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spk04: and welcome to Third Coast Bank Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Nathalie Hairston, Thank you. Ms. Heston, you may begin.
spk01: Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Third Coast Bank Shares conference call and webcast to review our third quarter 2023 results. With me is Bart Kerwin, 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.tcbssb.com. There will also be a telephonic replay available until November 3, 2023, and more information on how to access these replay features was included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, October 26, 2023, And therefore, you would advise 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 15, 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 Coast Chairman, President, and CEO, Mr. Bart Caraway. Bart?
spk10: Thanks, Natalie. Good morning, everyone. Thank you for joining us today. I'll begin by highlighting the company's performance for the third 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. During the third quarter, we achieved significant progress towards our strategy of conservative loan growth, disciplined expense management, and strengthening shareholder value. Total assets reached $4.22 billion during the third quarter, an increase of 6.4% over the prior quarter, and 19.9% increase over the prior year period. We booked over $226 million in high-quality loans. an increase of 6.8% sequentially and 19.7% increase over the third quarter last year. Likewise, deposits reached $3.65 billion, a 7% increase from the linked quarter, and a year-over-year increase of 22.2%. In response to market conditions, we took some deliberate actions to reduce our operating expenses and other overhead costs. including the previously announced winding down of our auto finance group, as well as a 5% reduction in workforce. As a result, our full-time employee headcount now stands at approximately 370, which is consistent with our numbers from the beginning of the year. We have been able to grow the bank by $443 million in that same timeframe. During the quarter, we also booked a $2.6 million provision for credit losses primarily driven by strong loan growth for the quarter, which Audrey will discuss in more detail in her prepared remarks. These actions were necessary to position us for the fourth quarter and establish a solid foundation for 2024. Deposit rates remained highly competitive for this quarter, and we were able to increase our deposits by $238 million, or 7% from the previous quarter, a notable achievement. Our success in deposit acquisition can be attributed to the deposit campaign contest held across multiple lines of business, including retail, private banking, treasury management, and commercial bankers. We were able to raise deposit by an impressive $275 million within a short span of four months. Our bankers' unwavering focus on deposits, coupled with their commitment to building strong relationships with clients, played a crucial role in achieving this feat. This approach, combined with our commitment to providing innovative solutions and exceptional service, has resulted in success across all our markets. Our insured cash suites and treasury management services have particularly proven to be innovative solutions contributing to our company's growth. As we progress, we will continue to explore new ways to deepen our relationships with existing customers and attract new ones, all while maintaining our focus on deposits and loans. Additionally, we were able to increase book value and tangible book value per share by 1.4% and 1.5% respectively. By delivering exceptional shareholder value and increasing tangible book value per share, we have made significant progress in enhancing our balance sheet and maintaining a strong financial position in the third quarter. We believe we can continue to drive increased shareholder value and achieve sustainable success long term. 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 for the quarter. As Bart mentioned, loans were up $226 million, deposits were up slightly more at $239 million, and total assets reached $4.22 billion all new records for the company. Net interest margin for the quarter was down 11 basis points, slightly more than expected, due primarily to higher than expected loan growth. Spreads on new loans tend to average less than the bank's current net interest margin. Loan growth is expected to be less in the fourth quarter, which should result in less margin pressures. Additionally, the bank has $100 million Treasury security maturing in October, yielding 2.25%. If the proceeds were used to pay down wholesale funding, the net interest margin would improve two to three basis points. We therefore believe that for the fourth quarter, the net interest margin will be down less than five basis points. Non-interest expense was materially higher than expected due to several non-recurring items, including severance expenses, fraud losses, and legal fees associated with those items. As previously mentioned, severance expense totaled $460,000. We reduced headcount to roughly where we started the year, and as a result, we expect fourth quarter salary and benefit expense to be less than $1,600. All other non-interest expenses were up $1.35 million in the third quarter versus the second quarter. This increase was primarily due to the fraud losses and legal fees as previously mentioned. Even though net interest margin was down 11 basis points per quarter, net interest income was up $1.2 million to $35.3 million due to strong loan rates. We have shown consistent growth in net interest income since going public in the fourth quarter of 2021, when our net interest income was only $24.6 million. The third quarter performance also resulted in increases in both book value per share, which reached $24.57, and tangible book value per share, which reached $23.17. This is up 11 percent, or 223, from $20.94 since going public in 2021. This compares very favorably to our peers, who over the same period saw an average decrease in tangible book value of 9.3%. Also, as a reminder, we used the converted method to calculate earnings per share. For the third quarter, this resulted in anti-dilution, and therefore the preferred shares were excluded from our diluted share count. We expect this to flip back in the fourth quarter. That completes the financial review, and at this point, I'll pass the call to Audrey for our credit quality review.
