Q2 2022 Third Coast Bancshares Inc Earnings Call
Now, I would like to turn the call over to third-code's chairman, President and CEO , Mr. Bart Careway. Thank you.
Thanks Natalie and good morning to everyone. Thank you for joining us today.
As stated in the earnings release, third-cost reported strong loan and deposit growth of about 300 million. We closed the second quarter with 3.4 billion in assets and increased of 34% year to date. The second quarter results also included certain one-time charges of 1.2 million.
John will walk through the non-recurring items during his prepared remarks, but for now, I'll begin by highlighting significant events in the quarter for our business. I'll begin by highlighting significant events
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.
Since this is the only our second conference call as a public company, I thought it would help if I shared a brief overview of third coast for the benefit of those listening.
With over $3.4 billion in total assets, Third Coast is one of the fastest growing financial institutions in the nation.
We have more than 350 employees in 14 branches across the state of Texas.
Consisting of seven branches in the Greater Houston market, four branches in the Dallas-Fort Worth market, and three branches in the Austin, San Antonio market. Our business lines consist of community banking, corporate banking, and specialty finance.
Next, I'll give you an overview of where we are today.
Over the past 12 months, due to disruption in community banks across Texas, we've hired 88 exceptional bankers in a variety of roles.
We're recruiting and being approached by leading, high-performing bankers who view Third Coast as not too large and not too small.
These exceptional bankers have both enhanced our loan portfolio and contributed to our loan growth.
We believe we are the bank of choice for extraordinary talent across Texas and a well-positioned to take full advantage of this market disruption.
In addition to hiring bankers, we recently opened two de novo branches to continue to better serve our customers. Thank you,
We opened our new Fort Worth branch during the first quarter of 2022, and in the second quarter we opened a branch in Georgetown just north of Austin.
As we sit here today, we've identified the following operational objectives. First, the banking industry is constantly evolving.
To stay competitive, we must meet the changing needs of our customers by being a nimble and agile bank with the ability to quickly respond to the rapidly evolving business environment.
During the second quarter, we announced that we selected Treasury Prime, a leading banking as a service company, as our strategic partner for our future of banking initiatives. AT animals response reaction –
I'll provide you more information about this new relationship later in my prepared remarks. But suffice to say, we expect the platform will provide us with a nimble, scalable digital platform poised not only to absorb change, but to outperform our competitors.
Second...
We continue to optimize, digitize, and automate our business processes in order to improve efficiency and responsiveness.
Another impactful decision that our organization is excited about is the announcement in early July about joining Alloy Labs. A consortium of community and midsize banks focused on adopting technology more effectively and efficiently by speeding up the pace of innovation of the new Fintech products.
Third Coast will also have access to Concept Lab, a reverse accelerator program that builds partnerships between banks and startups that provide services outside of traditional banking.
Ultimately, Third Coast Technology Platform will bring a comprehensive suite of innovative and cost-effective cloud-based fintech products to the market in response to the growing demand from our customers.
Additionally, we have committed 5 million to the Castle Creek Launch Pad Fund, where I will serve on the Limited Partners Advisory Committee.
Third, we believe we have the talent, scale, markets, and capabilities to meet or exceed our organic growth objectives.
Of course, we will always be opportunistic when it comes to considering acquisitions, but for the time being, Third Coast intends to focus on those internal initiatives that best position us for more organic growth and future successes.
Finally, we'll continue to look to the future and not be content with a status quo. Our investments in our future, particularly in research and development, should lead us to some innovative opportunities for third coast. We expect these products and customer experience solutions will increase deposits and fee income. For those who know third coast history, these objectives are a progression of what we have been doing since our inception, including our priorities to diversify our long portfolio and revenue.
each of our employees in honor of Arbor Day.
With that, I'll turn the call over to John for more detailed financial review. John ?
