Third Coast Bancshares Inc. Q1 2023 Earnings Call

Secondly reached out to depositors' led to an overall increase in deposits of $86 million with $31 million being in noninterest bearing demand.

The leadership team demonstrated a strong commitment to managing the impact of the liquidity crisis on the bank and its stakeholders. This approach helped to increase relationships with the banks depositors and grow the bank's reputation for stability and trustworthiness during a time of industry volatility.

We made significant strides in our business operations for the quarter.

With progress being made across virtually every financial measure such as margin income expenses and earnings per share.

We also surpassed our target of 1% return on average assets in the quarter accomplishing. This goal well ahead of our previously stated schedule.

We maintained our strong credit quality and even had net recoveries for the quarter, which Audrey will discuss further in her prepared remarks.

By focusing on the company's operations and business strategy, we can approach any obstacle with confidence and strength inspiring and motivating employees perform at their best the positive first quarter results for <unk> can be attributed to our talented employees innovative and timely solutions and our exceptional leadership.

Chip.

With that I'll turn the call over to John for a more detailed financial review 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 first quarter.

As Bart mentioned, we made great progress in the first quarter, not only were loans up $106 million, but deposits were up $86 million.

On an average quarterly basis, we did even better with deposits up $201 million, while loans were up $129 million.

This growth included no broker deposits or public funds.

For the same time period, our net interest margin improved four basis points to three 7%.

This improvement was primarily due to decreased federal home loan bank borrowings due to our strong deposit growth, we continue to be slightly asset sensitive with new business being put on at lower spreads, resulting in a slight drag.

At quarter end, our uninsured deposits totaled approximately $932 million or 28% well below industry average our available borrowing lines, our approximately $2 billion, resulting in a two to one coverage.

Additionally, our accumulated other comprehensive income was a negative $2 million at March 30, <unk> or approximately one half of 1% of shareholders' equity.

Noninterest expense totaled $22 million for the first quarter of 2023 down from $22 6 million in the fourth quarter of 2022.

This was the fourth consecutive quarter that noninterest expenses were down from the previous quarter.

It was also likely the last quarter for lower noninterest expenses due to the new branches, new employees and inflation finally, catching up and I think the next two quarters will be in the range of $23 million for noninterest expense.

The efficiency ratio was 63% for the first quarter of 2023 compared to 67% in the fourth quarter and 75% in the first quarter of 2022.

This significant improvement, resulting from one of our goals over the last year of growing revenues faster than expenses in fact over the last year net interest income has increased 30%, while noninterest expenses increased only 9%.

Net income available to common shareholders totaled $8 1 million for the first quarter of 2023 compared to $6 1 million for the fourth quarter.

Diluted earnings per share were <unk> 55 in the first quarter compared to 44 in the fourth quarter an improvement of 25%.

This performance resulted in returns on average assets of 1.0% to 2% and returns on average common equity of 10 two 8%.

Additionally, our pretax pre provision Aro was approximately 140.

In late March we entered into a five year swap agreement with a notional amount of $200 million, we will pay fixed $3 16 and receive fed funds floating which today is about 483.

This will give us good margin protection in the event that market rates are flat or down slightly.

In the event that rates are down materially we have floors on 58% of our loans and additionally, 21% of our loans are fixed.

While the Texas economy remains strong we anticipate and are prepared for more difficult conditions rising rates inflation and economic uncertainty continued to be a concern.

In closing we continue to manage through this rate cycle and compete for deposits and believe our unique positioning will allow us to be nimble innovative and maintaining a focus on safety and soundness.

That completes the financial review and at this point I will pass the call to Audrey for our credit quality review.

Thank you John and good morning, everyone. Once again credit performance for the quarter was strong with nonperforming assets decreasing by 16% to $10 3 million at the end of the first quarter nonperforming assets to total assets was 0.27% in the first quarter 2020.

<unk> down from 0.32% for the fourth quarter of 2022, and 0.41% from the first quarter of 2022, non performing loans to loans held for investment remains low at 0.32% which decreased from 0.39%.

As of year end and from 0.44% as of the prior year period on January one 2023, we adopted the current expected credit loss methodology are seasonal and recorded an increase of $4 million to the allowance for credit losses.

For the cumulative effect of adopting ASC 326 the.

The $4 million increase in the allowance was primarily the result of economic projections for U S unemployment and GDP.

We also recorded a provision for the quarter of $1 2 million, which related to provisioning for new loans, this compared to a $2 million and $4 million loan loss provision during the fourth quarter of 2022, and first quarter of 2022, respectively under the incurred.

