Third Coast Bancshares Inc (TCBX) 2025 Q2 法說會逐字稿

Greetings, and welcome to the Third Coast Bancshares Second Quarter Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Natalie Hairston. Please go ahead.

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 2025 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McWhorter, Chief Financial Officer; and Audrey Spaulding, 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 July 31, 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, July 24, 2025, and therefore, you are advised that any 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 5, 2025, to better understand those uncertainties and contingencies. The comments made today will also include certain non-GAAP financial measures. Additional details and the 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's Founder, Chairman, President and CEO, Mr. Bart Caraway.

Bart?

Good morning, everyone, and thank you, Natalie. I'll start by sharing the company's profitability and growth highlights. Following my remarks, John will discuss the financials, and Audrey will give a review of the credit quality. Finally, I'll provide management's outlook for the remainder of 2025. To begin, I'm pleased to announce that we closed the second of our two securitization deals in this quarter.

This not only proves up the viability of our securitization strategy in real market conditions, but also demonstrates our ability to replicate these transactions. This capability has become a competitive advantage, allowing us to meet the needs of select customers who choose our services over much larger organizations.

Specifically, these transactions will reduce the bank's risk-weighted assets, lower construction concentrations and mitigate credit risk in the loan portfolio. Due to the uniqueness of the transaction, the bank has been nominated for a North American transaction of the year and North American Issuer of the Year at the 2025 SCI Risk Sharing Award Ceremony to be held in London this fall.

We continue to execute on our original business model and have made remarkable progress since our IPO in 2021. By hiring top talent, we have been able to leverage our balance sheet by consistently growing revenue at a faster pace than expenses.

For example, we have grown net interest income at a compound annual rate of 21.7%, while noninterest expenses increased at a more modest annualized rate of 10.7%. This has resulted in strong shareholder value with tangible book value per share increasing by $8.75 over the past 3.5 years, reaching $29.69 as of June 30.

Over the same periods, our return on average assets has steadily improved from just 55 basis points in 2021 to a top quartile of 1.38% in the second quarter of 2025. This performance demonstrates our ability to drive greater efficiency and profitability, though we still believe there is room for further improvement. Further, we continue to have top-tier loan growth and robust pipelines.

Second quarter loans grew by $91.7 million. And since our public debut, our compound annual growth has been 21.1%, expanding from $2.07 billion in December 2021 to $4.08 billion in June 2025.

All combined, this outsized progress is especially impressive given that we have maintained high credit standards, improving our ability to scale with quality. Our disciplined management approach is further evidenced by the prudent governance of our investment portfolio, which compares favorably to peers. Our strategic use of hedging to predict our net interest margin and our continued success in attracting best-in-class talent.

Overall, Third Coast's performance in the second quarter not only exceeded expectations, but also surpassed previous company records, firmly placing us among top-performing banks. Time and time again, our team has consistently delivered exceptional results, which we believe positions us for long-term success and enables our company to create sustained value for our shareholders.

With that, I'll turn it over to John for the company's financial update. John?

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. We reported second quarter net income of $15.6 million, up 25% versus the first quarter of 2025. This resulted in a return on assets of 1.38% and a 14.7% return on equity.

Net interest income was up $6.6 million or 15.4% from the first quarter. This increase was partially attributed to our two securitization transactions for which we recorded approximately $2 million in fee income. Noninterest expenses were up 2.6% or $738,000 in the second quarter and of this increase, roughly $500,000 was attributed to the securitization.

Investment securities were up $164 million to $562 million. This increase was attributed to $206 million in securities created from our securitizations, which have an average yield of approximately 5.63%. Investment increases were partially offset with sales of lower-yielding securities. AOCI remained steady with a gain of $10.6 million. Deposits increased $32 million for the quarter, resulting in a loan-to-deposit ratio of 95% and our cost of funds declined slightly.

Net interest margin improved materially to 4.22%, and we are forecasting a margin of between 3.90% and 3.95% for the third and fourth quarters, assuming no new securitizations.

