Third Coast Bancshares, Inc.

Welcome to the Third Coast Bank Shares First Quarter 2025 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, Natalie Harrison, Investor Relations for Third Coast Bank Shares. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bank Shares Conference Call and Webcast to review our first quarter 2025 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. There will be a replay of today's call, and it will be available by Webcast on the Investor section of our website at .ThirdCoast.Bank. There will also be a telephonic replay available until May 1st, and more information on how to access these replay features was included in yesterday's earnings release. Please note that information reported on this call speaks only as of today, April 24th, 2025, and therefore you were advised that any time-sensitive information may no longer be accurate as of the time of any replay listing 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 Law. 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 10K that was filed on March 5th, 2025, 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 Carraway. Bart?

Good morning, everyone, and thank you, Natalie. I'll start by sharing the key points from our earnings release. Following my remarks, John will discuss the financials and Audrey will review our credit quality. Finally, I'll provide our outlook for the remainder of 2025. The results of the first quarter showcase the strength of our team and the effectiveness of our strategic planning. This is largely due to our well-defined priorities, which include disciplined loan growth, robust credit management practices, improved operational efficiencies, and the ongoing commitment to increasing shareholder value. First, early in the second quarter, we announced that Third Coast had successfully executed a significant commercial real estate loan securitization. This transaction provides us with increased flexibility in managing our balance sheet and capital ratios and generates fee income that will positively impact our net interest margin in the second quarter. We believe the securitization transaction exemplifies our forward thinking approach to capital management by positioning the company to support future loan growth while maintaining a prudent risk profile. By converting a portion of our loan portfolio into marketable securities, we have not only reduced our concentration in commercial real estate, a key focus for regulators and source of potential risk, but also improved our risk-based capital ratios as the securitization allows us to redeploy capital more effectively into new lending opportunities. This proactive step enhances our liquidity and enables us to manage our loan portfolio dynamically, responding to shifts in loan demand or economic conditions without compromising our credit standards. Furthermore, the structure and ongoing management of the securitization ensure that we maintain rigorous oversight of our credit quality, as required by regulatory guidance, and that we continue to meet the evolving needs of our customers and communities. Additionally, our proactive asset management strategies focus on reducing non-performing loans and efficiently transitioning selected assets to other real estate-owned, continue to deliver positive results as evidenced by the ongoing improvement in our already strong credit quality. While Audrey will provide more specifics, I just want to emphasize our continued confidence in the company's credit risk strategies. We are committed to maintaining a healthy balance sheet while promoting long-term sustainable growth. Another high point is our net interest margin, which improved nine basis points in the first quarter to 3.80%. While John will provide more detailed financials, I want to underline that our commitment to maximizing returns through informed decision-making, cost awareness, and adaptability. Lastly, but certainly not least, we are committed to prioritizing enhanced shareholder value, which is demonstrated by our continuous rise in book value and tangible book value. We achieved growth of .4% and .7% respectively over the prior quarter. And when compared to the same period last year, we achieved growth of .3% and .2% respectively. Overall, I am very pleased with the results of the first quarter. Our team has continued to show remarkable focus and discipline in executing the company's priorities, which has allowed us to sustain this upward momentum. With our clearly defined objectives and such a talented team, we are well positioned for future success. I'm confident that we will continue to deliver exceptional value in the upcoming quarters. With that, I'll turn it over to John.