Loan loss methodology.

During the first quarter of 2023.

<unk> has increased from $30 4 million to $35 9 million. The ACL to total loans was 112% up from 0.98% in the fourth quarter and from zero point, 95% in the same period last year, we're especially pleased.

He used to report net recoveries in the first quarter.

During the three months ended March 31, 2023, and 2022 the company recorded net recoveries of 364017 thousand respectively.

We continue to closely monitor the portfolio for the impact of rising rates and the likelihood of a recession and we continue to underwrite conservatively our asset quality remained strong our loan portfolio continues to perform well and remains well diversified.

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

Thank you Audrey moving forward the goals, we've set are still relevant as we progress through the next few quarters of 2023.

We remain focused on two key strategic priorities, increasing efficiencies and maintaining a healthy credit culture.

We are committed to improving efficiencies across our company through the following bank wide initiatives implementing technology to optimize our internal processes.

Enhancing our digital capabilities for our customers and increasing communication and collaboration we.

We will continue to monitor the loan portfolio to ensure that we maintain strong credit quality.

While updating the full year 2023 loan growth guidance to a more moderate level at $300 million to $400 million compared to the full year of 2022.

We acknowledge that our achievements to date are largely attributed to the exceptional team of professionals working for our organization. The Companys sound business strategy and the fact, we operate in the most favorable markets in Texas.

And while none of us are entirely immune to becoming headwinds we are better positioned than most to adapt and capitalize on these core strengths as we navigate the ever changing landscape of the financial services industry. Amid continued economic uncertainty. This concludes our prepared remarks I would like to now turn the call back over.

To the operator to begin the question answer session operator.

Thank you we will now be conducting a question and answer session.

To ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two 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.

Our first question comes from the line of Thomas Wendler with Stephens. Please proceed with your question.

Hey, good morning, everyone.

Good morning.

I just wanted to start out with noninterest bearing deposits, we saw a step up in the end of period and I was just wondering your expectations for the <unk> 'twenty three levels.

So we've had a focus of actually with our treasury products that we've mentioned in a couple of other calls and we're getting some progress in growing that core what I call commercial treasury products.

So these are mostly granular.

Deposits that are coming through and we actually believe with some of our customers' digital offerings that are kind of enhancements to that treasury product that we are seeing some more accounts coming on fact.

One new account that is <unk>.

May be fairly significant in noninterest bearing DDA that has already been opened and we will start funding. So we think this is going to be a trend that you will see for the next few quarters. Obviously, it's a volatile market, but we are seeing quite a bit of progress in selling commercial treasury products with.

Good DDA component to it.

That was great color. Thank you and then moving on to loan yields loan yields saw a nice step up in one Q3 was there anything unusual there driving the strong increase and then can you give us any color of what we should be thinking about for loan yields moving forward.

No I mean, Tom.

Most of our loan portfolio of about 80% is floating so as rates go up I mean, certainly we expect them to go up again next week, assuming the fed increases rates, but let's say for the month of March.

March it was probably our best spread months that we've had in quite some time, our average yield on new loans in the month of March was a little over 8%. So we had a really good month there.

I could add on to that.

Revising down our projections for loan growth again more to the three to 400 range and part of that is intentional and that we're just looking more at credit quality and yield. So we're just being more selective on the loan side as well and Thats youre going to continue to see the same trends going forward.

Alright, Thanks for answering my question, guys and great quarter.

Thank you.

Thank you. Our next question comes from the line of Bernard Bot.

<unk> with Deutsche Bank. Please proceed with your question.

Yes, hi, good morning.

Credit held in fairly well for the quarter nonperforming assets declined as noted.

And you had some recoveries instead of charge offs during the quarter with a potentially weaker backdrop mentioned in the prepared remarks or at least some uncertainty in the macro are there any areas in the portfolio that you would expect to see some tick up in charge offs or have higher reserving against over the next several quarters.

Not really I mean, we.

We monitor the portfolio. So closely I mean, we actually have implemented over the last couple of years monitoring groups.

Four of our verticals and so what we are seeing is.

A lot of our companies have.

Either cancelled or decided not to go forward with some capital expenditures to expand their business, we're seeing some customers that have.

Pipelines, where they work through their backlog and perhaps there their pipelines are smaller than what we've seen in the past so that slowdown is impacting most of our customers.

<unk> addressed that with either expense reductions with yourselves or just.