Second quarter average loans were up $40.9 million versus the first quarter of this year. Period-end loan growth was $91.7 million. Loan demand remained strong with loans already up $50 million in July. 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. Asset quality demonstrated resilience during the second quarter, staying close to historical benchmarks. Nonaccrual loans improved significantly, declining by $3.7 million during the quarter primarily due to the payoff in full of a $2 million loan and approximately $800,000 in loans placed back on accrual.

Nonperforming loans increased by $1.5 million from the previous quarter, but was $4.3 million less than the same period a year ago. Similarly, the nonperforming loans to total loans ratio rose by 2 basis points quarter over quarter but improved by 16 basis points compared to last year.

Net charge-offs to average loans increased by 20 basis points quarter over quarter, impacted by the $1.7 million write-off of a factoring client, which also resulted in most of the $1.68 million increase in provision expense.

Our loan portfolio remains well diversified and consistent with the previous quarter's allocations. Commercial and industrial loans were 42% of total loans, while construction development and land loans were 19%. Owner-occupied CRE was 11% and nonowner-occupied CRE was 16% of total loans. Our office and medical office portfolio exposure was not materially different than previous quarters, and our multifamily exposure has declined.

We remain disciplined in our credit underwriting and maintain a robust monitoring process, which has served us well. We are confident that our strong foundation and disciplined risk management strategies will continue to ensure sustainable growth and stability in the quarters ahead. With that, I'll turn the call back to Bart. Bart?

Thank you, Audrey. Looking ahead, Third Coast is strategically and tactically prepared to navigate and thrive in the ever-changing landscape this financial services sector. Whether driven by ongoing industry consolidation, impending shifts in interest rates, or evolving customer preferences and technology, I am confident Third Coast will continue to leverage our strong capital position to seize additional growth opportunities and further enhance shareholder value, building on our consistent top-tier track record of growth and profitability.

Our key strategies moving forward are: first, enhancing operational efficiency. We are proactively working to improve our efficiency ratio, and we are making significant strides, thanks to our ongoing success of our 1% improvement campaign and completed core conversion.

The efficiency ratio improved to 55.45% in the second quarter, down from 61.39% a year ago, a headline result that underlies our ability to drive meaningful transformation in a short period. This demonstrated progress reinforces our confidence in delivering sustained momentum and further enhancements.

Second, strong loan growth. Our loan pipelines remain robust, reflecting our efforts in building a diversified portfolio and enhancing our offerings, which continue to deepen client relationships and bolster trust in our franchise. We remain confident about our loan growth targets, projecting $50 million to $100 million of new loans each quarter and maintaining an annualized growth rate near 8%, in line with our recent performance.

Third, preserving and optimizing our net interest margins. Our forward view includes two rate cuts by the Federal Reserve before year-end, and we are ready to capitalize on them. By strategically managing our asset and liability mix, including dynamic loan pricing and careful deposit cost management, we are well equipped to handle the fluctuations in interest rates and preserve our net interest margins.

We will continue to leverage the variable rate structure of most of our deposit portfolio and employ various strategies within the investment portfolio, such as swaps and selected securities to seek yield enhancement, amplifying our ability to navigate changing rate environments with precision.

Fourth, maintaining superior credit quality. Our conservative credit culture has consistently yielded strong results. Disciplined underwriting and prudent standards remain core to our approach and our credit metrics have continued to improve, reflecting proactive portfolio management. This discipline aligns with our strategic vision for sustainable, high-quality growth.

In closing, I want to emphasize how proud I am of this team. We consistently exceed expectations with growth that outpaces that of our peers. With some of the best bankers in the industry and our strategic position in the most attractive Texas markets, we have built a strong franchise with scarcity value as others consolidate. This positions us for ongoing success and sustained value creation for our shareholders over the long term.

I would now like to turn the call back over to the operator for question-and-answer period. Operator?

(Operator Instructions) Jordan Ghent, Stephens, Inc.

