Third Coast Bancshares, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Third Coast Bank Share's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. 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. I would now like to turn the conference over to your host today, Ken Denard, with Denard Lasker Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bank Shares inaugural conference call and webcast to review first quarter 2022 results. With me today is Bart Carraway, Chairman, President, and Chief Executive Officer, John McWhorter, Chief Financial Officer, and Audrey Duncan, Chief Credit Officer. First, a few housekeeping items to run through. There'll be a replay of today's call and it will be available by webcast on the investor sections of the website ir.bcbssb.com. There'll also be a telephonic replay available until May 5th, 2022. More information on how to access these replay features were included in yesterday's earnings release. Please note that information reported on this call speaks only as of today, April 29th, 2022. Therefore, you're advised that time-sensitive information may no longer be accurate as 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 company's prospectus or annual report on Form 10-K that was filed March 17, 2022, to understand certain of those risks, uncertainties, and contingencies. Comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can also be found on the Third Coast website. Now with that behind me, I'd like to turn the call over to Third Coast Chairman and CEO, Mr. Bart Carraway. Bart.

Thanks, Ken, and good morning to everyone. Thank you for joining us today for our first quarter 2022 earnings conference call. Because this is Third Coast's first earnings call since completing our IPO in mid-November, I'd like to welcome our employees, shareholders, and analysts. Third Coast IPO would not have been possible without the commitment and dedication of our employees, and I'd like to thank them for their efforts. As for today's agenda, I'll give a brief overview of Third Coast Bank and our first quarter performance. After that, John will provide a more detailed financial review, Audrey will give a credit update, and then I will return with our outlook before we take your questions. But before I get to that, I would like to remind everyone of the history of Third Coast and some of the topics during the IPO Roadshow. I'll begin with some of the key milestones in the bank's history. Third Coast was chartered in 2008 as a $17 million de novo bank with five employees working on temporary folding tables in Humboldt, Texas. In 2011, Third Coast had over $200 million in total assets. And just four years later, the bank doubled in size, surpassing $400 million in total assets. By our 10th anniversary in 2018, we doubled in size again, achieving $800 million in assets. The bank has always had a strong growth story, averaging 29% CAGR through 2019. From 2019 on, the bank has had three consecutive transformational events. The first was merging with Heritage Bank on January 1, 2020. which put us over the $1 billion in total assets. The second was PPP. As we were prolific PPP and Main Street lending producers, originating 5,700 loans for nearly $850 million, which helped us double in size again. Then in 2021, due to the disruption in the banking markets and changes associated with the pandemic, we seized the opportunity to lift out some impactful banking talent en masse. We recruited a premier builder finance team, several community banking teams, a middle market CNI group, and a wealth management group. Altogether, we hired over 70 new bankers and more than doubled our sales force. Fast forward to today. Third Coast is a $3 billion bank and one of the fastest growing financial institutions in the nation. We have more than 330 employees in 13 branches across the state of Texas. consisting of seven branches in the Greater Houston Market, four branches in the Dallas-Fort Worth Market, and two branches in the Austin-San Antonio Market. We believe our footprint enhances our geographic diversity across the state of Texas, and our business lines position us for continued organic growth both in and around our markets we serve. As a reminder, our business lines consist of community banking, corporate banking, and specialty finance. And part of the story today I would like to convey is that the progress of our business lines has met or exceeded expectation, that management has done what they said they were going to do, and that the overall plan execution for the bank is going exceptionally well. Over the past six months, we have met with over 50 institutional investors and answered a lot of questions. During those meetings, we talked a lot about Third Coast financial goals and objectives. Today, I'm pleased to share with you that we have met or exceeded our stated objectives. On the roadshow, we projected that loan growth would be lumpy, but about $210 million per quarter or $70 million per month. Since then, actual growth has averaged more than $139 million per month. This is a testament to the quality of employees we have hired and the strength of the markets we operate in. For example, the builder finance group hit their 18-month goals in nine months, and the CNI team is 50% ahead of their goals. On the roadshow, we also discussed our funding strategies. This included expected contributions from newly hired community bankers, private bankers, PPP customers, and enhanced treasury management. Together, this has worked exceptionally well, with deposits growing faster than loans in the last quarter, while the cost of deposits declined at several basis points. We also projected that the bank would become more asset sensitive, and it did. At September 30th, 2021, floating rate loans represented 55% of the loan portfolio and has since increased to 65%, just as we predicted. Further, loan quality has improved from last quarter, as Audrey will go over in a minute. And lastly, earnings has had a very positive trend. We said we believe we made investments in support and infrastructure last year to accommodate the new growth, and that revenue would outpace expenses by a large measure. Expenses have stayed relatively flat, just as we estimated, and you can see improvement and strong trends in the pre-provisioned pre-tax incomes. In sum, the progress has been on target from what we conveyed during the IPO process. We are in great markets that still provide significant tailwind. The quality talent we recruited are performing better than our expectations and are enhancing our loan portfolio. And finally, revenue growth along with expense control is trending positively and ahead of our early expectations. With that, I'll turn the call over to John for a more detailed financial review. John? Thank you, Bart, and good morning, everyone. I'll begin with our recent offering. Earlier this month, we announced the completion of our $82 million notes offering. The fixed uploading rate subordinated notes, which mature April 1st, 2032, and will initially bear interest at a fixed rate of 5.5%. We intend to use the net proceeds to bolster our capital position and for general corporate purposes. Moving to our first quarter financial results, yesterday we provided detailed financial tables in our earnings release. So today I'll review select balance sheet and profitability metrics for the first quarter of 2022 compared to the prior quarter. In the first quarter, we experienced strong loan growth of $379 million, 18.3% over the fourth quarter of 2021. This growth was well diversified with real estate loans up $222 million and commercial loans up $145 million. Following that trend, deposits grew $446 million over the prior quarter, a 21% increase. Deposit growth has exceeded our expectations to the extent that we decided to purchase $100 million in Treasury securities. and we are in the process of buying an additional $25 million in BOLI. We closed the first quarter with just over $3 billion in assets, an increase of more than $500 million since year-end. We expect growth closer to $100 million per month for the next couple of quarters. Net interest margin was 4.09% for the quarter, a decrease of 69 basis points from the fourth quarter of 2021. The great majority of this decline was related to fees. EPP fees were down $1.1 million, PCI accretion was down $1 million, and all other fees were down about $968,000. Non-interest expense totaled $20.2 million in the first quarter of 2022, basically flat, versus $20.1 million in the fourth quarter of 2021. Significantly, salary expense was down due to several large signing bonuses that were paid in the fourth quarter. employee headcount increased from 334 to 339. Regarding interest rate risk, as Bart mentioned, the bank has become more asset sensitive. According to our modeling, over a 12-month horizon, our net interest margin will increase 19 basis points with a 100 basis point increase in rate and 40 basis points with a 200 basis point increase in rate. I would now like to turn the call over to Audrey for our credit quality review.

