Q2 2023 Third Coast Bancshares Inc Earnings Call
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Natalie Hairston Senior Vice President Dennard, Lascar Investor Relations for third coast Bancshares. Thank you you may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us for third Coast Bancshares Conference call and webcast to review our second quarter 2023 results with me today is Bart Caraway, Chairman, President and Chief Executive Officer, John Mcwhorter, Chief Financial Officer, and Audrey Duncan 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 Dot T. C. B S. S. B dot com. There will also be a telephonic replay available until August 32023, and more information on how to access these replay feature.
<unk> was included in yesterday's earnings release.
Note that information reported on this call speaks only as of today July 27th 2023, and therefore, you were to buy 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 meeting 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 15th 2023 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 cause chairman President and CEO , Mr. Bart Caraway Bart.
Thanks, Natalie and good morning, everyone. Thank you for joining us today.
I'll begin by highlighting the company's performance for the second quarter.
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.
As reported in yesterday's press release, our second quarter results demonstrate <unk> ability to maintain strong credit quality faster than peer balance sheet growth and improving margins. Despite macro pressures nonperforming assets to total assets were 25 basis points.
Same as the prior quarter and down from 33 basis points in second quarter of 2022.
Total assets reached $3 96 billion, which was two 7% more than the first quarter of 2023 and 18% over the prior year quarter loans.
Loans held for investment grew to 333 billion, which was three 8% higher sequentially and 21, 3% more than a year ago period.
<unk> reached 341 billion two 6% over the prior quarter and 17, 6% more than the same period last year. Finally, net interest margin improved three basis points from the prior quarter and five basis points from last year to a strong three <unk>.
Eight 2%.
We're also pleased with the increase in tangible book value to $22.82, a positive sign for investors and customers alike. This achievement shows strong financial footing.
<unk> is well positioned for the current market environment.
<unk> capital position remains strong with tangible common equity to tangible assets, increasing slightly to 788%.
By prioritizing customer satisfaction and operational competence, we have established ourselves as a dependable financial institution.
Excellent leadership and strong credit quality of the company further reinforces our position in the industry with that I'll turn it 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 second quarter.
As Bart mentioned second quarter loans were up three 8% or $121 million sequentially deposits increased $86 million over the first quarter and total assets reached $3 96 billion, a new record for the company.
For the same period, our net interest margin improved three basis points quarter over quarter, and five basis points year over year to 382.
This improvement was primarily due to increased loan yields.
We remain slightly asset sensitive with new business being added at lower spreads, resulting in a slight drag on the net interest margin.
Going forward loan growth is expected to offset margin pressures, resulting in increases to net interest income.
On May 26, we unwound, our 200 million dollar pay fix swap realizing a gain of just over $5 million.
This gain will be accreted over five years as an offset to interest expense.
Based on this quarter's average interest bearing deposits the offset is equivalent to 38 basis points.
Combined with our two previous unwind, we have almost $9 million in gains equivalent to 70 basis points.
At quarter end, our uninsured deposits totaled approximately $1 billion or 30%.
Our available borrowing lines are approximately $1 7 billion, resulting in a coverage ratio of 1.7 to one.
Noninterest expense totaled $23 8 million for the second quarter of 2023 compared to 22 million for the first quarter of 2023.
As anticipated increases from new branches, new employees and inflation have resulted in slight increases in noninterest expense.
I think for the remainder of 2023 noninterest expense will be in the range of $24 million.
Net income available to common shareholders totaled $7 7 million for the second quarter compared to $8 1 million for the first quarter.
Diluted earnings per share were 53 cents in the second quarter compared to 55 cents in the first quarter, a slight decrease of 4%.
This performance resulted in returns on average assets of 96 basis points and returns on average common equity of nine 4%.
Additionally, our pretax pre provision ROA was approximately 1.35%.
That completes the final financial review and at this point I'll pass the call to Audrey for our credit quality review.
Thank you John and good morning, everyone credit performance for the second quarter with again strong nonperforming assets to total assets was 25 basis points for the first and second quarters of 2023 down eight basis points from 33 basis points for the second quarter of 2022.