First question is around the securitizations. I'm wondering if you could kind of add any color to it and kind of maybe what's the appetite for more? And kind of what are your expectations for doing more securitizations?

Yes. John, do you want to start with that?

Yes. So Jordan, this is John. The second one that we did, we certainly weren't expecting when we closed the first, it came about much quicker, which was good for us. It made it somewhat less expensive and just more efficient.

We're probably talking to half a dozen different customers about the same type of transaction, although it doesn't appear that we will have any in the third quarter at this point. Most of the conversations at this point are just in the early stages. So we're not specifically forecasting any new ones for the remainder of the year.

If we were to have more, certainly that would help our margin and help our earning assets even more than we're forecasting. But we think there's one for the first quarter of next year that looks likely and there's a possible one in the fourth quarter, but it's -- we're not there yet.

Got it. And then just kind of going to the profitability and the ROA. Where do you guys see the ROA going through the remainder of the year?

Yes, that's a good question. We had a little more noise than usual this quarter. I think it will definitely be better than 1.25%. It could be in the 1.30% sort of range. Those I'd say are somewhat soft estimates, but that's kind of our best guess now based on everything we know, it's kind of between that 1.25% and 1.30% range.

Bernard Von Gizycki, Deutsche Bank.

So just a question. John, I know you mentioned, I think, the $2 million, I think, benefit in net interest income from securitization and you gave the guidance of 3.90% to 3.95%. What was the core NIM if we take out what the securitization impact was in 2Q?

Yes, it would have been in that same range of 3.90% to 3.95%. So we did have improvement in margin. And the improvement that we saw was primarily from loan fees. So again, there's kind of a lot of noise there that we had not just the $2 million from the securitizations. But we're leading more deals.

We just have more fee income generally. For instance, we have about $18 million in capitalized fees at the end of the quarter. That's an all-time high for the bank. I would have thought that, that number would have stopped growing at this point, but we're putting on more fees than ever. And those will come back to us generally straight line over the next three years. So between that and the swaps, we have a pretty significant tailwind to the margin.

And then maybe just given some of the noise you mentioned with some of those capitalized fees, your loan yields increased 50 basis points, too. What -- I mean how much of that is kind of like reoccurring? Or was there like the onetime items in this as well, just to kind of break out that 50 basis point sequential increase.

The 50 basis points, $2 million of it was from the securitizations. The coupon yield on our loans hasn't changed materially. I mean prime hasn't changed. Nothing else has changed. So if you back into the number of subtracting out the $2 million, the difference would be extra loan fees, if you will.

But we do expect that part to continue for the third and fourth quarters. So it's just the $2 million that was kind of nonrecurring. Everything else is recurring. So again, we think normalized 3.95% probably for the second quarter. So we're giving ourselves a little cushion for the next couple of quarters, saying 3.90% to 3.95%.

Woody Lay, KBW.

Just one more follow-up on the loan yield and NIM expectations. So does that 3.90% to 3.95% range exclude all impact of capitalized loan fees?

I'm sorry, I didn't quite follow the question.

Yes. I guess as you sort of called out a core margin this quarter of 3.90% to 3.95%. But if I back out the $2 million, that would put the margin around like 4.05%. So I'm just wondering if that 3.90% to 3.95% going forward, is that like a core NIM, excluding all capitalized loan fees? Or does that include the impact of some of the nonsecuritization loan fees on it?

It includes the other capitalized fees. So when you say 4.05%, I'm saying, call it, 3.95%, I'm maybe just being a little bit more conservative in calculating that. But yes, sure -- you're certainly -- it could be a little bit higher than my number. Yes.

Got it. And then maybe just big picture on the securitizations, could you just talk or maybe walk through sort of how you evaluate the pros and cons of sort of growing the securities portfolio through these types of transactions versus using the capital for loan growth and sort of the risk return profile of both options?

Yes. When we did the first one, we didn't necessarily think that the security that we were taking back was sellable in the market and we put it in held to maturity not knowing exactly how to value it. The second one came right on the heels of it, so we kind of did the same thing.

