Third Coast Bancshares Inc (TCBX) 2026 Q2 法說會逐字稿

Greetings, and welcome to the Third Coast Bank second quarter 2026 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Natalie Hairston, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for Third Coast Bancshares second quarter 2026 earnings conference call. 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 call replay available until July 30, 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 23, 2026, 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 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's Founder, Chairman, President and CEO, Mr. Bart Caraway. Bart?

Thank you, Natalie, and good morning to everyone. It was another strong quarter for Third Coast. We delivered a new record for EPS performance, continued to generate disciplined loan and deposit growth as projected, improved core profitability and maintained solid credit performance.

These results reflect the continued execution of the same priorities we have shared with investors since becoming a public company nearly five years ago, disciplined growth, relationship-based funding, positive operating leverage and consistent credit execution. The growth in record diluted earnings per share, tangible book value and net interest income reinforces the core progress and core strategic priorities and further demonstrates the quality and durability of our earnings profile.

The quarter reflected progress across each of the areas we focus on most, namely, we generated strong loan growth while maintaining disciplined underwriting and risk-appropriate loan pricing standards and continue to project a robust and steady loan pipeline. We continue to expand and improve our deposit base, supporting both growth and profitability as evidenced by our $65 million in growth in DDAs. We produced meaningful operating leverage with operating income growing faster than expenses, a consistent theme that has proven out the durability of our core earnings. And we maintained strong credit performance while continuing to grow the balance sheet.

During the quarter, we also took several strategic initiatives that position us for sustained long-term success. First, as previously noted, we completed the sale of substantially all of the assets of Third Coast Commercial Capital. This transaction simplifies the organization, sharpens our strategic focus on our core banking platforms while still allowing us to continue serving factoring clients through a strategic partnership and ongoing revenue-sharing arrangement.

Second, we continue to leverage our securitization capabilities as a key element of our broader balance sheet management strategy, closing our third securitization on July 15. We now view these activities as a normal extension of our funding and capital management toolkit, and we expect future uses of them to support growth opportunities as conditions warrant. Third, and perhaps more importantly, we continue to attract top talent to our already exceptional team.

As a talent magnet, it should not be a surprise that remarkable talent continues to seek us out. We added five experienced commercial banking professionals during the second quarter and expect to hire a similar number in the third quarter. We believe our ability to consistently attract talented bankers is one of the clearest indicators of the quality of our bank that we are building and bodes well for long-term growth potential. Overall, we believe the second quarter demonstrates our continued ability to grow revenue, improve profitability, maintain disciplined credit standards, all while investing in the future of Third Coast.

With that, I'll turn it over to John to cover the financials.

Thank you, Bart, and good morning, everyone. Our second quarter results reflected strong performance across the company, and I'll focus my comments on providing additional color around the numbers. Net interest income increased meaningfully during the quarter to $60.3 million, up 12.4% from the first quarter. This increase was driven by a combination of strong organic loan production, continued balance sheet optimization following the Keystone merger and expansion in lower-cost funding sources.

During our first quarter call, we discussed our expectation that the strength of the loan pipelines and strategic investments we have made in talent and production teams would support continued growth throughout the year. We believe our second quarter results validate that outlook. Loan demand remained healthy across our markets. Production levels continue to outpace normal portfolio runoff and total loans increased by approximately $185 million or 3.5% in the quarter. Commercial and industrial lending accounted for substantially all of that growth, increasing approximately $187 million from the prior quarter.

From a funding strategy perspective, our focus on growing relationship-based deposits is producing measurable results. Noninterest-bearing deposits were up $65.5 million and overall deposits were up $140.4 million from the first quarter. Importantly, deposit growth continued to keep pace with balance sheet growth while improving our overall funding mix. Additionally, the average cost of deposits declined 12 basis points from the previous quarter reflecting continued improvement in deposit pricing and mix. As a result, margin performance was favorable during the quarter.