Thank you, Bart, and good morning, everyone. We provided the detailed financial tables and yesterday's earnings release. So today I'll review, select a balance sheet and profitability metrics for the second quarter of 2022 compared to the prior year and prior year.
To recap, we experienced strong loan growth of 301 million to 2.75 billion.
This growth was well diversified with commercial loans up $158 million and real estate loans up $117 million.
Similarly, if we look at it by line of business, growth was somewhat evenly split between community banking, commercial banking, and specialty finance.
Following that trend, deposit grew slightly more than loans at $311 million.
We did, however, experience a negative shift from non-interest-bearing deposits to interest-bearing deposits of approximately $400 million. This negatively impacted the net interest margin about 10 basis points and reduced the bank's asset sensitivity.
We close the second quarter with 3.4 billion in assets up from 2.5 billion at year end and increase of almost 900 million.
While we are pleased to have greatly exceeded our growth targets, we do not expect to grow at the same rate for the second half of the year.
As of today, we're up about $80 million for the month and we're targeting near-term growth to be in the range of $75 to $100 million per month.
Now, the interest of margin was 377 for the quarter, a decrease of 32 basis points from the first quarter.
Most of this decline was related to the swab between nonintersparing and intersparing deposits discussed previously, but also resulting from our $82 million sub-dit issue in fin April and declines in PVPCs of $883,000. And declines in PVPCs of $883,000.
Non-interest expense totaled $22.8 million in the second quarter, up from $20.2 million in the first quarter.
Primarily due to a loss on the sale of other real estate of 350,000, an unexpected one-time legal settlement of 900,000.
We also had higher salary expense related to new hires in the first half of the year.
Additionally, we're spending approximately 150,000 per month on Fintech and banking as a service project.
In early July , to increase our asset sensitivity, we entered into a five-year swap agreement with an ossional amount of $200 million.
We will pay fixed at 262 and receive Fed funds floating, which today is about 250. That completes the financial review. At this point, I'll pass the call to Audrey for our credit review.
Thank you, John , and good morning, everyone. Asset quality improved during the second quarter of 2022 with non-performing assets declining by 1.4 million or 11.4% from the first quarter and 15.2% from the second quarter of 2021. The improvement was primarily the result of a decline in restructured loans. Non-performing assets remained low at 0.33% of total assets.
from 0.41 in the first quarter and from 0.64 percent in the prior year quarter.
We recorded net recoveries of $4,000 for the second quarter of 2022.
Our allowance for loan and lease losses now represents 0.97% of total loans, and increase from 0.95% sequentially and 0.86% in the second quarter of 2021.
That concludes the credit discussion, but before I pass the call back to Bart, I'd like to congratulate him on behalf of every third-coast employee for being named a finalist for the Entrepreneur of the Year, 2022 Central South Award. Entrepreneur of the Year is one of the preeminent competitive business awards for entrepreneurs and leaders of high-growth companies. For Entrepreneurs and leaders of high-growth companies.
BART was selected by a panel of independent judges according to the following criteria, entrepreneurial spirit, purpose, growth, and impact, among other core contributions and attributes. With that, I'll turn the call back to BART to cover our outlook. BART? BART is selected by a panel of independent judges according to the following criteria,
Thanks, Audrey, for that. I'm excited to share this very special recognition with our leadership team and dedicated employees. It's going to be humbling.
Before we take your questions, I want to expand on something I mentioned earlier, that we intend to take advantage of growth opportunities. Last quarter, we shared that we had formed a fintech committee in 2021 to consider opportunities for banking as a service, and in June , we announced our partnership with Treasury Prime.
Third Coast, through our high-tech suite of treasury management solutions, can now provide fintech companies with a supportive and reliable bank partner. Together, Third Coast and Treasury Prime will build a program to enable fintech and enterprise clients to more quickly and easily embed banking services, including bank accounts, payments, and cards into their product and service offerings.
We believe that embedded finance is critical when delivering personalized day-to-day solutions to clients. Third Coast is prepared to serve today's competitive banking and payments landscape by adding low-cost deposits and diversifying non-interest income streams.
