at year-end than not.
Okay. Great. I'll step back and congrats on the quarter.
Our next question is from the line of Michael Rose with Raymond James.
Just wanted to touch again on the deposit side of the equation. John, as you mentioned, you have one of the higher costs in the industry out there. Some of that's reflective of the strong loan growth that you've had. Can you just remind us of some of the initiatives that you have in place? And then maybe what percentage of the deposits are either indexed or exception price that may have some leverage as the Fed cuts rates. And it was nice to see the NIB mix improve with some nice demand growth this quarter. Can you just remind us of some of the -- again, some of the initiatives you have in place and maybe over time where that mix could potentially migrate to?
Yes, Michael, I'll start first with some of the initiatives. I mean, we started this, if you probably remember well over a year ago that every line of business had their own goals and own initiatives on deposit side. So the nice thing is the commercial group as a whole, and there's several lines of business in that commercial group, all have very strong incentives for deposit growth. It's both financial because it's probably the biggest part of their incentive packages, deposits, but it's also certain kind of even some fun goals that we have. And certainly, we want to emphasize treasury in particular of that. Treasury itself has its own goals as well as some calling initiatives that going after deposit-only customers as well. So that's been -- those have worked very well together to give us some nice improvements.
We also have a retail group that has launched several initiatives and have been very instrumental in bringing in small business and retail customers that really showed a lot of benefits last year, almost [ $100 billion ] in deposits that they brought in as well.
And then in addition to that, we have this relationship with Ameriprise that's been successful in either helping us bring in deposits and new customers or at least maintain a relationship so that we keep more customers in-house. So I think altogether, it hasn't been a home run in any particular area, but it's been every line of business having some great base hits that made the difference. And I do think they're all spinning up to have even better yield this year perhaps.
Yes. And Michael, regarding how much is index. So we have about 12% noninterest-bearing demand. Our CDs are about the same. So that leaves 75% roughly this money market accounts. There is a decent amount of that that's indexed, but all of it is certainly variable from our perspective. So we have that 75% that we can price down. I think that's probably more than peer, partially because we have less in noninterest-bearing demand. So it didn't feel as good on the way up, but it should be good on the -- as the rates are coming down. And that's where I was talking about being able to kind of overperform versus our modeling because we attracted deposits by paying relatively high rates. But now that everyone expects rates to be down, it hasn't been particularly hard to lower rates just as fast. So that's gone well for us.
That's great color. And maybe just on a corollary to that, would just be on the loan pricing side. You guys saw average loan yields to tick higher. Can you just talk about where new production yields are, just I would assume that they're going to start to come down, just given that rates have come down, but not certain. It's obviously going to vary by category, things like that, but just wondering to get a sense for -- because I think what you're talking about is relative NIM stability at least for the next couple of quarters. So just trying to understand both sides of the equation?
Yes. We have an internal pricing model. And plus we have some very seasoned bankers that understand where we're trying to go. So certainly, we're looking at prime plus on new deals, and there are certain margins that we try to hit internally, what we call hurdle rates. And what we're seeing is all this production is fitting in those categories. We have very few exceptions to that.
Michael, I talked about 75% money market accounts that would be floating on the deposit side and the asset side is similarly structured in that. Close to 80% of our loan portfolio is either floating or variable, one or the other. And the stuff that's floating versus SOFR, we typically don't do a deal at SOFR less than plus [ 300 ]. The community bank deals are typically priced off prime and they're typically prime plus. So we're averaging in that prime sort of area, maybe plus some fees, puts us a little over 8%. So when we're raising noninterest-bearing demand deposits, it's certainly very good for the margin, and that's where we had the big uptick this month -- quarter.
Very helpful. And then maybe just one last follow-up for me. Bart, you guys have done a really good job keeping the head count flat to down and continuing to add assets to the balance sheet has created a really nice tailwind you've seen the efficiency ratio come down pretty materially. But as we go forward, I assume that you're going to have to start adding bankers at some point to continue to grow at these levels are potentially higher as we move forward. And then I assume that there's going to be some incentive compensation accrual, things like that as we think about next year. Can you just give us thoughts around that? And then are you expecting further improvements in the efficiency ratio? Or are we going to start to think about that beginning to level off here in the kind of the mid- to high 50s?
Yes. So this is just our initial goal to get below 60%. So our internal goals are to get the efficiency ratio down much further. And so it's a process, as you know, it takes time. Quite frankly, where we are today is probably 2 quarters ahead of where our even internal goals were. So the teams just outperformed in every way, and it's been quite amazing to watch them figure out ways to have savings.
There's a few other things that we're working through that could help the efficiency ratio and cost reductions that's going to happen through 2025. I think as far as personnel, we've done a really good job of kind of reallocating resources internally to help manage that head count. Naturally, we are growing and because we're growing, we're eventually going to have to add headcount. And truthfully, in terms of where that goes, we're probably down a couple of underwriters that we'll need to backfill, probably have some portfolio managers that come on board to help as these loan portfolios continue to grow. So we'll have some investment in terms of just continuing to build, but they're sort of very selective that we're doing it. And so we really believe revenue is going to grow still much faster than expenses. And while it may not necessarily be flat or it may go up a little bit, we think revenue is going to go up a lot faster.