But in hindsight, we have had others offer to buy our A1 paper because it's roughly speaking, 3-year maturity floating rate paper yielding [565]. We've had people call us and ask us to sell it to them. So I think if we were to do a third one, we would sell some of the securities at least, just proof of concept to show the market that we can do it, but we've had more than one offer to buy the paper.

So it does look completely legit that we can sell it at -- sell it at par, and that just frees up capital. Although with that said, I mean, we accreted capital generally this quarter. So to the extent that we have the balance sheet or the capital to support the bigger balance sheet, we would probably be inclined to keep it. It just depends on where we are at the time.

Yes. Woody, I'd add to that, that the securitization kind of impacts us in multiple different areas. I mean, one is capital; two, earnings, whether what we keep on the balance sheet, we don't -- concentrations, but also customer accommodation. And I would say maybe the first one, I would lump into more us managing capital and concentrations.

But on the second one, it was more centered around accommodating a very good customer. And I think what we're seeing now is we have these customers that are quite frankly used to dealing with some of the biggest banks in the country that would like to deal with us. And this tool allows us to facilitate larger transactions and keep the customer closer to us on it.

So I think each one of these has a little bit different story, but I think the ones coming up is more of a testament to the quality of the customers that we have that were able to basically take care of their business under our umbrella with this tool. And I think that's what we're seeing coming up is just larger customers where we're trying to manage that relationship with this tool.

Yes, that's helpful. And then maybe just last for me. I think you called out $500,000 sort of extra expenses associated with this transaction. If I adjust for those, does it feel like the 2Q expense run rate is a pretty good one?

I believe so, yes. Our salary and employee benefits number actually went down quarter over quarter. So somewhere in that $28 million range is what we expect for the rest of the year. There's no significant increases in expenses that we're aware of right now.

We did have some expense also in the second quarter related to the conversion that we just did from Jack Henry to FIS. There may be a little bit of that carry over to the third quarter, but it really wasn't material enough to even point out in the second quarter. So as far as core expenses, we were very happy with the basic flatness of it versus the first quarter. And I think we can do that again for the third.

Tim Mitchell, Raymond James.

Let me start out on the loan growth outlook. I think you kind of reiterated that 8% number moving forward. Just curious if you could kind of unpack some of the drivers, customer sentiment, line utilization, et cetera, as we think ahead.

Yes. Sure, Tim. So we always kind of caution everybody to realize that our growth tends to be kind of lumpy. And you've seen that over the last three years. But we've been pretty consistent in what our messaging is with it, which is $50 million to $100 million per quarter.

And I still feel good about the next three quarters or so of sticking with that kind of guidance. Again, it's going to be lumpy. We have experienced a lot of payoffs or else we would have had even more growth than what we have now.

And I will tell you, maybe utilization has been a little softer, particularly in the first quarter. But I think what we're seeing particularly in our markets is there is still some optimism but there's a lot of caution too. So I don't see the utilizations on loans picking up some of the pace as much as I see just new production outpacing the payoffs.

And I would say that almost every one of our verticals is contributing to that, just depends on which quarter it is. So I think we're seeing even more diversity in our portfolio as we continue to grow and particularly, just our markets are strong. And I think we're experiencing a lot of our growth just from winning customers over from some of the larger banks. Does that help, Tim?

Yes. Very helpful. And then if I can just kind of a larger picture question on capital deployment. So obviously, you guys announced the buyback program this quarter. You had pretty strong loan growth.

We've seen M&A activity in Texas start to pick up over the past few weeks, and you're putting up a 1.40% ROA this quarter. It sounds like 1.30% might be more of a run rate. But hopefully, that leads to a better currency. But -- just how should we think about your -- the way you guys are going to prioritize capital deployment kind of across those different options as we move forward?

I think part of what you're saying is optionality, and that's what we want as well. I think certainly, we were looking at if our stock looks like it's a good deployment of our capital to buy some back, we will. We are looking at pretty strong loan growth, and we're going to prioritize growth probably over the buyback.