Forming loans to loans held for investment remains low at 30 basis points, which decreased 10 basis points from 440 basis points as of the prior year period.
We adopted the seesaw methodology, beginning January one 2023 and under the new methodology, we recorded a loan loss provision of one $4 million during the current quarter compared to $1 2 million for the first quarter of 2023, and $3 4 million for the second quarter of <unk>.
'twenty two.
During the second quarter of 2023, our ACL increased from $35 9 million to 37.2 million. The ACL to total loans was 1.12% up from 97 basis points for the same period last year.
During the six months ended June 32023, and 2022 the company recorded net recoveries of 292020 1000, respectively.
With that I'll turn the call back to Bart Barthes.
Thanks Audrey.
As we've progressed through the third quarter and the second half of the year Theyre coast remains vigilant about executing on the following internal and external objectives.
First managing the balance sheet in a conservative fashion growing deposits to fund loan growth and continuing to enhance liquidity.
We have been able to take advantage of higher rates in the face of rising deposit costs to stabilize the net interest margin, we feel like our performance towards these objectives has been very solid.
Second pursuing growth amid the current economic climate.
Despite fluctuating market conditions, we continue to be optimistic given our strong credit position and our ability to invest with confidence in our growth strategy, our strong capital position and solid asset quality positions us to endure and performed through the coming market cycles.
Third disciplined around expense growth and efficient capital allocation management is constantly tasked with improving the efficiency in that regard we are exiting our auto finance division direct expense savings will be 500000, plus and the 40 million in loans will be reallocated.
<unk> two higher earning assets.
Managing the asset allocations to maximize our balance sheet return.
Fourth our commitment to quality and innovation by maintaining our strong credit culture, and finding innovative ways to build out service and product capabilities is strategically important to stay ahead of our competition and finally, we understand the importance of customer service and satisfaction our success in attracting retail.
<unk> and even connecting with customers has been a testament to our commitment to the satisfaction by continuing to listen to their needs. We can maintain our loyal customer base, we believe in relationship banking and diversified lending.
Overall, we are well positioned to face any challenges that may arise and continuing to provide value for our shareholders by staying focused on our core beliefs and listening to our customers. We can navigate through any softening in the growth expectations and emerge stronger on the other side.
This concludes our prepared remarks, and I'd now like to turn it back over to the operator to begin the question and answer session operator.
Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Kim.
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Our first question comes from the line of Graham <expletive> with Piper Sandler. Please proceed with your question.
Hey, everyone. Good morning.
Good morning.
So I just wanted to start on the loan growth side of things.
Last quarter, we had talked about doing about $300 million to $400 million of loan growth. This year. It seems like you guys are a little bit ahead of schedule over the last few quarters just wanted to get any updates on on your all's color around what you're looking at for growth. This year on the loan side.
And I know you mentioned that you're you know you're still pretty confident in your own strategy. So theres any upside to that initial guidance would be interesting to hear thank you.
Yes. Thank you Graham I appreciate that you're actually teed that up for me because I did want to bring that up so what we're looking for for the rest of the year is probably 100 to 200 million in net growth.
From now to the end of the year I think that's probably more accurate with where we're seeing in terms of.
Just the environment that we're in and we're just being very selective on the loan side, we're seeing a lot of great customers coming to us, but we're also being very selective of what meets our criteria. So I think 100 to 200 million is probably the best number I can give you in that range that we will see between now and the end of the year.
Yeah, and Graham John just to add to that Yeah. Go ahead, just yeah just to add to that I think we mentioned last quarter that loan growth has been somewhat limited by what we can raise and deposit. So we obviously don't want to outstrip our deposit growth that we think we could be growing even faster if we werent some more.
Disciplined on rate, but there's there's lots of good business out there last couple of months have been pretty strong, but we're going to be mindful of credit and rates and deposit growth and that will limit the growth a little bit for the rest of the year.
Okay. That's a perfect segue, so I guess I mean, you pretty much answered it there, but it sounds like you expect deposit growth in the pipeline you guys have to pretty much match that growth. The rest of the year I guess is that fair to assume.
Correct.