Our next questions are from the line of Woody Lay with KBW.
I wanted to talk about deposit growth. It looks like time deposits were up a little bit in the quarter. Just any color you could give on the go-forward deposit strategy from here?
This one particular customer that I talked about, their deposits come in the form of money market, because -- we certainly do have some wholesale funding as it's somewhat difficult to predict when the loan growth is going to happen. The last 3 years, September has been our biggest month of the year for reasons kind of unknown to even us. So, some of those deposits that you saw a tick up in the fourth quarter was on the brokerage side. We did bring in some brokered CDs. And interestingly, the cost of those was probably 100 basis points less than they were 6 months ago or something like that. But those were short term set to roll off as soon as we replace it with more permanent money, but I didn't want the loan-to-deposit ratio to creep over 100%, didn't want to borrow from the home loan bank and still had plenty of capacity there.
So that was just kind of a short-term fixed for the big loan growth that we had. And I think I alluded to this in my talk, but loans for the month of September were up over $100 million just for the single month. So it's hard to predict growth quite so fast for 1 month.
Got it. That's helpful. And then maybe shifting over to the loan pipeline. It sounds like the mix is in line with historical levels. Is that the right way to think about it?
I think so. Yes, I feel like it's more of a continuation of what you've seen in the last probably 3 quarters. That's fair.
Our next question is from the line of Bernard Von Gizycki with Deutsche Bank.
Bart, in your closing remarks, you mentioned how the Texas market has been robust, has strong growth prospects and you've been able to capitalize on those opportunities. You added your 19th branch location as noted in the press release. As we think about going into 2025, anything you can share on how you're thinking about just future expansion?
Yes. So most of our branches were built around bankers. And part of this is still filling out some of the needs from the hires that we had post pandemic, but we've mostly satisfied the branch needs that we have right at this point. You will not see the branch expansion based on our current strategy much past where we have right now, unless there's something that's opportunistic. So a true de novo branching is certainly going to slow down, and we're mostly where we need to be. We're opening our, probably our last branch with the grand opening next week. And I think that's pretty well where you'll see our branches are for the next 12 to 24 months. I think we're going to build off of that network.
Got it. No, that's helpful. Maybe just moving to fees quickly. Taking out the security losses have performed better than expectations. The service charges were much higher. I know loan growth was as well. Just anything seasonally higher in that line item to be mindful of? And if you could just provide some color on how you expect like fees to kind of like go forward from here?
Yes. Bernie, we talked about this a little bit last quarter and that our treasury group, in particular. The numbers are relatively small, but they're growing at a rate 50% to 75%. And given enough time, that really adds up. So I would probably give them credit for a lot of the fee income on the treasury side. That's been where a lot of the increases come from in noninterest-bearing demand and the service charges. And then we also had a relatively big loan fee this quarter on a deal that we had led. And those are going to be a little bit lumpy. I don't know if we can say that we'll have maybe 1 a quarter, maybe it's 2 or 3 times a year. It's hard to know when those larger loan fees may come into play, but we did have one for this quarter.
And then any expectations on how to think about fee income, the $2.5 million a quarter kind of range sounds right? Or anything you can provide on that?
No, I think that sounds about right, just because we don't know on those lumpy sort of fees. But the $2.5 million plus, we're pretty comfortable with that number, yes.
[Operator Instructions] The next question is from the line of Dave Storms with Stonegate Capital Partners.
Just wanted to circle back on loans a little bit. I know you mentioned that you're targeting the $50 million to $100 million in growth. And it looks like commercial and industrial had a really strong quarter and growth kind of above and beyond that, as you mentioned. Is that more emblematic of some of the refinement that you highlighted earlier? Was that just 1 large customer? How should we think about that? And how that looks going forward?
Yes. I think it's growth in general. Audrey and I were just talking about. Audrey, I don't know if you want to pipe in on this one?
I would say it's just growth in general, primarily from our corporate lending group that does kind of the middle market, somewhat larger loans, but it is not just 1 loan. It's just growth in that group.
Understood. Very helpful. And then just one more for me. You mentioned in your prepared remarks that you paid down some more debt in the quarter. How much more runway do you feel like there is there? And kind of what's your comfort with that?
Yes, that's a good question. It depends on growth. It depends on earnings, obviously. I don't expect we will pay down any more this year and next year is kind of yet to be determined. But given enough time, certainly, we want to pay it down to 0. It's our highest cost of funds. It's about 7.5%, it's a -- little less than 7.5% is the rate that we're paying on that. So to the extent that we have excess capital, we think that's kind of the highest and best first use and particularly since it's a revolving line, if we decide we need more, we can just reborrow it. But I'd say no more for this year, and we'll reevaluate in the first quarter. And maybe it's $5 million a quarter next year, it just depends.
Congrats on the quarter.
At this time, we've reached the end of our question-and-answer session. I'd like to turn the floor back to Mr. Caraway for closing remarks.
Thank you, Rob. Very much appreciate it, and thanks, everybody, on the call for the questions and support. We feel really good about where we're positioned and where we're going with and look forward to releasing earnings next quarter and visiting with you all again. Have a good day.
Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.