Third Coast Bancshares Inc (TCBX) 2022 Q3 法說會逐字稿

Greetings, and welcome to the Third Coast Bank Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the presentation please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natalie Hairston with Dennard Lascar Investor Relations. Thank you, Natalie. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our third quarter 2022 results. With me on the call is John McWhorter, Chief Financial Officer; and Audrey Duncan, Chief Credit Officer. Unfortunately, Bart Caraway, Chairman, President and Chief Executive Officer, is under the weather and therefore, John and Audrey will be our primary speakers today. 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, 2022, 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, October 27, 2022, and therefore, you are advised that any time-sensitive information may no longer be accurate as 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 company's prospectus or the annual report on Form 10-K that was filed on March 17, 2022, 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 those directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the Third Coast website. Now I'll turn the call over to host CFO, John McCarter. John?

Thank you, Natalie, and good morning, everyone, and thank you for joining us today. I'll start by highlighting an important milestone in our company's history, almost 1 year ago on November 9, 2021. Third Coast completed its initial public offering, and we've achieved a lot since then. Not only have we almost doubled the size of the bank, but we've also greatly improved the bank's profitability. We have also strengthened and diversified our deposit base and improved our asset quality. As stated in the earnings release, Third Coast reported strong loan growth of $224 million for the third quarter and $1.4 billion in the last 12 months. Deposits reached $2.98 billion in the third quarter, up $86 million for the quarter. Total assets were $3.52 billion, an increase of 68.9% over the prior year. I'll begin by highlighting significance in the quarter for our business and provide a more detailed financial review, and then Audrey will give a credit update. And before we take your questions, I'll return to discuss our outlook. Over the past 12 months, Third Coast has recruited, hired, promoted and retained top-tier talent. We now have exceptional bankers that have what it takes to ensure Third Coast's long-term success by continuing to profitably grow its loan portfolio. We believe Third Coast is well positioned to serve the unique needs of the communities in which we serve. Now I'll update our operational objectives. First, Third Coast is nimble, innovative, forward-looking and responsive to the communities we serve. We are committed to making banking services readily available to existing and new businesses and consumers who want to take advantage of new opportunities in the marketplace. Second, our streamlined business process to improve efficiency and responsiveness are taking shape. These new comprehensive processes leverage technology trends and best practices to help us identify and launch new business initiatives, including new products and services. Finally, as we look to the future, we remain optimistic about our long-term profitability. We look forward to evolving and expect new innovative products and customer experience solutions will increase deposits and fee income. Combined these objectives are an extension of Third Coast's commitment to diversify our loan portfolio and revenue streams, grow core funding, strengthen our digital capabilities and improve customer service functionality. We have provided the detailed financial tables in yesterday's earnings release. So today, I'll review select balance sheet and profitability metrics for the third quarter of 2022 compared to the second quarter and to the prior year. As previously mentioned, we experienced strong loan growth during the quarter of $224 million. This growth was well diversified with commercial loans up about $114 million and real estate loans up $115 million. Following that trend, deposits grew $86.1 million for the quarter to $2.98 billion. We closed the third quarter with $3.52 billion in assets, up from $2.5 billion at year-end, an increase of just over $1 billion. Profitability metrics were much improved for the quarter with ROA more than doubling to 0.78%, and the efficiency ratio improving to 67.06%. Still, we're not where we want to be, but heading in the right direction. Net interest margin for the quarter was 3.77% and included $665,000 in excess accretion on purchased loans. Noninterest expense totaled $22.7 million in the third quarter, representing 2.6% of average assets compared to 3.4% for the same period last year. Higher salary expense was offset by lower legal, professional and other expenses. For the quarter, income taxes were accrued at a rate of 18%, and we expect our effective rate will be 20% going forward. That completes the financial review, and at this point, I'll pass the call to Audrey for our credit quality review.