We have Interface 2 of the onboarding with Treasury Prime that includes the development of the platform and its integration with our banking systems. And its integration with our banking systems.
We expect to complete the integration late in the third quarter or early on the fourth quarter.
Consistent with our FENTEC strategy, our committee continues to evaluate opportunities as they present themselves.
In closing, while we are cognizant of the anticipated slowdown and the underlying economic activity, we continue to prioritize our investments in our people and leverage our technology to support long-term, sustainable growth. We are committed to generating positive operating leverage and remain focused on our strategic growth initiatives as we continue to enhance shareholder value. This concludes our prepared remarks. I would now like to turn the call back over to the operator to begin the question and answer.
of the answer session, operator. Thank you very much sir.
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One moment please while we pull for questions.
We request you to limit to one question and one follow up.
We have first question from the line up, Brad Millsaps with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Morning, Brad.
Thanks for taking my question. John , maybe you wanted to start with the net interest margin. Obviously, a lot of moving parts. I think the last quarter you got into 19 basis points of core and in expansion with 100 basis points increase in Fed funds. And then about double that with a 200 basis point increase. Obviously a big change in the funding this quarter. Could you update sort of your outlook there for the margin and you've got a lot of durable rate points?
close to zero, but as rates started moving up, they...
insisted, if you will, on being paid. So we're paying close to Fed funds on those accounts, and the full impact wasn't felt in the quarter because they didn't make that change until about the middle of May, roughly. So to the extent that that affected the margin, maybe 10 basis points in the month, we probably do have a little more next quarter that would affect it.
Other things on the margin, PPP fees were down $883,000 for the quarter. That's something that we're almost through with. We only have $240,000 remaining in PPP, so we won't have the headwind that we had for that in the past.
All other loan fees were down slightly quarter over quarter, not all that material, maybe five basis points to the quarter. And then of course our subject costs, we did not have to pry our quarter and we had for the full quarter. And that was probably another 10 basis points also. Now looking at asset sensitivity going forward, you can see it.
It's hard to fully reflect with all the changes that we've had going on, but the reports at June 30 do still show that we're asset sensitive, although slightly less so than we were before. So as Rachel up yesterday today, whatever, however we want to look at it, we do think we're still asset sensitive. We'll have the headwinds from the non-interest bearing, but the margin we're forecasting to be.
roughly flat for the next quarter. Okay, thank you for that. And I guess is my follow-up just on loan yields. I think if I calculate it correctly, if I kind of take out the PPP at loan yields somewhere around 470, 469.
are we close to seeing that sort of, you know, stabilize or our new loans coming on and still diluting that yield that we saw as the average for the quarter.
Yes, so I did go in and look at that and for the month of June , which I assume is kind of going to be the most relevant numbers we have, our average new loan yield for loans booked in June was $4.50. And our fees, you know, that's a little harder to equate to the whole portfolio, but I think our loan fees going forward on the full portfolio are going to be about 10 basis points a month.
And I assume what you're putting on is mostly variable so that full 50 should move up with what happened this week. Isn't that number two? And that is there. Yeah. We're stuck on that. again.
if we have future late hikes.
Correct. Our floating rate loans on the entire portfolio were roughly 65%.
Okay, great. Thank you all. Pop back into you.
Thank you. We have next question from the line of Michael Rose with Raymond James. Please go ahead.
Hey guys, thanks for taking my questions.
I just wanted to dig into the expenses. The expenses is quarter, obviously, a couple of non-recurring type items. Understand all the investments that you guys are making. I think last quarter you talked about kind of a 21 million range for the next few quarters, but it seems like it's running kind of at the high end of that range and we're seeing kind of wage inflation across the space impacting pretty much all banks. In closing, slow promises profiled in the startup, being the rightWow, in the beginning of our breakdown, several banks will bring up the range of income sales from the you
Should we think about kind of a higher run rate as you guys build out some of these new products and services? Thanks.