spk00: Thank you, John, and good morning, everyone. Third Coast's credit performance for the third quarter was again strong. Our total non-performing assets currently stand at $16.4 million, which is 0.39% of total assets. and our net charge-offs have stayed extremely low at $24,000 for the quarter. The $6.4 million increase in non-performing loans is primarily due to the placement of a $2.3 million loan on non-accrual and a $2 million loan that was over 90 days matured and still accruing. Both loans are well secured and no losses are anticipated. In October of 2023, the $2 million loan was renewed in its current. The remaining loans placed on non-accrual this quarter consist of two relationships totaling $2 million, and minimal losses are expected as those loans are worked out. The remaining loans that are over 90 days past due at quarter end are well secured and in the process of renewal. Overall, we remain confident in our asset quality, which continues to remain strong. Provisions for credit losses total 2.6 million and related to provisioning for new loans and commitments. The ACL remains at the high end of the range calculated under the new CFO methodology. Consistent with our prior quarters, loan growth of $226 million continues to be well diversified from a loan category standpoint. Commercial loans were up $123.7 million and real estate loans were up $106 million from the previous quarter. The loan portfolio mix is well balanced with commercial and industrial loans accounting for 36% of total loans and owner-occupied and non-owner-occupied commercial real estate at 15% and 16% respectively. Non-owner-occupied office represents 1.8% of the loan portfolio with non-owner-occupied medical office accounting for an additional 1.3%, while owner-occupied office and medical office total 2.3% of total loans. The office portfolio generally consists of Class B with some owner-occupied Class C space and is all located within our Texas footprint. Performance for the quarter is a testament to our solid business model and our commitment to prudent risk management. We are pleased to see continued loan growth across a diverse range of loan categories, which further strengthens our position in the market. At the same time, we're mindful of the potential risks that may arise from a changing economic environment. We will continue to closely monitor our credit quality and continue to be conservative in our lending practices to maintain our strong credit performance. Overall, we are confident in our ability to navigate the current economic landscape and stay committed to delivering conservative loan growth. With that, I'll turn the call back to Bart. Bart?
spk10: Thanks, Audrey. As we move into the fourth quarter and end of year, we are confident in our goal to achieve operating leverage, which will translate into increased shareholder value. We will maintain an active focus on managing expenses by carefully analyzing our budget and identifying areas where we can reduce costs without sacrificing customer quality or operational efficiencies. At the same time, we will continue to invest in key areas of our business that are critical to our future growth. Our commitment to full-wallet relationship banking remains a top priority. we will continue to leverage our treasury management and other services, deepen existing customer relationships, and attract new ones. In addition, our innovative custom digital solutions, such as banking as a service and embedded finance platforms, will play a larger role in 2024. We have successfully transitioned from the proof of concept stage to fully operational with wide partnerships. Our bankers and branches are strategically located in Texas' best markets, providing access to some of the highest quality deals available, allowing us to remain conservative in our deal approach and choose the most promising opportunities. Looking ahead, we will remain optimistic about our ability to continue to grow our business. We will continue to prioritize asset quality and make prudent and proactive decisions relative to the current economic environment. Our dedicated team is committed to delivering exceptional service to our customers, and creating long-term value for our shareholders, and we are confident that our growth strategy will enable us to navigate the challenges and opportunities that lie ahead. This concludes our prepared remarks.