Thank you, John, and good morning, everyone. Asset quality improved during the first quarter of 2022 with non-performing assets declining by 4.9 million or 28.3% from the fourth quarter of 2021. The improvement was primarily the result of a decline in restructured loans. Non-performing assets decreased to 0.41% of total assets from 0.78% in the prior year quarter and from 0.69% in the fourth quarter of 2021. We recorded net recoveries of $17,000 for the first quarter of 2022. Our allowance for loan and lease losses now represents 0.95% of total loans. an increase from 0.8% in the first quarter of 2021 and 0.93 on a sequential quarter basis. During first quarter of 2022, we added our fourth regional credit officer who has over 30 years of credit experience in the middle market and corporate banking space. As a result, we now have four regional credit officers to support our lines of business. We're pleased to share that during the first quarter, Third Coast Corporate Banking Group successfully completed its first loan syndication as the lead arranger and administrative agent. The syndication consists of a revolving line of credit and a term loan. Third Coast Specialty Finance Group also successfully completed its first loan syndication as the lead arranger and administrative agent. The syndication consists of a revolving borrowing baseline of credit for single family residential development and general working capital needs. We consider these transactions to be a major milestone that gives a strong endorsement of our ability to raise senior debt in the capital market, enhances the diversification of our financing sources, and helps to further develop our presence and promote additional opportunities within these markets. That concludes the credit discussion. I'll pass it back to Bart to cover our outlook. Bart?

Thanks, Audrey. Over the last 14 years, we have positioned ourselves to take advantage of opportunities in our markets and serve our expanding customer base. We operate in growing markets in Texas, and our market diversification helps to reduce the impact of economic swings in specific regions. Our vision includes taking advantage of growth opportunities as they present themselves. For example, last year we formed a FinTech committee to consider opportunities for banking as a service. I'm happy to report that our first relationship is nearing completion and will be announced soon. Going forward, Third Coast Bank expects to further its organically grown strategic plan by attracting talented relationship managers. We expect these professionals will generate and maintain meaningful and diverse portfolios, while also continuing our focus on providing superior financial products and services and increasing core deposits to fund loan growth. We will prioritize our investments in our people and leveraging our technology to support long-term sustainable growth while maintaining our financial discipline around acceptable returns on invested capital. We are committed to generating positive operating leverage and remain focused on our strategic growth initiatives as we continue to enhance shareholder value. We appreciate your continued support. This concludes our prepared remarks, and I would now like to turn the call back over to the operator to begin the question and answer session. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment, please, while we poll for any questions. Our first question comes from the line of Brad Millsaps with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. Morning, Brad. Maybe John wanted to start on expenses. You had really great expense control this quarter. Just kind of curious how you're thinking about sort of the balance of the year. Do you have any investments that you'll sort of start to catch up on that we might see that run rate go higher? Just curious kind of how to think about expenses going forward.