Net interest margin expanded to 3.83%, exceeding the 3.75% target that we set following the Keystone merger, reflecting the strength of our balance sheet, disciplined loan and deposit pricing, improving funding trends and successful execution of our Keystone integration strategy. While deposit competition remains elevated, we continue to see opportunities to further improve our funding mix and support margin stability. Perhaps most encouraging, we delivered meaningful operating leverage during the quarter.

Total noninterest expense remained essentially flat when compared to the prior quarter, while our efficiency ratio improved to 56.5% from 66.1% in the first quarter. This performance demonstrates the scalability of our model and highlights the benefits of the operating and technology investments we've made over the past several quarters. We expect additional cost savings related to systems integration of $100,000 per month effective August 1 and an additional $150,000 per month effective February 1, 2027. Diluted earnings reached a record at $1.08 per share for the second quarter.

While earnings benefited from a gain on sale of the TCC assets, we were equally encouraged by the strength of our core operating performance. Regarding TCC, during the quarter, we closed the sale of substantially all the assets of Third Coast Commercial Capital effective June 25. The transaction generated total consideration of approximately $27.5 million and a gain of $3.5 million at closing and includes a structured ongoing revenue share that will allow us to continue participating in the performance of the portfolio going forward.

Consistent with our balance sheet strategy, we redeployed capital toward our core commercial banking, ABL and specialty lending platforms where we see attractive growth opportunities. Overall, our second quarter results reflect progress from ongoing relationship development, maturing production teams and investments we've made across our franchise. We remain constructive on net interest income growth and earnings trends while maintaining a disciplined approach to funding, capital allocation and risk management.

With that, I'll turn the call over to Audrey to discuss asset quality.

Thank you, John, and good morning, everyone. Credit fundamentals remained healthy during the second quarter. Nonperforming loans declined by approximately $5.6 million during the quarter and improved to 0.55% of total loans compared to 0.68% in the prior quarter.

The decrease in nonperforming loans during the second quarter was primarily due to the transfer of a $17.1 million loan to other real estate owned, offset by the placement on nonaccrual of three relationships totaling $10.1 million and an increase of $2.1 million in loans over 90 days past due and still accruing. The three relationships that were placed on nonaccrual are all well secured, and we do not anticipate any losses on these loans. I'd also like to note that 44% of our total nonaccruals are SBA guaranteed.

We recorded net recoveries of $150,000 during the quarter, marking our second consecutive quarter of net recoveries. As mentioned earlier, during the quarter, we sold substantially all of the assets of Third Coast Commercial Capital. It is important to point out that over the last 5.5 years, 44% of our total net charge-offs came from Third Coast Commercial Capital. The successful disposition of this subsidiary is viewed very favorably from a credit perspective as it has historically negatively impacted credit performance. Provision for credit losses totaled $2.1 million during the quarter, and the allowance for credit losses increased to $53.6 million, representing 0.99% of total loans compared to 0.98% in the prior quarter.

We continue to believe our reserve level remains appropriate for the size, composition and risk profile of the loan portfolio. Our loan portfolio remains well diversified across industries, markets and borrower relationships. As of June 30, total loans increased to $5.44 billion, driven primarily by growth in the commercial and industrial lending. Portfolio allocations remain consistent with the prior quarter with C&I loans representing 44% of total loans, while construction development and land loans were 16%, owner-occupied CRE was 11% and nonowner-occupied CRE was 17%.

We continue to closely monitor broader economic conditions and borrower performance remains generally consistent with our expectations. Our teams remain focused on proactive risk management and disciplined credit underwriting. We remain confident in our ability to support continued growth while maintaining strong credit quality.

With that, I'll turn the call back to Bart. Bart?

Thank you, Audrey. As we look ahead to the second half of 2026, we remain optimistic about the momentum across our organization. We are benefiting from strong customer activity, healthy loan pipelines, improving funding trends and a resilient Texas economy. As I mentioned earlier, we're particularly encouraged by our ability to continue attracting experienced bankers to the organization.