Yeah, I think definitely. So...
You know, it's hard to put an exact number on that. Some of the projects that we have ongoing or maybe a little hard to define what the expense is. And then the employees that we're hiring. I mean, we're certainly seeing the wage inflation that you talked about and...
You know, even though our hiring is materially slower than last year, it is definitely not zero. But the people that we're hiring today are either coming to us that are very high performers, that are seeing an opportunity, or are there people that we're reaching out to specifically where we have a need? But it's certainly more...
strategic, more targeted than it was last year, but we've really hired some great people in the last month or two that we're real excited about. That it takes time for them to fully pay for themselves. The typical thing about a lender, the most expensive day is day one when you have all their salary and none of their loans, but they're people that'll be high performers that we're excited about. Yeah, if I could echo that with John , is that, kind of in big themes, in 2021 it was,
the big team liftouts, which were truly transformational for us. But in 2022, the theme is a surgical and opportunistic. And like John said, these are all high value talent. Almost all of them are approaching us to join us. And it's also folks that quite frankly, you only get kind of once in a lifetime opportunity to probably to get.
But it is very much a smaller number. We don't have any other large teams that we were looking at. This is all highly productive, high value talent coming on board.
Yeah, Michael, we're all saying in them something between 21 and 22 last quarter, I think it's more between 22 and 23 at this point. I think it's more between 22 and 23 at this point.
Okay, that's helpful. Then just maybe back to the deposits and kind of following on to Brad's question. Can you just talk about the funding strategy as we move forward? I understand the rate of loan growth looks like it's going to slow a little bit from where you guys had been. I think that makes sense for a lot of different reasons, but you're sitting at a 5% loaner deposit ratio. The beta is obviously...
You know, ramping pretty high. So you can just get an update there. And just maybe if you can put a far more point, I think last quarter you talked about getting to a 1% RWA. Yes.
in relatively short order, you know, it's like next year if you can just kind of address.
just given some of the change that we've seen in the funding mix, what that could mean for achievement of that ROA. Thanks.
Yeah, so maybe I'll start and let Bart add on. But for the second quarter, we were roughly 70% wholesale funded, which is certainly higher than we would like to be. I mean, that's why we're spending money and time and effort on some of these other projects to get that number down. But we've talked many times in the past about our growth being somewhat lumpy, and it's hard to exactly evenly match the funding with our loan growth. And if 70% is more than we would like it to be because of the deposit.
So I would guide towards the second half of the year.
Okay, I just got a little bit on the positive go ahead Michael. Nope go ahead. I'm sorry
Yeah, I just want to remind everybody a little bit about on the deposit side that it's really a multi-pronged approach. And as fast-growing bank as we are, it is a little difficult. But we have a lot of bankers that have good core customers and we get full wallet relationships from. And we are seeing some nice deposits coming in from the community banking efforts as well as the private bankers. There's a few of them that still are not free of restrictions and have some limitations. But by and large, we are getting full wallet relationships.
In our treasure platform, again, we are, we're continuing to enhance it, and it has some very robust capabilities that we think we're gonna get some momentum on deposits for it. We also have some retail strategies. Those will probably come into play more Lake Fourth Quarter, early First Quarter before we start seeing some movements on it. And then again, on the Fintech side, with the partnerships we're looking at, including with Treasury Prime.
You know, we are optimistic that those are going to be some good, non-intersparing accounts with some p-revenue to them as well. So we're looking at this across several platforms and trying to make sure that, you know, we're hitting all of those to bring in the deposits and certainly turn it as core as possible.
All right, thanks for the color. If I could just maybe slip one more in the drop in derivative income this quarter. I mean, be sad.
I know it's going to be, but is this kind of a run rate we should expect there? Do you think it will bounce back in the third quarter? Thanks.