Yeah, the salaries were a little unusual in that the fourth quarter we did have some big signing bonuses that we did not have in the first quarter. And you know, all the other expenses were probably up more in line with what you were expecting. So for the second quarter, I do think salaries will, you know, start to go back up along with the other expenses and probably targeting something in the $21 million range for total expenses the next couple of quarters.

Great. That's very helpful. And just wanted to maybe dig into kind of some of the moving parts of NII and the margin a little bit more. It sounds like In the release, and you mentioned on the call, there's about a million dollars of just loan fees. And then it looks like you got almost zero accretion in the quarter. And then, of course, the PPP fees. Just want to make sure I have all that correct. And then the leverage that you have to higher rates, 100 basis points equaling 19 basis points. Would that be off sort of an adjusted NIM, you know, excluding accretion and PPP fees? Or is that more off the stated number?

It would not consider fees. So it's off a plain vanilla basic margin, if you will. We're not taking fees into consideration when we're talking about the margin. So whatever the adjusted normal operating margin would be plus, you know, the 19 basis points or 40 basis points, as you will. But on fees, I mean, our fees are a little complicated. You know, we had a lot of PPP fees last year, obviously. We had the extra accretion in the fourth quarter. But, you know, one thing that's hard to see looking at the numbers is, you know, the last six months, not only have we grown a lot, but the type of lending that we're doing has changed a little bit. And there are more fees associated with a lot of these new loans. So if you think about FAS 91 and how it normally works for a typical bank, and actually the way we were six or nine months ago, it's all pretty much in equilibrium that what we're recording as income each month and what we're capitalizing is about the same thing. So it works out to be almost as if you're on a cash basis. But for us, because we've grown so much and because the fees are, there are more fees on the type of lending that we're doing, we actually capitalized an extra $3 million in fees in the fourth quarter and another $2 million in the first quarter. So in other words, if we would have been cash basis, we would have made another $5 million in the last six months. And to the extent that we keep growing like this and keep putting on this type of business, that number will continue to grow. So our fee income going forward should really be a bright spot that we're going to be amortizing or accreting more and more of that balance each month. And, you know, today, if that just ran off over the next three and a half years, it would be $175,000 a month in fee income. So we really think that'll be a bright spot and will offset any of the other headwinds that we have.

Got it. And very, very helpful. And just final kind of bigger picture question for me, maybe for Bart, I know at the IPO, you kind of targeted doubling the size of the bank by the end of 2023. I mean, it looks like you're on pace to be there by the end of 2022, if loan growth kind of keeps up where it is. Can you kind of speak to that, you know, maybe kind of where you see, you know, kind of profitability shaking out, you know, if that in fact does play out in terms of a ROA, you know, maybe by the end of this year?

Sure. So, you know, along what we talked about on the roadshows, we did believe that with the loan growth that the revenue side was going to grow faster than the expenses. And, you know, what you saw in the fourth quarter and the first quarter was, you know, loan growth actually exceeded what our internal expectations were, which is all good because it was certainly a lot of customers that were moving faster than what we anticipated. You know, if we continue with, you know, call it $100 million a month in loan growth, that's accelerated a little bit of the interest income coming in from what the original budget was back whenever we did the IPO. And so I think we could be, you know, potentially ahead of schedule on, you know, where we want to be on the net income side. As far as the asset side, you know, the way we look at it is we just want to grow with quality assets. And I obviously want to temper the fact that we don't know what the economic environment is going to be in the future, if we'll have any kind of headwinds. But right now, we're seeing very strong markets where we are. I mean, Texas has been still very robust, a lot of population growth. You're seeing a lot of companies relocate here to our markets. And so we really have a significant tailwind on that. And thus far, we're not seeing our pipelines being affected by any other national headlines. So I would say asset-wise, I think we're ahead of schedule with that. I think that it may be impacted later in the year potentially with anything that could happen in the economy. But we feel our markets are really strong and that we probably are a little ahead on that. And because of that, because we jumped out with such strong loan growth in the fourth and the first quarter, that we think is going to positively impact earnings. You know, John, do you want to echo any of that? Yeah, you know, I think consensus is that we'll be to a 1% ROA in 2024, maybe the first or second quarter, and I think we'll be there much faster than that. You know, the extra loans that we've put on in the last six months I think will make a big difference.

Great. Thank you, guys. I'll hop back into you. Appreciate it.

Thank you. Our next question comes from the line of Matt Olney with Stevens. Please proceed with your question.

