Third Coast Bancshares, Inc. (NASDAQ:TCBX) Q2 2023 Earnings Call Transcript

Third Coast Bancshares, Inc. (NASDAQ:TCBX) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Greetings, and welcome to the Third Coast Bancshares’ Second Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natalie Hairston, Senior Vice President, Dennard Lascar, Investor Relations for Third Coast Bancshares. 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 second quarter 2023 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.tcbssb.com. There will also be a telephonic replay available until August 3, 2023, and more information on how to access these replay features was included in yesterday’s earnings release. Please note that information reported on this call speaks only as of today, July 27, 2023, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listing 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: Thanks, Natalie, and good morning, everyone. Thank you for joining us today. I’ll begin by highlighting the company’s performance for the second 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. As reported in yesterday’s press release, our second quarter results demonstrate Third Coast’s ability to maintain strong credit quality, faster than peer balance sheet growth and improving margins. Despite macro pressures, nonperforming assets to total assets were 25 basis points, the same as the prior quarter and down from 33 basis points in the second quarter of 2022. Total assets reached $3.96 billion, which was 2.7% more than the first quarter of 2023 and 18% over the prior year quarter.

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Loans held for investment grew to $3.33 billion, which was 3.8% higher sequentially and 21.3% more than a year ago period. Deposits reached $3.41 billion, 2.6% over the prior quarter and 17.6% more than the same period last year. Finally, net interest margin improved 3 basis points from the prior quarter and 5 basis points from last year to a strong 3.82%. We are also pleased with the increase in tangible book value to $22.82, a positive sign for investors and customers alike. This achievement shows Third Coast’s strong financial footing and is well positioned for the current market environment. Third Coast’s capital position remains strong with tangible common equity to tangible assets increasing slightly to 7.88%. By prioritizing customer satisfaction and operational confidence, we have established ourselves as a dependable financial institution.

The excellent leadership and strong credit quality of the company further reinforces our position in the industry. With that, I’ll turn it over to John for a more detailed financial review. John?

John McWhorter: 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 from the second quarter. As Bart mentioned, second quarter loans were up 3.8% or $121 million sequentially. Deposits increased $86 million over the first quarter and total assets reached $3.96 billion, a new record for the company. For the same period, our net interest margin improved 3 basis points quarter-over-quarter and 5 basis points year-over-year to 3.82%. This improvement was primarily due to increased loan yields. We remain slightly asset-sensitive with new business being added at lower spreads, resulting in a slight drag on the net interest margin.

Going forward, loan growth is expected to offset margin pressures resulting in increases to net interest income. On May 26, we unwound our $200 million pay-fix law, realizing a gain of just over $5 million. This gain will be accreted over 5 years as an offset to interest expense. Based on this quarter’s average interest-bearing deposits, the offset is equivalent to 38 basis points. Combined with our 2 previous unwind, we have almost $9 million and gained equivalent to 70 basis points. At quarter end, our uninsured deposits totaled approximately $1 billion or 30%. Our available borrowing lines are approximately $1.7 billion, resulting in a coverage ratio of 1.7:1. Non-interest expense totaled $23.8 million for the second quarter of 2023 compared to $22 million for the first quarter of 2023.

As anticipated, increases from new branches, new employees and inflation have resulted in slight increases in non-interest expense. I think for the remainder of 2023, non-interest expense will be in the range of $24 million. Net income available to common shareholders totaled $7.7 million for the second quarter compared to $8.1 million for the first quarter. Diluted earnings per share were $0.53 in the second quarter compared to $0.55 in the first quarter, a slight decrease of 4%. This performance resulted in returns on average assets of 96 basis points and returns on average common equity of 9.44%. Additionally, our pretax pre-provision ROA was approximately 1.35%. That completes the financial review. And at this point, I’ll pass the call to Audrey for our credit quality review.

Audrey Duncan: Thank you, John, and good morning, everyone. Credit performance for the second quarter was again strong. Non-performing assets to total assets was 25 basis for the first and second quarters of 2023, down 8 basis points from 33 basis points for the second quarter of 2022. Non-performing loans to loans held for investment remains low at 30 basis points, which decreased 10 basis points from 40 basis points as of the prior year period. We adopted the CECL methodology beginning January 1, 2023, and under the new methodology, we recorded a loan loss provision of $1.4 million during the current quarter compared to $1.2 million for the first quarter of 2023 and $3.4 million for the second quarter of 2022. During the second quarter of 2023, our ACL increased from $35.9 million to $37.2 million.