Thank you, John, and good morning, everyone. Asset quality improved during the third quarter of 2022, with nonperforming assets declining by $660,000 from the second quarter of 2022. Year-over-year nonperforming assets have declined by $8.3 million, which was primarily the result of a $4.5 million decline in accruing restructured loans and a $1.6 million improvement in nonaccrual loans. Nonperforming assets represented 0.29% of total assets compared to 0.33% in the second quarter of 2022. The allowance for loan and lease losses now represents 0.98% of total loans, an increase from 0.97% in the second quarter of 2022. Annualized net charge-offs to average loans were 2 basis points for the 9 months ending September 30, 2022. Asset quality remains a key emphasis for our lending culture. While the economics in all of our markets remain strong, we manage our portfolio with conservative loan underwriting and comprehensive loan review processes. With that, I'll turn the call back to John to cover our outlook. John?

Thank you, Audrey. To summarize, over the past year, we've experienced broad-based growth across multiple business lines and have maintained excellent credit quality. We expect these trends to continue. We have also delivered strong growth in fee income from new products and services. We entered the fourth quarter of 2022 and the year 2023 with considerable momentum, focused on expanding revenue sources and improving efficiencies that strengthen our company. While we're extremely proud of our past accomplishments, we're even more excited about the future for the following reasons. First, Third Coast is uniquely positioned to take advantage of opportunities in our market and serve our strong and expansive customer base. Second, we continue to look for innovative and efficient ways to grow our scope and scale of products and services. And finally, Third Coast expects to benefit from favorable economic conditions across Texas and expand on the relationship-based approach that has served us so well. In closing, we remain very positive about the future. We have demonstrated a good formula for differentiated top-tier financial performance and see pipelines for business growth across the bank's dynamic markets. We believe that our strong execution on these combined strategic priorities will continue to position Third Coast to deliver profitable growth in 2023 and beyond, creating significant additional value for shareholders. This concludes our prepared remarks. I would now like to turn the call back to the operator to begin the question-and-answer session. Operator?

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the questions queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.

Hey, good morning. John, maybe I wanted to start with the margin. A lot of moving parts this quarter. You talked about the loan discount accretion. Loan fees were also maybe a bigger piece of it. I know you've talked in the past that you've deferred a lot of loan fees because originations have been so high. I just wanted to see if you could maybe comment around the sustainability of that $1.1 million loan fee number. And then just in general, kind of talk about how you're thinking about the margin. I think you said last quarter, kind of flattish to down, but just kind of curious, given the growth continues to be good, deposits are lagging a bit, kind of how you plan to fund that and what that means for net interest margin.

Yes. We think that loan fees will continue to be a net positive. And I know we've talked about this in the past, Brad, but when we started capitalizing loan fees at the beginning of last year, we had roughly $3.3 million capitalized January 1 of last year. We now have about $7.3 million capitalized, and that number continues to grow. So our loan fees, if anything, should increase going forward. But now as it relates to the margin, where we'll see pressure is going from a loan-to-deposit ratio of 95% to 100% for the quarter, we obviously can't do that again, and it's more likely that, that will drop back to 95% for this quarter. So we will have a little headwind there and just the deposit cost. I mean, I know we've talked about that for several quarters, but we are still seeing pressures on deposit costs and don't expect that to go away anytime soon.

It looked, if I looked correctly, I looked at the end of the quarter, you didn't have any Federal Home Loan Bank advances. And is that something you would anticipate kind of maybe leaning into more a little bit more heavily? Or do you think you have sort of the interest-bearing deposit pipeline to fund your needs going forward?

Our deposit pipeline for the fourth quarter looks particularly good. Certainly, our deposit growth as well as our loan growth has been lumpy over the last year, but the fourth quarter, our deposit pipeline looks as good today as it has all year. We should be quite liquid by the end of the year.

Okay. Great. And then maybe last one for me. Sort of the rate of expense growth seemed to slow a little bit. Do you anticipate, or kind of as you think about fourth quarter and into 2023, how should we sort of think about sort of your expense trajectory?