Okay, Great and then I kind of just I wanted to follow up on the <unk>.
The swap this decision to sell the swap and the impact that's going to have on the margin did you say that there is 38 basis points of impact for lower deposit costs going forward from that the amortization of that gain from the $5 million and 70 from the $9 million in total you guys have.
Correct. Although that is included in the second quarter, that's not additionally.
Additionally to where we are I mean that that's fully reflected in the second quarter, but that is the net effect. If if we did not have those swap gains we would be that much worse off so for the second quarter. We only had one full month, where we were paid in the swap we repaid $280000.
For the month of April and going forward, we will have for that particular trade about 85000, a month. So we had a little excess of.
Not exactly accretion, but the swap income for the quarter, but.
Most of the rest of it was baked in.
Okay. Appreciate it and then the last thing for me I guess would be just on the direction of the overall margin. You said you expected to expect a little more pressure here.
Over the next couple of quarters. It sounds like you guys have like.
I guess it amount of press you are expecting I know you kind of you kind of hit the nail on the head this quarter with your guidance last quarter, saying theres going be up a couple of basis points. So if there's any color you can provide on what you're expecting in terms of pressure in the back half of the year that'd be helpful.
Yeah, the market is not making it any easier on us I mean, the fact that rates went up today certainly helps us we are still asset sensitive should rates start coming down I mean these.
The swap income that we have is going to be great protection for rates going down we had mentioned that new deals that we're putting on the books are at slightly lower spreads. So I think for the quarter, we averaged about seven and a half so that should go up to.
Somewhere between 775 and age so a lower spread based on marginal cost of funds, but kind of best guess is this was the Max margin for us for this cycle that will probably come down I don't know maybe five basis points. This quarter as kind of a best guess, but I do think that.
On the balance sheet growth will offset that so that our net interest income is actually up versus this quarter and if you look back over the last year. Our net interest income has been up about $1 million every quarter. So over the last four we've gone in literally 31, 32, 33 34 million.
We probably won't be up a million. This next quarter, but I do think I think the growth will offset any decline in margin.
Okay I appreciate it that's very helpful. Thanks, John .
Thank you. Our next question comes from the line of Bernard.
<unk> with Deutsche Bank. Please proceed with your question.
Yeah, Hi, Good morning, guys, you had a nice sequential increase in fees driven by a pickup in derivative fees can you just talk to the activity you're seeing and then any expectations in the second half of the year.
Yeah, so those fees bernier a totally separate from the balance sheet swap that we did these are customer derivatives and you wouldn't think at this point in the cycle that that would have as much appeal to customers, but there are still some that worry about rates going up and those those can be very profitable trans.
Actions when we do do them.
Wouldn't necessarily expect any going forward, just because we are likely close to the highs in rates, but.
We do have the occasional customer that decides they want them.
We're happy to help them, where we can.
Got it that's helpful. And then maybe just separately I think you guys had a recent press release you noted partnering with me Sir to provide up to 50 million enhanced FDIC insurance on cash accounts. So I believe at 331, you had 932 million in uninsured deposits.
Which was about 28% of total deposits I'm just curious any updates to this in comments on this service you're providing for clients.
Are the costs, mostly incurred by clients to get this an enhanced insurance or is there some sort of sharing between the two of you.
Yes, so first of all I mean, we're very pleased with some of the partners that we're doing on the technology side been provide some services that very few banks can do so we've got some some great customers like may fare and some are others. They are joining us in Mayfair is a great example of being able to provide a partnership.
Where they provide certain services.
For the market and we're able to provide the technology behind that and we expect that relationship to continue to grow and prosper over.
Even through the next couple of quarters to grow pretty dramatically.
As far as being able to offer the insurance we have a couple of different products that are unique and order offer FDIC insurance.
Through some large accounts and continuing to develop that and it's been a very popular product for us in the last few months.
From there so yes, Bernie last quarter I think we mentioned MEO is one of our new customers. They had sent out a release similar to this one so we now have two customers that are sent out releases about partnering with third coast. So for both of those were their depository institution, we help with.