Hey, thanks. Good morning. I wanted to go back to the loan growth discussion. I think the guidance that you mentioned is about $100 million per month of loan growth. I guess over the first two quarters of being a public company, you've beaten your loan growth guidance by a pretty considerable level. So any color on just how you arrived at that $100 million guidance and what's the potential for that number ultimately being conservative in the near term? Thanks.

Yeah, I think to help Matt on this, I mean, part of it is our teams, when they came on, we really talked about what the expectations they would have, and they've all exceeded goals. And I think that's helped. The other part is I think there's just a lot of disruption in the market and customers are more portable than they've been in a long time. And so that's helped us. And then that combination with just the markets we're in are so dynamic. When you have all those things converging, we've had really the benefit of stronger loan growth. Now, we can't do what we did in the fourth quarter every quarter, right? I mean, that was kind of a unique event. Still, even on our side, you know, we've kind of moved up our internal, you know, guidance from $70 million a month to we think, you know, at least this next quarter we can still do $100 million a month and maybe even after that. It's just, you know, I think overall we're in the right position with the right people.

Yeah, understood. Let me ask it this way, Bart. I think if it was $100 million per month in 2Q, call it $300 million we were talking about, that would imply kind of a pretty big slowdown from what we saw in 1Q, which is certainly understandable given kind of the really extreme growth in 1Q. So do the pipelines support a big deceleration today versus a few months ago?

Yeah, I think it's by comparison, right? So, you know, our pipelines look very strong. I think our loan growth is going to be very strong. But, you know, what we had in particular in the fourth quarter and some of the things that rolled into the first quarter were just exceptional. I mean, it's just kind of an outlier how many customers moved over so fast. So, you know, I do think that will trail off a little bit to something more along what our guidance is, just because there was this mass surge of customers moving at that period of time. But I still think it's going to be – obviously, our loan growth is going to be one of the top in the nation for our size, period. It's just going to be a little bit more along with what we think our guidance is.

Yep. Okay. That's helpful.

Yeah. I have another thing to think about is, you know, we hired so many people last year, and they brought over their best customers first and the easy customers first. And we're not going to hire at the same rate that we did last year. So it's going to slow down a little bit just as they reach economies of scale on their own portfolios. Yeah.

Yeah, no, that makes sense. And that's kind of consistent with what we talked about during the roadshow last year. So definitely appreciate that. And I guess going back to some of the discussion around the net interest income, I'm trying to just appreciate some of these new loans being brought over, once you consider the fees on those, just help us appreciate kind of what the newer yields are on those loans. I think we're all trying to appreciate where the core loan yields could be over the next few quarters. Thanks.

Sure. So for the first quarter, our coupon rate on new loans was 354 is what we averaged. And then the loan fees on top of it are going to be anywhere from 25 to 50 basis points, just depending. So, you know, that'll put a little pressure on the margin, assuming it's still, well, today being that it's a little over 4% and is potentially offset by rising rates that it may more than make up the difference. So kind of that 4% margin is kind of what we're thinking.

Okay. And just PPP fees, I don't think there's much left here, but what's still in that bucket you could recognize next few quarters?

So at March 31, we had $715,000 left or something. So we're likely to recognize it relatively soon. In fact, PPP-1, we have four loans remaining where we originally had, I don't remember, $3,000, $3,500 or something left. They're like $28,000. So PPP-1, we're almost finished with, and then about $20 million left in PPP-2. And that's as of today. That wasn't quarter-end numbers. But still, we're excited about getting down to just four loans for PPP-1.

Okay, good. And then on the capital front, you mentioned the recently closed debt deal. Let me hear. Updated thoughts on capital as you move throughout the year, add more assets and profitability obviously is going to reflect here pretty quickly. Just curious kind of how you're thinking about managing capital levels from here.

Yeah, so it's something that we're, you know, always looking at, always talking to the investment bankers about. At the rate that we're growing, we'll be back in the equity markets at some point. You know, hopefully it's more of a next year event for us, but you know, we still have room that we can borrow on holding company lines and push it down if we need to, you know, extend into some point next year. But, you know, for now, our capital ratios are good, and it's more of a future event for us.

Okay. And you mentioned the 1% ROA bogey or goal that you have, and that's certainly something we're trying to nailed down. I guess you mentioned earlier, John, you think it would be before early 24. Any more color on the range or potential timeframes you could get there? I know it depends on a lot of variables, but any kind of range or any other thoughts you can give us there? Thanks.

Yeah, I mean, there's, you know, as much guessing that goes into that number as any other. There's a lot of determining factors, of course, but But we could be there as early as the first quarter of next year.

Okay, guys. Thanks for taking my questions, and congrats on the great growth.

Hey, thank you. This concludes our question and answer session, and I would now like to turn the call back over to Mr. Carraway for any final comments.

Thank you, John. Again, appreciate everybody attending, and thank you for your support and for your interest in Third Coast Bank shares, and we'll look forward to speaking to you next quarter. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.