Yes. Certainly, for the next quarter or 2, I think the guidance that we've given of $22 million to $23 million per quarter is still good. We're real comfortable with that for the fourth quarter and probably again for the first quarter of next year and the foreseeable future.

Okay great. I'll hop back in the queue. Thank you.

Thank you. Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed with your question.

Hi, good morning. Just to expand on the margin for next quarter. What are your expectations? I know originally, you had flat Q2. Obviously, you had the 8 basis point benefit from that excess accretion. I'm just wondering what you're thinking for the next quarter? And then maybe you could just talk about what you're assuming for Fed hikes?

Yes. So assuming for Fed hikes, I'll take that one first because that's easy. I mean we are assuming 75 basis points this next time around and then 50 basis points afterwards. And as far as our internal modeling don't have anything more for next year. But on the margin, we do have this dilemma of as rates have risen, our spreads are lower. So loan-to-deposit ratio, I mean, if anything, going to fall a little bit, the spreads of new loans that we're making is a little bit less. So whether that translates to 5 basis points on the margin or something more than that is harder to say. It depends on the volumes that we put on. But we are making a concerted effort on loan growth to make sure that it's good profitable growth, and therefore, would probably guide more towards a $50 million to $70 million a month in loan growth going forward.

And what's that tracking for October?

So October... Margin is looking pretty good. The loan growth is in that $50 million to $60 million range. The fourth quarter is typically a good quarter for us. So I wouldn't be surprised to see a little more. But so far, for October, we have not. It's been modest. And much of that is intentional although some of it is just rates. I mean, with people seeing rates with a 7 handle on it, there are some borrowers that have gotten a little squeamish about borrowing in the 7s.

Sure. And I appreciate that color. Thank you...

Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Hey, good morning. John, can you just comment on some of the fee income items? So I think you guys had said last quarter that just given the rate backdrop that the derivative income was probably going to be down, but it was up this quarter. So kind of what drove that? And then you had a bunch of SBA gains this quarter. I'm a little surprised because they've been pretty depressed at other banks. It just seems like the spread isn't worth selling. If you could just give some context as to kind of what drove both those lines this quarter. And then would you expect to continue to sell SBA loans? And what should we anticipate for the derivative line as we move forward? Thanks.

Sure. On the derivatives, I mean, I certainly would not have expected with rates as fast as they've increased to continue booking income from that, but we have and in fact today, I think we had $100,000 trade, which was nice. What will happen for the rest of the quarter is certainly harder to predict on the derivatives. On SBA sales, we do still have a few in the pipeline. And it's not that this is something that we've just this quarter decided to do. I mean it was very early in the year when our loan growth was so strong that we decided there was no reason to hold the SBA loans the way we had in the past. We just didn't have any of the first 6 months of the year. So the third quarter was good. We were averaging a couple of hundred thousand dollars a month, and we'll probably at least have that for the month of October, November, December, it's harder to say. I would guess SBA gains will be down in the fourth quarter versus the third, just because it was so good relative to where we have been. But there's many other initiatives that we're working on, on the fee income side that hopefully will make up some of the difference. Wealth Management, in particular, I think we were about $100,000 for the quarter, and that number looks to be stable to gaining momentum as we go forward and then hopefully just service charges as we continue to book new accounts, we should see our service charge income go up also.

Okay. Helpful. And then I appreciate the commentary on kind of monthly loan growth from here. Obviously, the environment is getting a little bit more challenging. But I just wanted to know from you guys' perspective, just given some of the funding challenges that you and others face, I mean, how much of it is kind of self-regulated, meaning that you may be pulling back on loan growth a little bit to perhaps let the funding side catch up. And obviously, just again, given the macro backdrop being a little bit more challenging. I know Texas is strong, the market is strong, but just trying to figure out how much of it is kind of self-imposed versus what the market has given you. Thanks.

Yes. To the extent... If there's anything... Go ahead, Bart.

Go ahead, John.