Thank you, Bart. And good morning, everyone. We provided the detailed financial tables in yesterday's earnings release. So today I'll provide some additional color around select balance sheet and profitability metrics from the first quarter. We reported first quarter net income of 12.4 million, essentially flat versus the fourth quarter of 2024. This resulted in an ROA of 117 and a .4% return on equity. Net interest income growth was .4% for the year, but down slightly from the fourth quarter. The decline from the fourth quarter was primarily due to a decline in Fed funds sold and other interest earning assets. Non-interest expenses were up .2% or $878,000 in the first quarter and were up .5% or $2.2 million from the same quarter last year. Investment securities were up 13.4 million to 397 million and AOC improved to a gain of 10.3 million. Deposits declined 62 million for the quarter, resulting in a loan to deposit ratio of 93.9%, but also resulted in a net interest margin, which improved nine basis points to 3.80. Period in loan growth was 21.6 million, but quarterly average growth was slightly better at 42.5 million. Payoffs were relatively high for the quarter, resulting in the modest growth. Loan growth has been better in April with loans up more than 50 million thus far. Additionally, investment securities are up 78 million due to the securitization. The bank collected an origination fee on the securitization, which will benefit second quarter net interest margin by approximately five basis points. Non-interest expenses will be somewhat noisy in the second quarter with headcount up 14, undergoing a core conversion and also incurring extra expense related to the securitization. Lastly, we accreted capital for the quarter and are therefore considering a share buyback program. That completes the 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. I'm pleased to report that our ongoing efforts towards improving asset quality and maintaining a well diversified credit portfolio have led to a noticeable improvement in our already strong asset quality ratios. In the first quarter, non-performing loans declined by 9.3 million, resulting in the non-performing loans to total loans ratio improving by 23 basis points from the prior quarter. The decline in non-performing loans was primarily due to the foreclosure and transfer to OREO of three non-performing loans in one relationship totaling 7.3 million. The payoff and pay down of five non-performing loans totaling 1.9 million and the charge off of one loan for 810,000. Non-performing assets to total assets declined by two basis points to 0.56%. Net charge off also declined, improving by five basis points in the first quarter when compared to the prior quarter. Although we charged off one loan totaling 810,000, recoveries of 412,000 for the quarter resulted in net charge off of just 398,000. Our loan portfolio continues to be well diversified. CNI loans increased to 40% of total loans, construction, development and land loans increased slightly to 21%, while owner occupied declined slightly to 11% and non-owner occupied CRE stayed the same at 16% of total loans. Office represented .4% of total loans with approximately 54% being owner occupied. Medical office was another .2% of total loans. As I have stated previously, the office portfolio generally consists of Class B with some owner occupied C-space and is all located in our Texas footprint. The average LTV of our office and medical office portfolio is approximately 60%. Multi-family represented .4% of total loans and has an average LTV of less than 65%. Overall, our conservative credit culture has consistently yielded strong results. We remain disciplined in our credit underwriting approach and foster a culture of prudent credit standards and disciplined practices that align with our strategic vision for sustainable growth. With that, I'll turn the call back to Bart. Thank

you, Audrey. First, let me start our outlook by expressing my pride in our team's exceptional ability to navigate challenges and capitalize on opportunities with expert level precision. We consistently execute our strategic plan effectively, concentrating our efforts on initiatives and priorities that align with our company-wide goals. During our last earnings call, we outlined several key priorities. First, efforts to improve our efficiency ratio. We remain optimistic that our ongoing success of our 1% improvement campaign will continue to deliver significant operational efficiencies and cost savings. Second, our loan volumes continue to align with our targets, remaining in the range of $50 million to $100 million per quarter. Notably, we have already surpassed $50 million in gross loan production for April. While fluctuations may occur month to month, we remain on track to achieve $325 million in loan growth, translating to an 8% annual run rate when compared to the prior year. Third, deposits experience the typical seasonal decline in the first quarter, and we anticipate some additional seasonal roll-off. Similar to loans, deposits can vary significantly month to month. Lastly, we continue to evaluate additional securitizations as a tool to manage concentrations and support sustainable, profitable growth, demonstrating our commitment to robust capital planning and risk management. In conclusion, I'd like to emphasize our thorough pursuit of operational excellence and profitability. With our highly effective strategic plan in place, a strong capital foundation, improved asset quality, and disciplined execution, Third Coast is well positioned to continue delivering value to our shareholders and to remain competitive in our dynamic Texas markets. I would now like to turn the call back 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Woody Lay with KBW. Please proceed with your question.

Hey, good morning, guys. Morning, Woody. One of the start on the securitization impact congrats on executing that in April. I think you called out an origination fee that will flow through the NIM next quarter. Is there also a non-interest impact that we should see in the quarters ahead or will it all flow through interest?