The investments we've made in people continue to strengthen our competitive position, and we believe recently added team members will drive additional quality growth over time. I also want to highlight results from our deposit strategy.

As previously referenced, our noninterest-bearing demand increased by $65 million, a notable improvement. Another highlight is our track record in our rural markets. We performed a look back on the deposit trends of the rural markets acquired in the Heritage Bank merger in 2019. Deposits in those rural markets have grown approximately 90%, representing an impressive 11.3% CAGR, significantly outperforming the roughly 3.1% growth rate of those underlying markets.

These results reinforce a simple but effective strategy: retain talented local bankers, invest in community visibility and deepen customer relationships. We believe our ability to consistently outgrow our markets while strengthening the funding base of the franchise is a meaningful competitive advantage and an important driver of long-term value creation. Additionally, we completed the Keystone conversion last weekend, which went very smoothly. We are pleased with how the combined franchise is performing. We have exceeded our previous guidance for NIM while continuing to grow loans, deposits and tangible book value, which not only reinforces our confidence in the strategic rationale behind this transaction, but it also underscores the earnings power and long-term value creation potential of the organization.

Most importantly, what gives us confidence moving forward is not simply the level of earnings we've achieved this quarter, but the quality and durability of those earnings. Broad-based revenue growth, margin expansion, effective expense management, positive operating leverage, disciplined credit performance and continued investment in the future all contributed to our results. We believe that Third Coast is well positioned to continue generating profitable growth, and we're committed to creating long-term value for our shareholders, customers and communities.

With that, I'll turn it back over to the operator. Operator?

(Operator Instructions) Michael Rose, Raymond James.

Bart, maybe I just wanted to start on the loan growth this quarter. Obviously, very strong. You hired five lenders. I think you said you had another five lenders in the pipeline. I know you had a previous range. It just feels like all the commentary and the momentum that you spoke about that maybe you could do a little bit better than that. But obviously, you could have some paydowns as well. So just trying to balance kind of what I view as kind of positive statements versus the forward look.

Yes. I'd just like to emphasize that, I mean, we still have a pretty tight credit box, and it's got to meet hurdles both on rate, return on capital for us as well as structure. It's still a very competitive environment out there. And we do have paydowns, as you mentioned, I appreciate you bringing that up because it is still challenging somewhat in that area.

But what I would note is we've just been able to find great customers that are moving over more for relationship more than anything. And the timing of that also is going to depend on a lot of other different factors. And so as we talk about, we could have a big quarter and a slower quarter for loan growth. But overall, what I would say the trajectory is very positive for us. We like the client base that we're going after and the success we've had at bringing over quite frankly, some clients that are bigger than you would normally get at a bank the size as well as granular, the response from the community as we continue to grow. So we're kind of hitting in multiple different verticals that are growing.

And I think consolidation in the banking arena here in Texas has also helped us particularly grow. But with all that, Audrey sitting next to me, and we both agree credit quality is the number 1 thing that we strive for. And we're going to be out there getting what we think is the best credit and not just buying the market or else we could grow more.

Yes, Michael, I might add that $200 million quarters are probably going to be more the exception than the rule that when we do have these big quarters, we're more likely to do a securitization. We mentioned that we closed one July 15. So that reduces loans. Investments will go up by a similar amount. So we still have the balance sheet growth. So we did the one on July 15, and there is another one that we're working on that looks probable. I think I would say at this point that we would close another one in August. These things tend to be customer dependent and a lot of moving parts. But at least as we sit here today, I think another one in August is likely.

Okay. That's great color, everyone. Maybe just a follow-up, John, just as we think about the margin and certainly understand that you will get some benefit from the securitizations in the third quarter. Excluding that, though, it does sound like you have some further deposit repricing tailwinds and obviously, new production loan yields still fairly strong. Can you just kind of level set expectations around the margin just given those tailwinds, coupled with this quarter's better result versus what you said last quarter?

