TCBX (2025 - Q3)

Greetings, and welcome to the Third Coast Bancshares Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Natalie Hairston. Please go ahead. Natalie

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our third quarter 2025 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McWhorter, Chief Financial Officer; and Audrey Spaulding, 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.thirdcoast.bank. There will also be a telephonic replay available until October 30, 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 23, 2025, and therefore, you are advised 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 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 annual report on Form 10-K that was filed on March 5, 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 will turn the call over to Third Coast's Founder, Chairman, President and CEO, Mr. Bart Caraway. Bart?

Good morning, everyone, and thank you, Natalie. I'll begin by sharing the highlights from the company's performance this quarter. After my remarks, John will discuss the financials, and Audrey will give a review of credit quality. Finally, I'll cover our merger announcement and share management's outlook for the remainder of 2025. The third quarter was particularly impressive for Third Coast as the company reached several key milestone achievements in growth, innovation and shareholder value. First, the recent listing of TCBX on both the New York Stock Exchange and the NYSE Texas marked a strategic shift aimed at enhancing market visibility and providing shareholders with greater liquidity. Second, we experienced notable growth in the third quarter, creating substantial asset value. For the first time in the company's history, we surpassed $5 billion threshold in total assets with a compound annual growth rate of 19.3% since our IPO in November 2021. Our relationship banking model has remained effective, evidenced by the consistent quarter-over-quarter growth in both deposits and loans. Additionally, we set new records in book value and tangible book value, reaching $32.25 and $30.91, respectively. Our return on average assets also hit a new high, reaching an annualized 1.41% for the third quarter of 2025. These accomplishments not only demonstrate our growth strategy, but also underscored our commitment to creating lasting franchise value for our stakeholders. Third, the successful completion of the bank's first and second securitization transactions mentioned during our Q2 earnings call, received international recognition, winning the SCI Risk Sharing award for North American transaction of the year at a recent ceremony in London. These transactions demonstrated that what we once thought impossible is now within reach. And Third Coast is immensely proud to have set new standards for a bank our size, while redefining risk management for real estate development loan portfolios among our peers. Lastly, our ongoing efforts to optimize operating leverage led to improvements in efficiency, profitability and opportunity. Our efficiency ratio improved to 53.05% for the third quarter. Net income rose driven by enhancements in interest and noninterest-bearing income, while keeping expenses stable, resulting in a total of $18.1 million for the quarter. Collectively, the third quarter results position us as a strong performer and create a solid foundation for potential M&A opportunities ahead, including the definitive agreement with Keystone that was announced yesterday, and I will discuss more in detail later in the call. In summary, the third quarter not only exceeded expectations, but also set several new records for the company. And overall, we remain committed to delivering on our strategic priorities and providing sustained value for our shareholders. With that, I'll turn the call over to John for the company's financial update. 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 third quarter. We reported third quarter net income of $16.9 million, up 8.3% versus the second quarter of 2025. This resulted in an ROA of 1.41% and a 15.1% return on equity. The net interest income was up $15 million, or 3% from the second quarter. This increase was primarily due to a better-than-expected net interest margin and growth in average earning assets of $229 million. Noninterest expenses were essentially flat in the third quarter, where salary and employee benefits were up but legal and professional expenses were down. If you recall, last quarter, we noted relatively high legal fees associated with the securitizations. Investment securities were up $21 million to $583 million, and quarterly average balances were up $117 million. Yield on the portfolio at September 30 was 6.07%, and AOCI improved slightly with a gain to $10.9 million. Deposits increased $92 million for the quarter, resulting in a loan-to-deposit ratio of 95%, and our cost of funds declined slightly. Net interest margin declined to 4.10% but was still higher than expected due to relatively high loan fees. In fact, speaking of loan fees, despite higher-than-expected accretion, capitalized loan fees at 9/30 were a record $19.9 million. But with that said, we're forecasting a margin of between $3.90 and 3.95% for the fourth quarter. Third quarter average loans were up $158 million versus the second quarter of this year. Period end loans, however, were up $85.4 million. Loan demand remained strong with loans already up $50 million in October. We've recently hired several new employees that we believe will be significant contributors to both loan growth and deposit growth in future quarters. That completes the financial review. At this point, I'll pass the call to Audrey for our credit quality review.

Thank you, John, and good morning, everyone. The third quarter highlighted the stability of our credit quality, a result of our disciplined risk management practices and underwriting standards. Nonaccrual loans declined for the second consecutive quarter, improving by $2.6 million in the third quarter. Quarter-over-quarter, nonperforming loans increased by $1.6 million. However, they are $2.3 million lower than the same period a year ago. Similarly, the nonperforming loans to total loans ratio rose by 3 basis points quarter-over-quarter, but still improved by 10 basis points compared to the same period last year. The 4 basis point increase in provision expense was attributable to growth in gross loans outstanding, and the company recorded net recoveries of $17,000 for the quarter. Our loan portfolio remains well diversified and similar to the previous quarter's allocations. Commercial and industrial loans were 43% of total loans, while construction, development and land loans were 20%. Owner-occupied CRE was 10%, and nonowner-occupied CRE was 16% of total loans. Our office and medical office portfolio exposure was not materially different than previous quarters, and our multifamily exposure has declined slightly. Overall, the stability of our loan portfolio, combined with our team's discipline allows us to maintain strong performance as we navigate market fluctuations strategically. This blend of conservative credit underwriting and careful risk management not only propels our growth but also delivers long-term value to our stakeholders. With that, I'll turn the call back to Bart. Bart?