It will all flow through the margin. So for this next quarter, I think it will be about five basis points, tailwind to the margin, and it will be less than that going forward. We do still have some fees that will amortize over time, but not as much.

Got it. And then you completed this one in April. You said you'll evaluate the potential for additional securitization from here. What's a realistic target? Is it execute on a couple every year or just how should we think about the opportunity?

Yeah, it's going to be based on demand, so it's really hard to predict when it may be. If our concentration ratios creep up, we're certainly going to be more interested in doing one than not, but it's dependent on the loan demand that we see out there, and our ratios are in good shape today.

Got it. And then maybe last for me is just shifting over to loan growth. It's pretty impressive that your loans are already up $50 million this month, especially given all the sort of macro uncertainty that's in place. Talking to those borrowers, what gave them the confidence to execute on the loans? And speaking with other deals in the pipeline, does it feel like they're looking to delay deals or are they open to the loan?

Are they open to executing in the near term? And, you know, those numbers go up and down every month. And, you know, for the first quarter, we had a lot of paydowns. We had some paydowns on revolving lines, but we had some big customers that sold out and I think primarily sold out and just paid off completely.

Yeah, I think kind of following up on what John was talking about is, you know, our pipeline has been maybe a little bit more moderate in the past, but still pretty strong. And it's been the paydowns that have kept our loan volumes from being higher. So I think we hope that we're towards the tail end of that. When I'm talking to the customers, you know, we're in really good markets in Texas and, you know, a lot of them are even saying even if we hit a recession, that it taps the brakes and, you know, that's going to help some people find labor sources and keep costs down. And regardless whether we hit a little bit of a wall or go forward, our economy, I think, is pretty optimistic. I would say most of our borrowers are cautious but optimistic on where they're going with it. So, you know, I'm not seeing anything that is extremely alarming other than the fact that there's just a lot of noise out there, but the core businesses that we're seeing, and Audrey's looked at the portfolio, seem to be doing pretty well right now. So we're just going to be very selective. You know, we're not going to have the huge loan growth that we've had, you know, in the past years because we've just tightened up credit quality so much. But at the same time, there's a lot of business coming to us and so many of this is, so much of this is coming from existing customers and other banks that are portable and moving their business to us. So we feel pretty good about it right now.

That's great, Coller. Thanks for taking my question.

Thank you. Our next question comes from the line of Bernard Von Gzicki with Deutsche Bank. Please proceed with your question.

Hey, guys. Good morning. Just my first question on the fee income, it was really good at the $3.1 million and I think the biggest driver was in the service charges. I just wanted to know, has there been any pricing changes? Maybe you can just give some color on what drove the increase and if that's mostly a recurring trend from here.

Bernie, we probably haven't talked about it in a couple of quarters, but our Treasury Management Division, the fee income from that business, year before last was up 100%. Last year was up 75%. It's coming off a relatively small base, but we've done a great job in moving commercial businesses over that have lots of fee income. And some of the billings on that are quarterly. So after any quarter end, you'll see a little bit of a pickup and more, of course, I'm looking at it on a monthly basis, but particularly after year end, that'll be our largest billing cycle. So it wasn't an increase in fees or anything like that. It was more those customers that are on annual billing.

Okay, got it. Thanks for that. And then, John, maybe you mentioned the 14 headcount addition, some of the conversion expenses and I think some additional expenses to the securitization. Can you just help maybe size expectations for expenses, whether it's 2Q or for the rest of the year?

Yeah, that's a good question. You know, the first quarter, we have all the extra expense related to payroll taxes, and I know everyone has that. Other than that, and the new employees, I mean, I think we did a great job on expenses, holding the line on virtually everything. It doesn't look like the pipeline for hiring new people is material. So, you know, I think all the payroll tax stuff rolls off. It's maybe replaced with some of the securitization expenses. I mean, kind of my best guess is non-interest expenses pretty flat in the second quarter versus where we were. So I think right around that $28 million range is probably what you should expect.

Okay, great. Thanks for taking my question.