Forecasting where their business is going to be in pivoting to the new environment. So we're not seeing credit erosion as much as just a general slowdown is that fair to say Audrey yes, yes, Bernie what I was going to say is that our comment was more general in nature, just because everyone's expecting a recession, there's nothing specific to our.

Portfolio.

No understood.

That's good color.

Maybe John just as a follow up.

You gave that.

Details on the swap.

In the press release, you were talking about.

Expectations that the NIM could rise into queue, just any color anything that you can provide for the kitchen.

Q NIM guide.

What are you assuming for the fed hikes and our cuts.

Yeah. So we're assuming we get the 25 basis point increase next week.

If that does happen or assuming it happens we will be in the money on that swap by about 192 basis points. So it pay probably a significant amount of money for this next quarter whats a little harder to know is what the offset may be on the bank's portfolio now with that said.

With the rates going up one more time, we are asset sensitive I mean, the second quarter may very well be the.

The high watermark for our margin and I think it'll be up at least five basis points. It's hard for me to say anymore than that.

Understood I appreciate it thank you.

Thank you. Our next question comes from the line of Brad Milsap with Piper Sandler. Please proceed with your question.

Hey, good morning.

Hey, Bryan good morning.

Hey, you guys. Taking my question you guys have addressed most everything Barry you touched on this a little bit on the deposit growth that you saw in the quarter specific around DDA and you guys have been talking about a large.

Posit pipeline for a couple of quarters I was just curious how big that might be right now sort of relative to your.

Loan growth aspirations of $3 to $400 million. This year, just trying to think about how you'll fund.

<unk> that going forward and sort of kind of where the where the costs may come in to do so.

Yeah, Hey, Brian if I could start that and lip Bart add onto it so.

As we were in the fourth quarter, we knew we had an exam coming up in the first quarter end.

Over the previous couple of years, we've been trying to fund the loan growth kind of just in time funding, but we thought it was important to have more on balance sheet liquidity. So we had a hard push in the fourth quarter and early in the first quarter.

Long before there was any liquidity crisis that people were talking about so as you saw our average balances were up materially and our demand deposits were up materially and the reason was the push that we had started some number of months ago.

Since the liquidity crisis mid March I mean, we've continued to push hard and.

If I had to say now I would say our deposit growth would exceed our loan growth comfortably over the next couple of quarters at the pipeline just looks real strong and if I could just add on to the tail end of that too is that we're really looking at growing it as granular as we possibly can.

I'm very proud that our retail team has been bringing on.

Consumer deposits as well as small business deposits. They have been very successful at that and indeed in the last quarter. They brought on a record number of of the small business and consumer deposits and part of that is we've implemented.

Our program and added talent to that area, where we're doing a lot more outreach into our community and then again from the Treasury side <unk> mentioned again I think all the investments we've made in the past.

Enhancing our treasury products is paying off and is allowing us to bring on more sophisticated customers.

And again, our wealth side and private bankers have also done a great job.

As well in the wealth program has been by and large a huge success I think John the degree both from the income side with they're contributing but also bringing on new customers and clients.

That has allowed us to cross sell both deposits and loans to them and then even our specialty verticals.

<unk>.

Really done some great base hits and brought on some new deposits as well so it's been across the board all of our team.

It has had an emphasis on deposits.

Is it just one sector its everybody contributing to the deposit growth and I think we will only get better as we go on.

So just curious sticking with deposit costs I think your total deposit costs were around 292% in the first quarter, just kind of curious, maybe where where they ended the quarter and do you guys have much in the way of index money that would automatically sort of rolled out if the fed were to start to go the other way.

When we do we have a significant amount of money.

That followed.

It's floated up and I think thats why the margin pressure that we had.

A year ago, we were kind of ahead of most other banks don't have to worry about that so much now if rates do start going down those those deposit pool will immediately float down also.

Do you have that number by chance John .

No as far as levels I'd have to go look up exactly where we were but it wasn't materially different at the end of March again, we had so much deposit growth over the last six months.

I know some banks had the issue of losing deposits and had to borrow from the home loan bank and increase their cost of funds and we just didn't really say that.

Sure Okay.

Alright, great. Thank you guys I appreciate it.

Thank you.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking my questions.

Most have been answered, but just wanted to get an update on the SBA business, obviously no gains this quarter, but.

It looks like Theres, a seasonal pattern, but I just wanted to get a general update on on SBA and maybe just more broadly.

What efforts do you have on going to.