All things deposits, there's there's not a lot of card services virtually none there's no lending I mean these are deposit relationships in the kind of thing that we've been talking about over the last year partnering with some of these fintech companies that are still somewhat cash rich and we're we're optimistic that these.
<unk> ships and others can can make a significant difference to our deposits over the long term.
Okay, great. Thanks for taking my questions.
Thank you. Our next question comes from the line of Jordan <unk> with Stephens Inc. Please proceed with your question.
Hey, good morning, everyone.
Good morning.
I just wanted to ask a few questions.
On credit first if you could give us your CRE office exposure. If you could just give us an update that'd be great. And then also I don't know if I saw mentioned, but any credit migration from classified and special mention.
During the quarter.
Sure Good morning Mara.
Our office exposure non owner occupied as 2% of total loans.
On a dollar amount its about the same as it was last quarter owner occupied is another two 3% of total loans and then we have about one 5% of total loans in medical office.
We don't have.
Any all of our office.
Both owner occupied and non owner occupied or in Texas with the exception of one.
$1 $2 million loan and we don't have any we have one loan in office, that's $1 1 million that's classified.
The office is really.
We haven't been doing new office, but it's it's been been holding up well for us and it's in good markets. Yeah. We were really pleased that we were in the right position for this change in the marketplace. We have very little exposure in most of ours is smaller office side. So we don't have any.
Large office, nor any participations in large office deals so, particularly our non owner occupied office is just a miniscule part of our portfolio. The average loan balance is $1 2 million and the average LTV on the non owner occupied is about 53%.
And then with regard to.
Special assets again, we've been relatively stable and truthfully.
We're seeing in the market as our portfolio is.
Handling very well the market right now we're pretty soon it's been very stable and we're pretty pleased with the market conditions, how well our our portfolio has performed.
Okay perfect. Thank you for answering that and then maybe just one follow up on that swap.
Where's the what line item is that flowing through.
Yeah.
So if youre looking at the income statement on the press release is going to be interest expense on deposit accounts.
Okay perfect. Thank you congrats with a credit to interest expense and it's it's running just a tad under 150000, a month and we will be that for the next five years roughly five years.
And does that straight line.
Yes. It is.
Perfect. Thank you for taking my questions I'll hop back in the queue.
Thank you.
Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions.
Wanted to start.
Start on the expense outlook I think you said flattish you guys highlighted in the press release you guys have added.
Some people over the past couple of quarters are you trying to signal that hiring is going to slow from here or are there other initiatives in place that are going to be offsets the kind of ongoing opportunistic hiring and if so what are those initiatives are going to keep the run rate kind of flattish here. Thanks guys.
Yeah, Michael certainly expenses were a little higher this quarter than we were expecting but if I think about expenses over a longer period of time, rather than just one quarter. So if I go back a full year our expenses are only up four 6%.
We had several quarters that they were actually down.
This was just a little bit of a catch up I mean, it's hard to have an exact science with this stuff, but I mean, we certainly hired people. This year, we've hired people and compliance and operations and our loans are up 20% over the last year and expenses are up less than 5%. So we think we've done a pretty good job managing that but.
You know there we.
We have opened a couple of new branches. This year and we have hired people, particularly on the compliance side. So you know it's.
It's going to be 24 million plus is kind of our best estimate of where expenses are going to be but the storyline is still the same. We think we can grow net interest income faster than we're growing expenses and certainly that was true over the last year, where net interest income was up 23% in noninterest.
<unk> expense was up less than five that's that's certainly our goal is that sort of relationship and we certainly are internally watching.
Every line of business and every area for expenses and again, yes.
Making a decision like exiting the line of business for the all the finances.
One of the ways in which we've made hard decisions to make sure that we're on the right path to hit those numbers and returns that we expect so this team isn't afraid to make hard decisions to make sure. We scour our P&L to make sure we find ways to remain competitive and we certainly are going to continue to do that.
Yes, John .
Bart that actually lead that.
The auto Finance was actually my next question can you just talk about the process that you guys went through to kind of evaluate the risk reward or youre not the first one is scaled back or get out of that business.
So certainly understand the decision making process, but just wanted to see what yours was and then is there any other areas or divisions that you are maybe either looking at reducing or getting out of <unk> or <unk>.