spk06: I would now like to turn the call back over to the operator to begin the question and answer session. Operator?
spk03: Thank you. We will now be conducting a question and answer session.
spk04: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
spk03: The first question comes from the line of Graham Dick with Piper Sandler. Please go ahead.
spk06: Hey, everyone. Good morning. Good morning, Graham.
spk08: So I just wanted to start on expenses. You've got the $460,000 in severance, $400,000 in fraud losses, and then you mentioned another legal charge. What was the size of that legal charge this quarter?
spk10: Yeah, we didn't detail out the legal expenses. I mean, you know, anytime you have a reduction in force, there's legal fees associated with agreements to the employees. We didn't detail that out just because, you know, we always have lots of legal fees. But it was somewhat material. It was certainly non-recurring.
spk08: Okay. Yeah, I'm just trying to get a sense for where... Maybe the growth came off of the, I think we had talked about, you know, $24 million, give or take, last quarter. So I'm just trying to get a sense for what drove the higher expense base this quarter. Was it the deposit competition you guys were talking about, or was it related to the loan growth, which was really strong this quarter? Just trying to, any color there would be helpful.
spk10: Yeah, I mean, there were some incentives related to the deposit campaign where we were paying out prizes to people. You know, there were... bonuses earned during the quarter but you know i think probably the the important number is where we think the fourth quarter will be and i'm pretty confident that it'll be less than 16 million dollars in total salary expense and and total non-interest expense we think will be less than 26 million okay um okay that's helpful okay and then i guess looking into 2024 i mean does
spk08: It sounds like you guys are focused on expense management, but obviously you're still a growing bank, having to invest where needed. What's your all's outlook for expense growth as you begin to budget for 2024?
spk10: Yeah, that's a good question. I mean, we certainly talk about it a lot. On the loan side, on the growth side, we've, for the last couple of years, talked about growth being lumpy, that it's it makes it hard to predict. We certainly weren't expecting $225 million in loan growth for the quarter, and it's not as if all of those deals were sourced and approved and booked all in the quarter. Some of them were carryover from previous quarters, and, you know, the same sorts of things will happen on expenses, and that's kind of what happened this catch-up on expenses that that we weren't expecting, but looking ahead to next year, I mean, our plan is to be disciplined. I mean, we're trying to grow faster than expenses. I think we've done a pretty good job with that in the past, and I think we will again next year. So, you know, if we think that you know, net interest income is going to continue to grow in that 10% to 15% range. Expenses will be less than that, so they'll be in the 5% to 10% range. Yeah, Graham, if I could add a little color to it again, you know, I think we're in the process as we've grown in reallocating resources internally to be more efficient. And I think you can see that from, if you look at our headcounts, not just the expenses, but just the headcount you know, we started the year at 369 employees. You know, we probably got a little ahead up to, you know, 390 or so employees. Now we're back down to about 370. And we've grown 443 million. So what you're seeing is we're kind of managing, you know, the employee headcount to still continue to grow. And this whole process has been what we've talked about before is that we've got to grow into a little bit of the operating efficiency as well as cut costs. And I think the $226 million coming in the third quarter is actually fortuitous because I think the fourth quarter will be slower, but it tees up the opportunity for us to grow a little bit into our operating efficiency, control our headcount, and also have an increase in revenue that's going to affect the bottom line And I think the fourth quarter is going to look a lot better, and it's certainly going to tee us up for a good 2024.
spk08: Okay. That's very helpful, Bart. And then I guess you touched on it a little bit there, but the loan growth outlook, obviously, as you guys said, some unexpected stuff happened. Things got pulled forward this quarter. What do you guys think for next year on loan growth? I think this year, before this quarter, we had talked about maybe $300 million or $400 million in growth for the full year. Can you frame up what you expect in 2024? Do you think it'll be a little bit less than that as the economy cools down, or are you still seeing pretty good opportunities on the lending side to do something similar?