Yes. So we did exceed what we what we were expecting last quarter. And the primary reason was Keystone and growth in noninterest-bearing demand. If you look at our noninterest-bearing demand over the last year, it's up almost 50%, which is hard to predict something like that. We're certainly working hard on it.

The treasury group is doing a great job bringing in big commercial accounts. It tends to be a little bit of a volatile account. But again, over the last year, if it's up 50%, I mean, that's great for the margin. So all things being equal, I think the margin is flat to maybe up just a little bit in the third quarter. But with the two potential securitizations, I would expect it to be up even more because these two definitely help the margin.

When you look back at last year when our margin was 4% plus, it's when we were doing the securitizations and I don't know. We're bigger, obviously, today than we were then. It may not have the disproportionate effect, but they'll be good for the margin for sure.

Very helpful. And if I could just squeeze one more in, just with Keystone conversion having just happened, where do we stand in terms of cost saving realization kind of through the third quarter? And maybe if you could just help us level set the expense trajectory as well, just given some of the hires that were made.

Yes. So first on Keystone. So we did wrap up our core conversion just this past weekend. So we expect effective August 1, we'll have about $100,000 a month in cost savings that's directly related to the data processing contracts. And then we think February 1 of next year, we'll pick up an additional $150,000 a month. So that should be the kind of the last of the cost savings associated with Keystone.

In the first quarter, the expenses were a little bit high. We had a lot going on. The securitizations aren't cheap, a lot of legal fees, accounting fees associated with them. We had the sale of [TCC]. We had the integration of Keystone.

I mean, all of those things cost money. And then, of course, the lenders that we hired. We hired the five lenders and the people that we're hiring are seasoned experience, we expect to be big contributors in the future. But certainly, as we hire those people, day 1 is the most expensive day for a lender when we have all their salary and none of their loans yet. So we had that in the first quarter.

We'll have it -- or in the second quarter, rather. We'll have it again in the third quarter. We've had a couple of people already accept. We have other offers outstanding for some really great people that we expect to come on. So I'd say kind of best guess on expenses is kind of flat for the third quarter that some of these savings are going to be offset with the people that we're hiring, but it will bode well for our growth, particularly next year as those people get ramped up.

Jordan Ghent, Stephens.

Just one follow-up maybe to the expense conversation. Were there any onetimes in 2Q expenses? It looks like -- I know you talked about how they're higher, but were there any one-timers from the merger or from TCC?

Yes, Jordan, there were. There wasn't any one thing that was particularly noteworthy. So we didn't break anything out in the release. I mean there's always little things. I mean the sale of TCC, I mean, I don't know, it was $100,000 in legal fees. And the merger, we probably had similar expenses. We had a shareholder meeting, some of these new lenders that we hired had signing bonuses. So there were several hundreds of thousands of dollars that were nonrecurring. But it seems like there's always some sort of nonrecurring expense. But on a stand-alone basis, it was somewhere between $500,000 and $1 million that we would think were nonrecurring expenses.

Got it. And then maybe just one more follow-up. Can you maybe talk about the $17 million OREO? I think it was the CRE relationship that you guys previously disclosed last quarter? -- you just provide like an update on that?

Sure. This is Audrey. I can give you an update on that. So we've had some positivity there. It's a medical office building in Southeast Texas. As you noted, we foreclosed in April. We've had some good updates there. We're working a few leases to increase the occupancy. We do have the property listed. We also were successful in modifying a restrictive covenant that was on the building. So that took some negotiation, a little time with the attorneys, but that has been resolved to our satisfaction. So it definitely helps us market more widely and lease more widely as far as the types of tenants. So have some positive feedback on that.

Woody Lay, KBW.

Maybe just a follow-up on credit and that the $10 million that moves into NPLs from three different relationships, could you just give some color on those? It sounds like a portion of it might be SBA related.