Conversely.
Allocating more resources to thanks.
Yes, so we kind of look at a holistic viewpoint for return on equity whats the best allocation of assets to return what we're trying to get for the shareholders and because of that.
We constantly internally on our reporting our monitoring every line of business down to stack ranking performers on it. So I think we have some really good internal.
<unk> that were watching everything and as rates have gone up obviously.
Put different perspectives on different lines of business for us and so as we've grown.
It would just become more obvious that there are ways to allocate our balance sheet.
To enhance shareholder equity and so it really came down to a numbers game whenever you look at it that.
There is an obvious way for us to reallocate our assets for higher earnings.
Loans.
Everything we look at I think we have a great management team and even the leaders of all the lines of businesses are always looking for ways to enhance performance. So right now I think.
That was sort of the obvious internal answer.
Everything else that we're working on is sharpening our pencils to kind of refine.
The other businesses, but we're pretty pleased with where they're at the other line of businesses are going.
Yeah, and Michael along those same lines you know as we were looking at the balance sheet over the last quarter and where we can be most efficient we were looking at an investment securities. In there there were a lot of distressed sellers of bank sub debt over the last quarter. So we did by roughly $20 million.
In bank sub debt much of so the average for the quarter was not.
Where we ended the quarter. We're at about 90 million now I think we averaged about $77 million for the quarter, but the new stuff that we were buying had yields above 10% and these were big well known banks should be should be money good and it just seemed like a good opportunity where it was.
Mostly small pieces, but just distressed sellers trying to get out of that.
Makes sense and then just I think just finally for me just putting everything together so you have.
Positive NII growth from a balance sheet relatively flattish expenses some momentum on the fee side.
It seems like you guys could actually if you want a few banks that could actually generate some positive operating leverage next year is that is that the kind of the goal here is that your kind of expectation at this point. Thanks.
Definitely we believe so.
<unk> for the night could I, just think we're putting ourselves in a position to.
Be nimble and have.
The right balance sheet structure and efficiency to be able to improve on our operating leverage.
And I think youll see a lot more of that happen over the next few quarters and it's not overnight, but its definitely.
Throughout the rest of this year and into next year, you'll see a lot of the benefits on the planning that we've been working on for a couple of years now.
Yes, especially if we can continue growing deposits the way we have the last couple of quarters. It certainly hasn't gotten any easier I know some of our peers listening to their calls they maybe had a little more confidence than I do but it's.
The deposit market is tough out there right now.
<unk> been up we've done great. The last couple of quarters and if that.
We stay the course, there I think we have a lot of opportunities even demand.
Saw it month in our demand deposits were up where most people were down in a lot of that actually came out of our specialty finance group of all places our builder finance crew.
They they called hard on their customers and they had a lot of cash and they really had a great quarter there.
Alright, guys. Thanks for taking all my questions I appreciate it.
Thank you Mark.
Thank you as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line, Australia and young with <unk>. Please proceed with your question.
Hey, good morning, everyone.
Hey, good morning welcome.
Thank you.
You all are focused on the 1% ROA target for a while now and hit it in the first quarter, a little little down this quarter. It was no surprise of all expenses.
Can you kind of frame your commitments in regards to that 1% as you divest that auto Finance Division and you kind of work on kind of making the balance sheet more efficient. Thanks.
Yeah, so about a year ago, we were projecting that we would get to a 1% ROA by the third quarter of this year. So we did it much sooner than we expected. So we consider ourselves ahead of schedule. If you look at the year to date numbers were at 99 basis points year to date, so again quite a bit ahead and.
One person isn't our goal to be high performing as our goal and if that means one in a quarter or $1 35 or whatever the number is we're certainly not satisfied with 1% being anything other than just a bare minimum.
Got you that's all my questions. Thank you.
Thank you.
Thank you. This concludes our question and answer session I'll turn the floor back to Mr. Kelly for any final comments.
Thank you Melissa.
Thank you everybody that called in and participated we appreciate you and thank you for your support of <unk> Bancshares, we look forward to seeing the next quarter. Thank you all.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.