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 question. Just wanted to go back to the put the stakes to the margin. So, five basis point benefit from the securitization. You guys still have a fairly high, you know, cost of deposits that I think you can kind of continue to bring down, although you did have to step down at DDA. So above some color there. And then just on the loan side, you know, kind of where new production yields, you know, trending, obviously saw the average yield came down, but just trying to get a sense for, you know, kind of what the all in margin could kind of look like, puts and takes. So, with the securitization benefit, and then how many, you know, cuts, you know, do you have baked into those those expectations? Thanks.

Sure. So I think you remember last quarter, we said that our margin was was somewhat tamped down by all the extra cash that we had, you know, we had some seasonal deposits. And for the most part, we just left that money at Fed. So our spread on that was was modest. And if I remember right, I said that, you know, it was probably five basis points to the margin and said we went up nine. So we did do a little bit better than I expected. All things being equal that kind of 375 to 380 on the margin, I think is what you should expect. And then adding to that is the securitization, which will be five basis points or roughly five basis points for the second quarter. That'll be kind of a one time shot as we pick up the origination fee income from the loan that we booked. There there is other amortized fee income, but it won't have a material effect on the margin, I wouldn't say. So kind of in that 375 range. And, you know, we've talked before about being pretty well matched assets versus liabilities and that if rates move, whether it be up or down, that we feel well positioned to take care of it. We do expect rates to come down at least a couple of times this year. And if it does, I think the margin will be flat to somewhat better.

Okay, helpful. I appreciate the color. And then just maybe back to the long growth outlook. If you are expecting a couple, you know, rate cuts this year, I'd assume that would kind of ramp up some of the pay down activity on the on the CRE side. But I think, Bart, you said you still kind of expect, you know, 325 ish million in growth in the next three quarters. That's about 110. Does that does that in office kind of expectations for rate and then you may get to do a little bit better on the growth side.

So, yeah, we've been pretty good about the long growth. And, you know, we've always been kind of bumpy. And then sometimes the third quarter is the biggest, sometimes the first, sometimes the fourth, it moves around. But we have a lot of clients that are going to move over a lot of opportunities we're seeing with

it. So

I feel like it's

just going to be. And what are,

you

know, our comfort level.

Actually, you know, sometimes we can slow down this, you know, when you get customer service, you're able to move more customers easier. You know, with rates come down, you probably will see some some more payoffs. But, you know, it's come down enough, you know, it also will help a little bit on the real estate lending side of it. We might be able to pick up some more deals. So, you know, there's opportunities all throughout the market if you're looking at it, you know, and that's why I feel confident that, you know, this team has a really good core group of customers that continually to move over to us that I just believe the pipeline strong enough. And the customer base is strong that we're going to somewhere in maybe maybe it's the lower end of that range. It's hard to tell with it, but.

Three hundred twenty five this year. Okay, helpful. Appreciate the color.

Bart, maybe just last one for me. Just contemplation on the buyback. I've always thought of you guys as a kind of a growth bank. You know, does that does that signal anything in your evolution? You also not banded dividend, right? I mean, does that signal any evolution of the company or are we still growth focus at this point? Just trying to better understand the rationale around a buyback other than just the where the stock is. Right. Because, I mean, you guys had have had such strong growth for a period of time. So just try to better appreciate why you would even consider a buyback at this point. Thanks.

Yeah, well, we are definitely having discussions around the board at this price level. I think we're seriously considering that. I'll bump that till next quarter, but I will tell you that where we are now, it is certainly such an attractive stock for the existing shareholders that we're having discussions about it.

Yeah, I agree, Michael. I mean, you know, the accretion of capital and the level of our stock price is what makes it appealing. Certainly we're somewhat biased, but I don't think we should be trading at less than tangible book value

either. Yeah, totally get it. Interesting environment out there. Thanks for taking my questions, guys. Appreciate it. Thank you, Michael.

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

Yeah, thanks. Good morning. Just a few follow-ups here, and you may have addressed some of these. I'm having our time with the phone, so apologies if you already addressed some of these. I guess on the deposit side, John, you mentioned it briefly in your prepared remarks, saw some deposit balance contraction, liquidity levels came down. Any color on the driver's event?