Well, I was just going to say that as far as being self-imposed, there's very little relative directly to liquidity. But we're certainly mindful that we don't want to be raising capital again at these levels and we want to make sure that any loans that we're putting on the books have good, strong spreads. But liquidity... liquidity, we just don't have any concerns about today. Obviously, it could change the next quarter or the quarter after, but we're pretty happy with our liquidity prospects for the near term.

Yes. Michael, if I could add, this is Bart. Sorry, I'm calling it a little under the weather, but I couldn't miss this. What I would tell you, the way we look at it from the loan side, is there's a lot of factors. And some of the lines of businesses are going to be down in terms of volume, our auto finance side definitely has been impacted as well as the builder finance side. Some of our C&I side and other aspects are doing well. But overall, we're just being very cautious on what the market is going to look like over the next quarters. And our credit quality, they are great gatekeepers and great underwriters as it is, but I think we're just even sharpening our pencil more to make sure that from a profitability standpoint that we're just choosing the best credit quality for the returns that we're trying to get. And by being just a little bit more selective, I think that's going to drive our volumes down a little bit, combined with whatever chaos is in the market. So I think what we're just trying to do is manage the bank even tighter. In the deposit side, I think we're less worried about. It's more of just making sure we've got the right mix in the loan portfolio to make sure we're unimpacted by the next few quarters, if that helps.

It does. Thanks, Bart. I hope you feel better. One, just one last question for me. So obviously, you guys did the preferred raise, but it does sound like maybe you're going to have a little bit slower balance sheet growth just moving forward, as you just laid out. I know you talked about kind of reaching that 1% ROA in the back half of '23. Any sort of update there? And kind of what is the push and pull to kind of get you over the finish line to that initial target? Thanks.

Yes. So Michael, for every, call it, $100 million in loan growth, that's probably good for 6, maybe 7 basis points to ROA. So you could argue that puts us $400 million or $500 million in loan growth before we get to a 1% ROA, I mean, just very rough numbers. So certainly, we think we can do that in the next 6 or 8 months. So I think we're still tracking towards that second half of next year. And the story, I think, is the same in that our top line revenue growth is going to grow faster than expenses, and we're doing our best to hold expenses, and we know the growth is going to be there, and it's just a question of when exactly we catch up to it. But we're certainly on the right path to get there. We did make big improvements this quarter, and we won't see that much of an improvement every quarter, but we do expect to see some every quarter.

Perfect. Thanks for taking all my questions.

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question please press star 1 on your telephone keypad. Our next question is from the line of Matt Olney with Stephens. Please proceed with your question.

Thanks, good morning, everybody. I want to ask more about deposits and deposit betas. I'm backing into an interest-bearing deposit beta around 67% just for the third quarter for the bank, which is going to be a little bit higher than your Texas peers, but I'm trying to figure out the outlook from here. I think your peers are talking about betas increasing from 3Q in the fourth quarter, just in terms of more competition, but what about you guys? What's your view of deposit betas for the bank in 4Q as compared to what you just experienced in the third quarter?

Yes. We're definitely seeing the same thing. I mean I have just never had so many rate shoppers in my career where just any random depositor is finding some rate on the internet and calling us and saying, "Hey, I want this, and in some cases, we can say, well, go ahead, but we certainly can't do that for everybody. I mean, some of the more sophisticated larger accounts, we're somewhat compelled to match some of those higher rates. So we're seeing the same thing. It's very different than the last up cycle. But our wholesale deposits, they've had a beta of 100, that's what our model has and that's not going to change. And the rest of the portfolio, I think, is going to be just very similar to what our peers are experiencing.

Okay. Thanks for that John. And then on loan pricing. Any more color on new renewed loan pricing? I think you mentioned a few loans, even touching the 7 handle. But what about any more color you can give us on the loan pricing you're seeing these days?