You know, with rates being so much higher, there are fewer customers that are interested in fixing their rates at this point. There's a few. I mean, we didn't do zero this quarter, but I would expect that to slow down. The higher rates go, the less likely it is that our customers want to do those transactions.
All right, thanks for all the color. Appreciate it.
Thank you.
Thank you. We have next questions on the line-up. Dear people No. 31 Gives a Key with Duy??? Bank please go ahead.
Hey guys, good morning. So my first question, you noted you're making about $150,000 a month of investments towards the FinTech initiatives, and it seems it's a big opportunity for you. I'm just wondering if you could maybe kind of give us a sense, what does this entail? And are you hiring for this initiative as well?
Yeah, so for the most part, we're trying to handle everything on a contract basis to where, you know, as things we can always dial back expenses if we want on it. And most of these projects we're working on are focused towards, you know, core deposit growth is what we're looking at. And if I could put in buckets, I would say there's a few in salaries, the most is in consulting and legal.
So most of these things can be adjusted if we needed. But the focus is on a lot of these initiatives are bring over core customers or customers that are bringing low cost deposits.
Okay, thank you.
Thank you.
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We have next question from the line up, Matt Onley with Stevens. Please go ahead.
Yeah, good morning. Thanks for taking the question. I want to circle back on the loan growth discussion. It sounds like you're expecting a bit of a slowdown in the second half of the year versus that first half. Just help us appreciate the slowdown. How much is driven by economic headwinds versus pipelines being a little bit more moderate now versus a few months ago versus do you expect paydowns to accelerate? Just any more color you can provide. on that.
than anything. Right now, again, I think our volume is pretty good, mainly because, again, we're moving business from other banks at this point. But I do believe that that will slow down just a little bit with the economy. Although, I still feel like it's gonna be robust and one of the fastest growing banks in the country. We just believe it's gonna be towards that lower range of what we initially projected.
Okay, that's helpful. Thank you for that. And then going back to this discussion around the margin and deposits cost. And deposit cost.
I'm back it into the positive beta for you guys and to Q of round.
25% of the most banks are talking about deposit-bated accelerating in the back half of the year would lead to more back what your expectations are for deposit-bated in the back half of the year. Thanks.
Yeah, I think that's likely to be true for us also. You know, six or nine months ago, seems like everyone was drowning in liquidity and deposits were easy. And they've certainly become more competitive just in the last 30 days or so. I mean, on everything that we're seeing, we could call just every day of customers at a rate shopping saying, do you need to bank down the street as paying the X? Will you match it to keep the deposits soon?
got six or nine months ago. We just didn't have those calls at all. So, you know, the betas that we have in the model...
It's just hard to say, but I certainly think they will move up just based on what we've seen over the last month.
Okay, and then, if I could ask one more question. You talked about the margin being relatively flat. I believe from 2Q into 3Q and kind of moving parts around that. Can we take that discussion to the net interest income? The NII, I'm curious how that should look from quarter quarter. I think the NII increased around $2.5 million during 2Q. It's a lot.
Is that a good ballpark number for us to think about as far as the improvement from 2Q or into 3Q?
Yeah, that's a good question. I didn't look at the average balances to see exactly where we stand. I know that the average balances versus period end were up more in the second quarter than the first, but I didn't see exactly where we ended to try to capture what you're talking about, but generally speaking, yes, the net interest income we think will be increasing. If the margin is relatively stable, we do still think we'll have enough.
growth to drive increases in net interest in
to drive increases in net interest income. Okay, thank you.
Thanks, Matt.
Thank you ladies and gentlemen we have reached the end of the Crestron Anantel Fashion and I'd like to turn the call back to Mr. Caraway for closing remarks. I would choose so.
Thank you, Dickrum. We appreciate everybody for joining us today on the call and the continued support for Third Coastbank shares. And we look forward to talking to you next quarter. Thank y'all.
Ladies and gentlemen, back in close to the call.
Thank you very much sir.
This concludes today's conference.
And.