To drive further fee income growth. Thanks.

So just to remind that from the SBA standpoint, it's an ancillary product to our community banking, meaning that.

It basically is.

Just another tool and we tend to in the past have kept a lot on our books and sometimes we sell them, we kind of make it on a case by case.

Scenario, but we're not dependent on that sales income I mean, we generally make a loan to the ASP on the SBA side, primarily as an intro for a customer to come in as a customer acquisition or it's a tool to where if we wanted to make some when it gives us some enhanced comfort with it.

So I view that as just part of our normal community banking business in it and because of that I don't think we quite stretch as far from a credit quality standpoint, they are usually near bankable or have some sort of.

Color to it but in general the SBA program kind of comes in waves, along with the community banking side of it it's been slower in this last quarter, probably last couple of quarters, It probably will remain.

Relatively small and still slower over the next couple of quarters.

But overall I mean, I would say, there's really been no change in what we've done you have anything to add Audrey on marine the portfolio as of March 31st is only 70 million. Yes. So it's a relatively small part of our entire bank, but key insignificant in that it is a nice product, where we're able to offer.

Offer some benefits to a customer sometimes on amortization or are being able to get a deal done. So it's a very complementary product.

Helpful. And then the increase in other fee income I assume some of that has to do with some of the fintech partnerships, but just wanted to see if there's kind of anything in there and then if we could get an update on the textbook. Thanks Sean.

And Barton, yes, as far as the fees ago. There really was no fee income from the fin techs, yet I mean, we are hopeful that that does pan out over time.

The other category of this month or this quarter. There was just nothing special and it was a bunch of smaller miscellaneous fifth anything alone related but.

Nothing nothing significant to point out.

And on the Fintech side. So we are pleased that we on boarded our first fintech.

I'd like to say that we're kind of focused on quality over quantity in this line of business. So we're being very selective we really only want to partner with the best Fintech that are out there and what we're primarily looking for in a partnership is stable deposits quality customers and an appreciation for <unk>.

Clients on that and so.

For US again, we're going to be very selective in who we onboard we expect maybe one to two more partners on board over the next two quarters.

Gibbs unit.

Sort of an example of how selective were being.

I will say again on that customer custom and digital offering with our traditional commercial treasury products that kind of overlap a little bit, but again, we have one significant new customer there.

We also have two more customers in the pipeline one that could be again more significant core deposits that are coming in one that's more of a revenue generation versus deposit balances, but in general all of these kind of work together that we believe we're going to bring in the aggregate.

Some potential positive impact to our deposit mix.

Very helpful. And then maybe just one final one for me on expenses, but I think John you said $23 million.

So per quarter or at least in the near term is the right way to think about it that kind of implies for the year kind of a mid single.

High single digit.

Expense growth number if you could just kind of.

Isolated kind of the parts between wage inflation hiring efforts and then maybe if there's any.

Cost containment efforts that you have.

Place just trying to kind of.

I thought the puts and takes.

Sure. So over the last year, we've certainly been very mindful of expenses and then everything we can hold expenses down and we did have layoffs over the course of the year are people that just left for whatever reason our head count has not changed materially over the last 12 months, but.

As much as we've grown in the last year I mean, theres certainly our needs on the operation side in particular, and if we find the right salespeople I mean, we'll hire them too, but most of our bank wide salary increases were effective here late in the first quarter. So we'll see the effects of that going forward.

Ford and I.

I don't know exactly what that number works out to be five or 6% on salary expenses something like that.

When you include bonus accruals and health insurance and you know kind of all in is kind of what the run rate increase will be in the second quarter, just just specific to that.

Any of the other expenses I mean, there is a couple of other branches that we're working to fill out and hire people branches that we opened late last year that we didn't see a big increase in expense related to those for the first quarter I mean, it was there but it was offset by other cost saving initiatives that we had.

Again that can't happen forever.

Oh I understand thanks for all the <unk>.

<unk>.

There are no further questions at this time I would like to turn the floor over to Mr. Carley for closing remarks.

Thank you and once again, we appreciate the questions.

Thank you for joining us today.

We think we had a fantastic first quarter and we do believe that we're going to continue to improve going forward and this is all again.

Part of the plan we started when we went public that we're executing on so I want to thank you for your time today.

Very much appreciate you joining us and we appreciate your support for <unk> Bancshares. Thank you all and have a good day.

Ladies and gentlemen. This concludes today's call you may now disconnect your lines and have a wonderful day.