Sure. So for the month of September, our originations were about $152 million, and the average, or the weighted average coupon was 6.18%. So it was a really good month there. So to average 6.18%, we're certainly seeing some things creep up on 7%. But we're just trying to be as disciplined as we can. I know I turned down a loan yesterday that was fixed rate 5 years at 5.75%, and it's a deal that somebody is probably going to do, but we just didn't think it was a good fit for us. But we're definitely seeing things in the high 6s pretty regularly now.

Okay. Thank you for that. And then, I guess, changing gears. We've talked on off over last year, just about your various initiatives around fintech. I'm curious just to update of where we are right now on the investment spend on some of those initiatives and then how you're thinking about seeing the payoff for the benefits of some of these initiatives.

Bart, do you want to take that one?

Yes. I'll start out with... we're actually seeing some volume coming through the funnel, particularly on the deposit side. We opened up one of our first accounts finally. It wasn't a huge account, but it was one of a pipeline of customers, we believe, that are coming in. And so we've, particularly with Treasury Prime and a couple of other partnerships we're working on, I think what we're going to see first is some nice deposit flow that will come in. We also are, as we're talking about, working on the fee income side, but some of those are larger relationships that take a while to both negotiate and then obviously, upload on our system and integrate. So I think what we'll probably have, particularly in the first quarter, probably a good update on some of the accomplishments of some of these various ones. I still think the way we're doing it, particularly with the internal staff, is we have people that are just handling this as a team approach in addition to their regular jobs for the most part. So I think as ambitious as our goals have been to grow this, most of this has been done with people internally who is just dedicating extra time and a few consultants that obviously, we could turn off at any point in time if we wanted to. So I'm pretty pleased with it. Hopefully, we'll have a few announcements over the next coming quarters that you'll be able to see similar to Treasury prime that will be really good for the bank. John, do you have anything else to add?

Yes, that was good.

Thanks Bart. And just to clarify, as far as the actual incremental investment spend, it sounds like it's going to be more, more moderate given some of the current staff kind of working out some of these initiatives along with a few consults. Is that a fair take?

Yes, I think so. I think you're talking more like... John, help me out like $50,000 to $75,000 a month is what our real (technical difficulty) has been when you talk about attorneys negotiating contracts or some consultants having to navigate through the compliance side of this. I mean the big thing with the fintech to me is choosing the right partners and the right clients to make sure that it's a heavily compliant and profitable relationship, and there's a lot that has to be done upfront to make sure that you select it right. And so some of these are just purely upfront investments to make sure that we have the right partnerships and the right structure on them. Do you have anything else to add, John?

Yes. The vast majority of our expense today is in the salary expense line item, it's people that are working on it. And of those people that are working on it, like Bart said, there's probably no one that's devoted to it strictly. They're just doing it in their spare time.

Yes. Okay, guys. Thank you very much for your help...

Thank you. Our next question is a follow-up question from the line of Bernard Von Gizycki. Please proceed with your question.

Hey, John. Just wanted to follow up on my previous question just to clarify something. So the NIM was at the 3.77% and that included the 8 basis points of the excess loan accretion. I think you said you're guiding something around 5 basis points. Obviously, there's a lot of puts and takes. Would that be off of the 3.77% reported? Or would you consider it off like a core number, which would have been like the 3.69%? Just wanted to make sure I had that accurate. And obviously, if there's any more accretion you're expecting to be contributed in 4Q. Thank you.

Yes. We have about $1 million left in purchased accretion but would expect to take that over a number of years. The the last big loan that could pay off did. So we're not expecting any unusual quarters going forward. But yes, as far as pressure on the margin, I would say that would be on a core basis, not to 3.77%. So if you call it, 3.77% core for the quarter, we'll see some pressure from there of probably at least 5 basis points.

Okay. Got it. So 5 basis points off the 3.77% is what you're guiding for 4Q?

No. Of the 3.69%.

Got it. Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you, Devin, and thanks, everyone, for joining us on the call today. We appreciate your continued support and look forward to meeting you again soon. Thank you. Bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.