spk10: Yeah, I think the nice thing, the position we're in, is we've had some really high-quality customers that we have been onboarding. And it's just a unique market in that we can be very choosy. And so it's been very nice to be able to pull, you know, high-quality customers from some of the competitors and establish relationships. So with that, I mean, you'll still continue to see some growth. I think for the, you know, fourth quarter, the growth is going to be very mild, $50 to $100 million. But when looking at 2024, we think somewhere between $300 and $400 million is quite reasonable. And again, you've got to factor in that we're going to have you know, some attrition in loans. There's going to be some pay downs and payoffs with it. But, you know, I think net growth of three to 400 million is very reasonable. And I think all of that is coming from just almost high grading the portfolio. We just have such excellent clients that we're choosing that I think the portfolio is even going to get even better as we continue to grow. So we're very excited about it. I think it's an opportunity for us to gain market share in our markets with some of the best clients that are out there with, you know, call it, again, $300 million to $400 million in net growth for 2024. John, do you have anything to add to it? I mean, rates may affect that somewhat to the extent that rates were to continue to go up. We'd be at the lower end of that scale. If they come back down, I think we'll see even more opportunities, particularly on the builder side.
spk08: Okay, perfect. That's a really helpful caller.
spk06: That's all from me, guys. Thanks. Thank you, Graham.
spk04: Thank you. Next question comes from the line of Michael Ross with Raymond James. Please go ahead.
spk07: Hey, good morning, guys. Thanks for taking my questions. Just wanted to start on... Good morning. Just wanted to start on... kind of the continued negative mix shift in deposits. Look, I know you guys have had really strong deposit growth. It's been a welcome sight to see, but obviously your deposit costs are fairly high relative to peer, and I think a function of that is just the strong asset growth that you've had. But just as we think about the next few quarters in a rate environment where Fed rates are kind of at or near a peak, how should we think about the progression of of deposit cost betas and, you know, mixed shift as it relates to, you know, kind of the ongoing, you know, asset, you know, repricing that is going to help the margin again this quarter. Just trying to kind of frame up the puts and takes as we think about the yield and margin progression into next year. Thanks.
spk10: Sure. So looking at non-interest bearing balances first, as a percent of total deposits, they've certainly come down. The dollars haven't come down so much. On an average quarterly basis, our non-interest bearing was actually up a little versus last quarter. But, you know, those deposits are certainly harder to grow. And when we have a quarter where we're growing, you know, $240 million in deposits, it's hard for those non-interest bearing to keep up. So, yeah, that certainly is a negative shift in the mix. And, you know... We will continue growing dollars, but as a percent of total deposits, to the extent that we're growing fast, that's going to be harder to keep up. We're certainly seeing more deposits go into CDs than anybody would have predicted a year ago. But the good news about being relatively high as far as cost of funds is I think we've already repriced most of the portfolio. We just don't have much left to reprice. Hire for longer is probably good for our margin, I think especially relative to peer. I just don't think we'll see much change. And from an asset liability perspective, we're almost exactly evenly matched. Our provider for ALM has said that we're, you know, certainly one of the most closely matched banks in their portfolio of several hundred, maybe singularly the most evenly matched. So, you know, if they stay right where they are, I don't think we'll see much change in the margin. And even if they change a little bit, I don't think we'll see much change. Yeah, you know, the numbers kind of ask a lot of stuff that's going on in the bank that I think you'll see over time. And one of the positive notes is between the commercial bankers and some the treasury management side is that we're seeing a lot of onboarding of accounts. We certainly have a lot more full wallet relationships than we've ever had. And we're rolling out more sophisticated products and being able to handle more sophisticated treasury customers. And they're quite busy onboarding customers with it, but they're keeping lower DDA balances because Obviously, they want to earn as much as they can on their money. Everybody's managing the money carefully. But we do have a lot of customer acquisition. We're growing so fast, as John said, that percentage-wise, it's tough to keep up. But overall, what we tell you, our customer base, more than ever, tends to have both deposit accounts and loans with us.
spk06: It's very much a full wallet relationship going forward.