No, I mean, we have the seasonal – it's more than one customer, but we do have seasonal deposits that primarily affect December and March. So there was still a little bit of that in the March numbers, but the pipeline for deposit growth looks strong in the second quarter. So, you know, probably flattish on deposits. I wouldn't expect a big increase because we do have some seasonal deposits yet to roll off that are, you know, kind of tax-related that they may be gone now or gone in the next week or so. But nothing out of the ordinary. I think if you look back at our prior years, you see the same thing in December and March. You know, I know you all aren't seeing the monthly numbers, but particularly just right at quarter end, we're getting some pretty big deposits in.

Okay. And back on the securitization, just a few follow-ups here. I think you mentioned this should obviously help improve the commercial real estate and construction concentration levels. Just any color on that in terms of where we were March 31st and kind of what the pro forma –

Yeah.

So, at December, if I remember right, our construction concentration ratio was 148 or 149 percent of capital, somewhere there about, and it's about 130 percent today. Low 130, 132 percent or somewhere there abouts over the last couple of weeks. So, doing the securitization did free up a lot of room there. And kind of similar story on the 300 bucket that we were, you know, I don't know, 350-ish or something. And, you know, it probably took us down 10, 25 basis points.

Okay. And then also the securitization, just trying to appreciate maybe the – any kind of off-balance sheet exposure here. What type of exposure is there remaining to the bank off that securitization?

So, we took back an investment security of $78 million that we put in held maturity that we consider to be investment grade. It's lower yielding, but should be from a credit perspective very strong, stronger than the original loan would have been, because effectively we're selling risk in doing a securitization. So, the assets that we take back, you know, whether – you know, we're calling it investment security. We actually contemplated calling it a loan, but it's, you know, obviously related to the original loan request. It's just that it doesn't have the same credit risk today. We don't have to put provisions against it, nothing like that.

And then, John, I'd say note, any more color on the underlying assets of the securitization? And what type of duration would that security on your balance sheet look like?

Yes, so the loan had a three-year maturity. So, it is short-term, it is floating rate, and the underlying collateral is primarily construction loans.

I assume single-family construction? Correct,

yes.

Okay. Okay, great. Thanks, guys. Appreciate it. Thank you.

Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Dave Storms with Stonegate. Please proceed with your question.

Good morning, everyone, and thank you for taking my questions. Apologies if these have been asked. I've been having a bit of an issue with the phone. I just want to start, you know, historically, some chop in the market has provided you all with an opportunity to add, you know, some key bankers and other employees. Does the current macro environment provide a similar opportunity, or does this one have maybe a different flavor than in the past?

No, I mean, I think we've steadily built up a good reputation of being a talent magnet, and quite frankly, there are probably more people that want to join us than we have room on the payroll right now. So we've been selective and added a couple of bankers here and there to fit needs, but I really think we've got a great culture that people want to join. However, we're also very mindful of expenses, too. So we're just kind of layering in bankers at the right positions when we need them. But certainly we have, I think, a very desirous culture to be a part of.

That's very helpful. And then just one more on the M&A environment. Just curious as to what you're seeing there, you know, how intently you're focusing on it. If it's all frozen up until we get a couple of rate cuts, any color you could provide there would be very helpful.

Certainly. Well, I mean, we've continued to talk to various people and make sure that we're, you know, see some deals that are coming through. You know, at this point in time, it's just M&A is very, very difficult to do. But at some point, you know, the market will change and all the legwork that we've been doing in foundation building, you know, hopefully something will come to fruition. I just think we have a great bank that we can grow organically and hit the numbers we need to. M&A is not something that we need to have like some other banks do. So I think we can continue on hitting our goals and objectives through the normal course of business. But eventually there probably will be a unicorn out there that could be very interesting to us.

So thank you for taking my questions and good luck in the next quarter.

Thank you,

Dave. Thank you. This concludes today's question and answer session. I'd like to turn the floor back over to management for closing comments.

Thank you, Devin, and thank everybody for your continued support of Third Coast Bank shares. We look forward to speaking to you next quarter. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.