The ACL to total loans was 1.12% up from 97 basis points for the same period last year. During the 6 months ended June 30, 2023 and 2022, the company recorded net recoveries of $292,000 and $21,000, respectively. With that, I will turn the call back to Bart. Bart?

Bart Caraway: Thanks, Audrey. As we progress through the third quarter in the second half of the year, Third Coast remains vigilant about executing on the following internal and external objectives. First, managing the balance sheet in a conservative fashion, growing deposits to fund loan growth and continuing to enhance liquidity. We have been able to take advantage of higher rates in the face of rising deposit costs to stabilize the net interest margin. We feel like our performance towards these objectives has been very solid. Second, pursuing growth amid the current economic climate. Despite fluctuating market conditions, we continue to be optimistic given our strong credit position and our ability to invest with confidence in our growth strategy.

Our strong capital position and solid asset quality positions us to endure and perform through the coming market cycles. Third, discipline around expense growth and efficient capital allocation. Management is constantly tasked with improving efficiency. In that regard, we are exiting our Auto Finance division. Direct expense savings will be $500,000 plus and the $40 million in loans will be reallocated to higher earning assets, managing the asset allocations to maximize our balance sheet return. Fourth, our commitment to quality and innovation. By maintaining our strong credit culture and finding innovative ways to build out service and product capabilities is strategically important to stay ahead of our competition. And finally, we understand the importance of customer service and satisfaction.

Our success in attracting, retaining and even connecting with customers has been a testament to our commitment to the satisfaction. By continuing to listen to their needs, we can maintain our loyal customer base, we believe in relationship banking and diversified lending. Overall, we are well positioned to face any challenges that may arise and continue to provide value for our shareholders by staying focused on our core beliefs and listening to our customers, we can navigate through any softening in the growth expectations and emerge stronger on the other side. This concludes our prepared remarks, and I’d now like to turn it back over to the operator to begin the question-and-answer session. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Graham Dick with Piper Sandler. Please proceed with your question.

Graham Dick: Hey, everyone. Good morning.

Bart Caraway: Good morning.

Graham Dick: So I just wanted to start on the loan growth side of things. I think last quarter, we had talked about doing about $300 million to $400 million of loan growth this year. It seems like you guys are a little bit ahead of schedule over the last two quarters. Just wanted to get any updates on your all’s color around what you’re looking at for growth this year on the loan side. And I know you mentioned that you’re still pretty confident in your own strategy. So if there is any upside to that initial guidance would be interesting to hear? Thank you.

Bart Caraway: Yes. Thank you, Graham, I appreciate that. You actually teed that up for me because I did want to bring that up. So what we’re looking for the rest of the year is probably $100 million to $200 million in net growth from now to the end of the year. I think that’s probably more accurate with where we’re seeing in terms of just the environment that we’re in, and we’re just being very selective on the loan side. We are seeing a lot of great customers coming to us, but we’re also being very selective of what meets our criteria. So I think $100 million to $200 million is probably the best number I can give you in that range that we will see between now and the end of the year.

John McWhorter: Yes. And Graham just to add to that. I think we mentioned last quarter that loan growth has been somewhat limited by what we can raise in deposits so we obviously don’t want to outstrip our deposit growth that we think we could be growing even faster if we weren’t more disciplined on rate, but there is lots of good business out there. Last couple of months have been pretty strong, but we’re going to be mindful of credit and rates and deposit growth, and that will limit the growth a little bit for the rest of the year.

Graham Dick: Okay. That’s a perfect segue. So I guess, I mean you pretty answered to that, but it sounds like you expect deposit growth in the pipeline you guys have to pretty much match net growth for the rest of the year, I guess. Is that fair to assume?

John McWhorter: Correct.

Graham Dick: Okay. Great. And then I kind of just – I wanted to follow-up on the swap – this decision to sell a swap and the impact that’s going to have on the margin. Did you say that there is 38 basis points of impact for lower deposit costs going forward from that the amortization of that gain from $5 million and then $70 million from the $9 million in total you guys have?

John McWhorter: Correct. Although that is included in the second quarter, that’s not additionally to where we are. I mean, that’s fully reflected in the second quarter, but that is the net effect. If we did not have those swap gains, we would be that much worse off. So for the second quarter, we only had 1 full month where we were paid in the swap. We were paid $280,000 for the month of April. And going forward, we will have for that particular trade about $85,000 a month. So we had a little excess – not exactly accretion, but the swap income for the quarter, but most of the rest of it was baked in.