spk07: I appreciate all the color of the thanks. And then, you know, obviously just on the headcount, reductions to score, some of that strategic, just as we think about the next, you know, year or so, I mean, are there other businesses or, you know, I know you got out of the auto business, but are there other portfolios, other optimization efforts that you could look to? And maybe just on the loan side, you know, are there areas that you're emphasizing versus you know, kind of de-emphasizing, I assume office might be one of those, but we just love some color. Thanks.
spk10: Yeah, I mean, if I could start with just the headcount part of it. I think we're looking at this and exploring all kinds of efficiencies across every line of business. I think everybody in the bank has bought into the efficiency side of it. It's been very interesting how we can even utilize and cross-train employees. For instance, we have some retail companies employees that volunteered to learn some of the BSA side. And with excess capacity, they're actually performing some of the BSA AML tasks with it. And so it's neat that everybody's kind of pitched in and we're finding ways to utilize people to their fullest. At the same time, as we continue to grow, some functions need more resources. As thinly staffed as we are, we do have to continue to think about where we're going in the future and make sure we're making proper investments. At the same time, I think John does a fantastic job of looking at every line of business and monthly we grade that line of business. The existing lines of business that are left are very profitable and we're very pleased with their performance and I think they're getting with scale even more efficiency so I don't see at this point that there's another line of business to exit as much as we're just everybody's going to grow into their size you know I think if you look at all of our different lines of business they all can scale and become more accretive to us with just you know even a little bit more growth as far as the I don't know, Audra, if you want to have any comments on that.
spk00: As far as what we're not looking at, I would say, you know, you mentioned office, of course. Our office is holding up really well. We only have one loan that's classified for a million dollars, but we're not looking in office. I would say not looking in retail and don't do much, wouldn't really entertain much multifamily at this time. really focusing on CNI and, you know, the full wallet relationships that we've been talking about.
spk07: Makes sense. And, John, maybe just one final one for me, just the loss in other non-interest income. Sorry if I missed it in the release, but kind of what drove that? Was there, you know, something that's non-recurring in there or just would love an explanation? Thanks.
spk10: Well, it is non-recurring. I mean, You're talking about the one fall loss? Well, no. In other non-income, we had an unfavorable swing quarter to quarter, and some of that is a little bit of a swap between quarters there, Michael, on SBIC. I mean, we have several SBIC investments, and some quarters they make money, and other quarters they don't. So most of it was related to SBIC having a great quarter last quarter and actually losing a little money this quarter, which we don't have big investments there. It's usually not material enough to change a line item, but it just happened to be this quarter.
spk06: Understood. Appreciate all the color. Thanks for taking my question. Michael, I just might add one thing on that.
spk10: The SBICs, they don't often have or they're selling an asset at a loss that we're needing to realize. So I certainly wouldn't expect that going forward. We didn't point it out because, I mean, I don't guess y'all would typically take out something like that. I mean, we didn't highlight it last quarter that they had a good quarter. It's just kind of one of those fluky things that went from good to bad over consecutive quarters. And it was, I don't know, to the tune of this, I don't know, 250,000 good last quarter and down 250. I mean, it was a swing kind of of that sort of magnitude.
spk03: Thank you. Next question comes from the line of Bernard Von Kiske with Deutsche Bank.
spk04: Please go ahead.
spk05: Hey, guys. Good morning. John, heard your comments on the drivers of the lower NIM than expected given the loan spread dynamics. You know, what kind of spreads are you putting on for the new loans versus the portfolio average? And, you know, what are your expectations on loan spreads from here?
spk10: Yeah, so, you know, our margin is, you know, relatively high compared to peers. But our spreads are probably much closer. We're competing for deals every day. I mean, the reason our margin is better is because we don't have the AOCI losses. We don't have the legacy investment portfolio that's relatively low-yielding. But for new business going forward as we're looking at it, I mean, We typically won't do a deal that is less than Fed funds plus 300. So with Fed funds today or so far, however you want to look at it, it's five and a quarter. We typically don't do a deal for less than eight and a quarter today. There could be some exceptions to that, but for the larger floating rate deals, they're typically 300 over so far. And I think I would add just that, you know, with the flight quality and our chance to get some of these really high-quality deals, the margin is a little less. Whenever you're talking about, you know, a customer that could basically pick anything they wanted to go with, unfortunately, we've been able to get those type customers. It is a little thinner margin, but it's also a fair quality deal.