Sure. Sure, Woody. I can cover that, too. One of the loans, $3 million of that is an SBA loan with a 75% guarantee. It's also secured by real estate. It's got about a 77% LTV on that. Then there was a $5.5 million loan secured by an office building, 57% LTV on that with a new appraisal. And we actually, just this week, that particular loan and another loan to the same borrower were both brought current, and we have six months payment reserves. So those are looking good. And then we had a $1.6 million relationship that was actually four or five loans to a C&I customer. We had we do have some real estate. We have some equipment, a revolving line of credit. The combined LTV on that relationship with all the collateral is below 50%. So while we did have that uptick, we feel good about those and aren't anticipating any losses.

Got it. And then I guess, as it relates to credit, I mean, any broader trends you're seeing given some of the migration we've seen over the past couple of quarters? Is there a common denominator? Or is it -- or is it all pretty idiosyncratic?

I mean a couple of things. We've seen some deterioration in the SBA portfolio. But that -- and we've had net recoveries for the year so far. The charge-offs that we have had, we've had about [$320,000] in charge-offs for the year. [$270,000] of that was unguaranteed portions of SBA loans. So we've seen not a particular market or industry, just in general, some stress in the SBA portfolio.

Maybe I'll add, that's a fairly small portfolio. So I mean it's not -- it's a very small portion of our overall business.

And actually, the balance of the SBA portfolio because we've been proactive and charged down unguaranteed portions on some of those where proportionately, we have a higher -- what's remaining on the books in some cases, is fully guaranteed, not just 75% guaranteed. So I'm not expecting anything big there either.

The other thing I would say is mini storage. We've seen -- we had a relationship of three mini storage facilities that are special mentioned currently. There's been a lot of competition in those markets. So the rates -- rental rates they're getting have reduced. But actually, the three that we do have in special mention, they do those are supposed to be paying off, and they're being refinanced. So as part of a larger portfolio that this customer has.

And I'd just note that historically, you look at our charge-offs and you just lumped up to an average of 10 basis points. And thus far this year, we have net recoveries. And I'm not seeing anything that's in the portfolio that would be out of the bandwidth of what we normally do. So I feel like the portfolio has really held up well. I think we've chosen well on the customers and we have a very diversified portfolio as well, so both geography and with the customer base and with several verticals we have.

So I feel like we're still positioned better than most of the banks out there from the credit side. And even if you look with the upticks, we're still probably at average or below average for the banks in our peer group, probably well below average. And that's with the $17 million [ORE] property. So if you look at it, I think our portfolio has held up very, very well. And I don't see anything in it that it's going to be a charge-off would take us out of that 10 basis points.

Yes, I agree.

Got it. That's really helpful color. I appreciate that. Maybe just one last question for me on the noninterest-bearing growth in the quarter. It was really encouraging to see. I was just curious on how granular that growth was? Did it come from one larger customer? Or was it numerous accounts driving that?

It's initiatives from just about everybody working it from everything from the corporate, the community team, commercial altogether, from specialty finance to the retail team, all of them working together that's added up, which is even better, right, because it's much more granular than just one big thing. But treasury has done a fantastic job, as John noted, I mean, they have really been ramping up and doing a great job of growing the client base. And all of it together just sums up to something bigger.

Bernard Von Gizycki, Deutsche Bank.

Just wanted to follow up. The loan growth was strong, obviously, in the quarter. I just want to make sure I heard this right. John, obviously, you mentioned it's the exception versus the rule and you're going to have the securitizations coming up in the quarter. Would the quarterly pace still be that $75 million to $125 million? I just wanted to confirm if that's still kind of the guidance for like at least the next few quarters, 3Q and 4Q?

I think so, yes. And again, the securitization complicates it a little bit depending on what we're doing, but I think that's a good guide, yes.