But it really is situational for us, giving us optionality to do what we think is in the best interest of the shareholders as a whole. John, I don't know if you want to add anything to that?

Just the one thing that I might mention about loan growth is with the securitizations, particularly the second one, we took on balance sheet loans that had been there for a while and sold them into the securitization. So without it, our loan growth actually would have been materially higher. So we are still seeing the loan demand, the pipelines look good. We certainly don't want to be short on capital. We ended up the quarter, kind of just where we wanted to be, where we accreted just a little bit of capital to give ourselves room to continue growing.

So we were pretty happy with the way it ended up. If loan growth were for some reason to slow down, I think we would be more likely to buy back shares. But at this point, it doesn't appear as likely.

Yes, that's a good point, John. We focus so much on talking about loans. And with the securitization, it kind of switches the concept a little bit for us looking at earning asset growth. And when you look at the earning asset growth and the overall balance sheet, it was a really strong quarter.

So that's kind of a different dynamic that you all might want to pay attention to. It's not just loans, it's the total earning asset growth.

Okay. Very helpful. And then just one last one. I think you called out the [OREO] valuation headwind for fee income this quarter. Can you just kind of update us on a good run rate as we think ahead for the noninterest income line?

Yes, there were several things this quarter that were not typical. I mean I think our core fee income is essentially the same as the prior quarter, in that $3 million range. But we did have some losses on securities where we sold some lower-yielding securities.

And in the other line item, for noninterest income, I think we had some SBICs that were relatively new in their capital deployment and they're not going to return monies for a couple of years or whatever it may be. So new SBICs tend to be a drag on noninterest income and then make up for it more later.

But I think next quarter is going to still be in that $3 million range.

(Operator Instructions) Dave Storms, Stonegate.

Just wanted to start with the portfolio and the loan growth expectations. Hoping to get a little more granular. When you're looking at the pipeline there, are you expecting the commercial and industrial segment to be a standout driver again for the back half of the year? Or do you think growth might come from somewhere else?

The C&I portfolio has been pretty robust all year. The problem is we've had some substantial payoffs. And I do know that we are going to have some more payoffs before the end of the year, just company selling, not really anything to do with the economy, more like customers are doing well and some of them are taking the advantage to sell their companies.

But overall, the C&I pipeline is probably one of the most robust verticals we have and that I'm seeing some really, really strong pipeline growth there. It's kind of hard quarter to quarter to predict that because even if we close on a loan, it may not be fully funded up or there may be different components to it.

So when I look at the C&I portfolio, I had to look out over several quarters to kind of give you an idea. But I do believe that will be one of our stronger drivers probably really over the next year.

Very helpful. And then just one more maybe around credit quality and underwriting. With some of the macro stabilizing a little bit, is there any potential to leverage some of your credit underwriting standards to maybe drive growth?

I mean, Audrey, it's here in front of me. We've talked about this ad nauseam about it that we basically tightened credit quality back in 2019, we joke about it because we predicted there was going to be some dramatic change in economy. And of course, we were wrong because even with the pandemic, it was still pretty robust. But we never loosened those standards.

And I think when you're talking about LTVs and our -- the way we structure deals, I think we've just maintained a high quality standard, and we have enough loan production that will continue the growth projections we're talking about without changing pricing or standards, and we're sticking to our standards.

Now I will tell you, we're seeing a lot of things in the market that are being done that we wouldn't do. And we are losing some deals. But even with that, we have enough growth to meet our projections. Audrey, you want any other comments on that or--

I don't really have anything to add. You covered it.

Yes, credit -- we always talk about credit as the number one objective in the organization, right? And because of that, we're going to grow and maintain credit quality. We believe we can do both.

This now concludes our question-and-answer session. I would like to turn the floor back over to Bart Caraway for closing comments.

I just want to thank you, Carrie. Appreciate your help in this. And thanks, everybody, for joining the call and for your continued support of Third Coast Bancshares. And we look forward to talking to you next quarter. Thank you all.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.