spk06: So, obviously, there's always tradeoffs that we try to manage. Got it.
spk05: And then just on the auto finance exit, I think last quarter you noted that you'd expect something like direct expense savings would be $500,000 plus, and you were reallocating $50 million of loans into more strategic areas of focus. Is that still kind of like the same thought process there? Any updates?
spk10: Yeah, I mean, the team has been disbanded at this point. That portfolio was paying down. I don't have the numbers, but it's way less than $50 million now. Yeah, and Bernie, that was effective September 30th, so we really haven't seen any of the savings there, particularly on the salary side. On the loan side, we had certainly stopped doing that last quarter, and I think that portfolio has about a four-year weighted average life, so it pays down several million dollars a month, and we're reallocating those proceeds to other loans. But the direct effects are we didn't see any of it in the third quarter. We'll see more in the fourth. Not super material, but every little bit adds up. We're certainly looking at everything.
spk06: Okay, great. Thanks so much.
spk03: Thank you.
spk04: Before we take the next question, a reminder to all the participants that you may press star and 1 to ask a question. Next question comes from the line of Matt Olney with Steven Inc. Please go ahead.
spk09: Hey, thanks. Good morning. I want to go back to the discussion around the margin. And, John, you mentioned the spreads on some of the more recent long growth. Appreciate the commentary there. Any other color about how those spreads have changed during the course of the year? Have those maintained similar levels or any kind of widening that you've seen this year so far?
spk10: I mean, Bart, Audrey, I mean, certainly jump in. I don't think they have changed that much. I think we've, you know, for the bigger commercial corporate type loans, I think we're in that so for plus 300 range. We do see deals that are, you know, plus 200, but we're typically just not doing those. I think we've commented before that we could be growing faster if we were willing to do those, but we're mindful of our capital positions and our liquidity position and our You know, not often doing things that are certainly in the low twos. I mean, there may be the occasional deal that, you know, plus 250 or 275, but those are kind of more the exception than the rule. Yeah, I mean, Audra and I have talked. We've been very disciplined about trying to make sure we have kind of at least a 300 spread. There have been a few, but they're small. deals that had a story behind them that makes a lot of sense for us to do. And, you know, certainly ones that I would choose to do it, you know, all over again with it because they're good quality customers and there's a reason that we're doing it. So I think from the loan selection, I think we've been very selective and disciplined. I think that's what I would continue to say. The exceptions are typically at least partially self-public. Exactly. Exactly.
spk00: And they're the higher graded credits. They'd be a high pass. Otherwise, we, you know, make sure we don't go below some surplus demand.
spk10: Yeah. And even with that, I think we are seeing a lot of, you know, loan opportunities. And, you know, maybe we do one of that every 10 or something. I mean, it is a market out there. Obviously, there's a lot more loan demand than there is folks who can fund it. So, we've been able to see cherry pick really good customers. And I think we'll continue to be just that disciplined as we go forward with it.
spk09: Okay. Thanks for the commentary. And then I guess as far as the incremental cost of funds that you're using to fund the loan growth, if we blend the growth, the dollar amount growth of the NIBs along with the interest-bearing deposits, what's the incremental cost of the total deposits that you've seen more recently?
spk10: Yeah, so for this last quarter when we had the deposit campaign, and it really spanned the last two quarters, our cost of funds for those deposits was less than 5%. Wholesale deposits that we're needing to raise to make up the difference is probably more in the 530, 530 range. You know, it's hard for us to predict what the mix is going to be going forward as to, you know, our self-generated core deposits versus, you know, what is needed on a wholesale basis to make up the difference. But, you know, self-generated, you know, is probably averaging... in the 4.5 range, and then the wholesale in the 5.30 range.