Okay. And then maybe just one follow-up, just keeping with the modeling. Fee income, obviously, ex the gains in the quarter, it still kind of fell in line with like your projections of 4% to $4.5 million. Does that seem kind of like the similar run rate we should expect in 3Q, 4Q? Or anything else you want to highlight?

No, I think it will be about the same. If it was roughly $4.2 million this quarter, I think it will be the same, maybe marginally higher next quarter, kind of between the $4 million and $4.5 million is a pretty good number.

(Operator Instructions) David Storms, Stonegate Capital Partners.

I was looking at it looks like your (inaudible). After receivable sales, maybe closer to the 50% without (inaudible). Is this still (inaudible). I know we've mentioned the basis and the increase in employee headcount. Is high 50s, low 60s feel like a fair run rate for efficiency?

I think the question is where we're looking forward with efficiency ratio. And if that's the case, obviously, there was a little bit of a noise in the first quarter. But we've been running mid- to a little higher 50s. Our goal is obviously to reduce that to get below [55] -- that's an internal challenge that we have.

But I think with some of the scale that's happening, you can see that it's consistently got it below [60]. And on a normal run rate, John, I would say [56], [57], something along those lines is kind of -- but we -- because we've invested some in the future with some of these new hires, I mean, they're going to be extremely efficient once they fund up. And we've seen this from team after team that we've gotten pretty good at being successful of both onboarding them, setting up for success and getting a very efficient profitable units out of them. And I think that's going to be the same here even more so. I think we've gotten better at it. So as we go forward, again, I think we do have the ability to continue to lower the efficiency ratio over the next year or so.

Yes, Dave, on our slide deck, page 10, we show noninterest expenses to average earning assets. And this past quarter was our second-best quarter. But we still think we have a lot of room for improvement there. I mean, 2.44% for a noninterest expense ratio is not great the way we think of it. I mean we think it should be 2.25%, maybe down to 2% if we were really high performing.

And we're not going to be there overnight, but the lower we can drive that number, our absolute expense number is going to continue increasing. But as a percent of our earning assets, it should decrease. That's going to be good for the efficiency ratio over time. So we certainly expect it to improve.

Yes. And just the bigger theme that we've talked about many times is the revenue is going to grow faster than expenses, and that's going to be better for profitability. And I think now haven't given enough time to that has actually played out. And I think people feel comfortable understanding that, that is what we're doing and that we've been executing on it and just getting better and better at it.

That's great commentary. I appreciate that. I did want to ask a second one here, circling back to credit. I think it was mentioned on the call earlier that you still have a pretty tight credit box, but then also that your portfolio is in pretty good shape. Is there any appetite to maybe open up that credit box? Or would you rather stick to winning elsewhere with the securitizations and the likes?

Yes. I mean with the talent that we've brought on in the past and currently and just because of the disruption that's in the market, I mean, I think we have very robust pipelines that there is not really any need for us to change what we're doing right now.

Again, Audrey and I talked about before the pandemic, where we were wrong, we thought that there was going to be in 2019, some event, and we pulled back on LTVs and some of the structures, and we never really loosened it up. And I think that's -- as long as we can continue to grow the way we're growing, we're pretty happy with it. And I don't see a reason for us to reach out there either on pricing structure. And indeed, internal discussions we've had, we talk about different things and particularly on pricing. And we're happy with basically passing on deals if they don't meet our pricing hurdles.

And I think the disciplined approach that we've been very successful in it because I think we're trying to win with relationships and people coming to us because they want service and they do a good job of explaining why we have more covenants or why we want a little bit more money down, but they want a partnership, a trusted adviser. And I think we can continue to move forward with that and still grow and continue to probably even improve credit quality.

This concludes our question-and-answer session. Mr. Caraway, I'd like to turn the floor back over to you for closing comments.

Well, thank you, Christine. I just want to thank everybody for joining us for this call, and we will be looking forward to a call next quarter. Thank you all.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.