Third Coast Bancshares, Inc. (NASDAQ:TCBX) Q3 2023 Earnings Call Transcript

Third Coast Bancshares, Inc. (NASDAQ:TCBX) Q3 2023 Earnings Call Transcript October 28, 2023

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: 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: 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 million. All other noninterest expenses were up $1.35 million in the third quarter versus the second quarter.

A smiling customer, holding a debit card issued by the bank.

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: 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: 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?

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Q&A Session

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

Graham Dick: Hey, everyone. Good morning. 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: 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: 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: 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: 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: 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.