spk09: Okay. Okay. Well, if I kind of take that and think about the margin in 2024, it feels like there's a little bit more incremental pressure beyond the fourth quarter we talked about, just if we assume those spreads continue. Is that the right way to think about the margin for next year, a little incremental pressure from the fourth quarter?
spk10: It is. If we would have grown loans $100 million in the third quarter, I think we would have been pretty close to our forecast of the margin being down plus five. So it is certainly a function of how fast we grow. Now, with that said, if we grow $300 million next year, it's certainly a smaller percent of the overall balance sheet, so it won't affect the margin as much as it would have this year. But it's going to be less than $371 on average, the spreads for new business.
spk09: Okay. Yep. That makes sense. And then just lastly, capital. Can you talk more about just capital constraints, binding ratios that you're watching for, especially in light of if the pipelines do improve and long growths at the higher end, just kind of what kind of capital ratios are you watching closely?
spk10: Yeah. So there's, you know, our risk-based capital ratio was flat quarter versus quarter. And And that's the one that we watch most closely is a high loan-to-deposit ratio bank. But, you know, as long as we're earning in that 1% ROA range, it's going to be – it should be capital accretive. And, you know, we may not be exactly there this next quarter, but, you know, certainly that's our bare minimum goal, and we expect to be there. And – Again, it'll be capital accretive, so we are not planning any capital on burns. Yeah, and I think in 2024, we should be, you know, capital accretive to where, you know, self-funding basically is what the goal is. John and I feel pretty good about not being there when we don't need capital.
spk09: Yes. So what you're saying is I think that that threshold to internally generate enough capital the ROA needs to be pretty close to 1% to get there. Is that right?
spk10: At the rate that we have been growing this year, yes. And we expect our growth rate to be a little bit slower next year. So it wouldn't have to be the 1% to be self-generating. But that's the 1% is certainly the way we were looking at it this year. And I think our growth is 20 plus percent. So, you know, as we go down to 12 or 15% growth next year, it'll take a little bit less to get to the same place.
spk09: Yep. Okay. And just one more, I guess, for Audrey. I think Audrey mentioned there were two loans that were, I think you said they were being worked out currently. Any prepared remarks? What's the timeline on the resolution? Is that a near-term fourth quarter event, or could that move into next year?
spk00: Well, probably I would say into next year, but not probably in first quarter, I think.
spk09: Okay, and how would you characterize or describe the collateral on some of those loans relative to the cost base?
spk00: Okay, so the increase in non-accruals, we had a $4 million increase. One of them is a $2.3 million spec house, and the LTV brand new appraisal is 64%. It's in a great location in a new construction, so it's... We're not anticipating a loss on that. That was done in our community bank vertical. And then we also had a small builder in southeast Texas that we've done, honestly, nearly 100 small homes for him over the past 8 to 10 years. And we've got a couple that that relationship is $1.1 million that we put on non-accrual. three houses, and then a couple smaller loans. I have $160,000 specific reserve on that relationship. That's our estimated at this point, so not significant. And then the third non-accrual was a $900,000 borrowing-based line of credit. We have a very strong guarantor with separate income. on that, so we're not anticipating a loss and no specific reserves on that either. And then on those past dues, typically you don't see us with over 90 days past due and still accruing. We had a $2 million loan this quarter, but it is clear it is renewed and current and it's not a credit problem. It's also a a real estate deal with an LTV in the 60% range, and then just two other smaller loans that are in the process of renewal, and those aren't credit concerns either.
spk09: Okay. Got it. Appreciate all the color, Audrey, and thanks to everybody, and thank you. Bye.
spk02: Thanks, Matt.
spk03: Thanks, Matt. Thank you.
spk04: There are no further questions at this time. I would like to turn the floor back over to Bart Calaway for closing comments.
spk10: I just want to thank you, Rintu, for taking care of us as an operator. I want to thank everybody else for joining us and your continued support of Third Coast Bank shares. We look forward to speaking to you next quarter.
spk06: Thank you. Have a good evening.
spk04: Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
spk03: Thank you for your participation.
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