Thank you, Audrey. Looking ahead, we are excited to capitalize on the positive momentum generated in the third quarter as we continue to implement strategic initiatives that will drive our company forward. As announced yesterday, Third Coast has entered into a definitive merger agreement with Keystone Bancshares, Inc. Once completed, the combined entity is expected to have a pro forma total assets in excess of $6 billion. We are targeting to close the transaction in the first quarter of 2026. Keystone Bank is headquartered in Austin, Texas. A region known for dynamic economic growth and a vibrant community, making it an ideal location for continued expansion. Keystone currently operates two branches within the Austin market alongside a branch in Ballinger, Texas; and a loan production office in Bastrop, Texas. This partnership presents a compelling opportunity to merge two culturally aligned community banks, allowing us to leverage our shared commitment to relationship banking and customer service. By combining our resources and expertise, Third Coast will significantly strengthen its position in that corner of the Texas Triangle. Turning to our outlook. Management expects the remainder of 2025 to be consistent with prior quarters. Our loan pipeline show even more demand over the robust figures of the third quarter, reinforcing our confidence in meeting our loan growth targets of $50 million to $100 million in the fourth quarter. This aligns with our annualized growth rate of approximately 8%, and as always, we remain disciplined in our underwriting and portfolio management practices to ensure high-quality growth. In closing, I'd like to restate how proud I am of the Third Coast team. We consistently exceed industry expectations, achieving growth rates that surpassed that of our peers. Thanks to the dedication of our bankers and the strategic positioning in Texas' most attractive markets, we have built a strong franchise characterized by desirable banking model, sustained growth and profitability, and long-term value creation for our shareholders. With that, I'd now like to turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] And our first question comes from Bernard Von Gizycki with Deutsche Bank.

Just curious on the merger of Keystone, the deal closes, or expected to close by 1Q '26. Just any expectations of how long the integration process may take? I know you noted in the deck, it should be straightforward integration given some operational compatibility. Just any color you can share on similar systems. Anything you can break out there?

Yes. Fortunately, we've coordinated very well with them. So we're looking at a very early second quarter core conversion with them. Fortunately, there are contracts tied to our benefit and expires at -- basically in May. Plus a lot of what they do business-wise is similar to us. So it's pretty easy to map over and their cultural aspects are very much aligned with ours. So we do expect the integration to be fairly straightforward.

Understood. And then maybe just following up on the loan growth expected for 4Q. I know, John, you mentioned the $50 million already in October. And Bart, you mentioned the expectations are still the $50 million to $100 million. That seems to be maybe conservative. Just wondering any expectations that November, December might be maybe a little bit slower? Just any thoughts on the pipelines and color you can provide there?

Bernie, last quarter, I said basically the same thing that July loans were up $50 million when we had our earnings call. And they ended up going up as much as $150 million and then we had a bunch of big payoffs towards the end of the quarter. So we're still kind of comfortable with that $50 million to $100 million number. We certainly always want to outperform but we are up $50 million. I mean, that's going to be good for the averages for the quarter. But what happens later in the quarter as far as paydowns, it's just harder to predict.

Yes, I echo the same thing. Again, I just try to keep the long vision as we're very consistent in year after year whenever you sum it all up at the end of the year, we kind of meet what our projections are. But the volatility gets very lumpy for us on it. So it's just hard to tell year-end. It can even make a difference whether some loans get pushed into this year versus next year. Just everything happening with the noise in the economy. It's just really hard to predict. But what I will say is I feel really good about the loan pipelines and the quality of customers that we're seeing, and a lot of disruption that's happening in our markets we're benefiting from. We're just able to start seeing some of these clients that are really good quality clients. We always talk about punching above our weight class that we're getting to see. And we remain a talent magnet. And so even these last few months, we've picked up a couple of bankers that are really people we're proud of. That we didn't think we'd be able to get. And they're going to also help with that funding part of it in the client acquisition. So I just think we're poised in a great position. I don't want to overpromise and over commit. There's going to be some surprises where sometimes we may be more than what we think on the quarter, but then there's some times where we're going to have some paydowns and be a little less. But overall, we feel like we're right on target with where we're trying to go.

Our next question comes from Woody Lay with KBW.

Wanted to start on the expected EPS accretion of the deal. Is that based on consensus estimates or internal projections? Because I mean just based on the quarter, it would seem like consensus is a little low.

Yes. Woody it is based on consensus. I mean we've talked about that a lot internally. I mean, the hard thing is to know exactly what number to use. I mean, certainly, we think that number is going to change over the next week or so as people saw our current earnings, and that will reduce the accretion a little bit. But we don't think it's going to be material.

And further, if I can add on to this. The reason why we feel like it's going to be more accretive than even what we announced is because we didn't include any synergies. We're being so conservative on this. There are a lot of things. Just to give you an example of a few where we think are going to fall to our benefit. For instance, we have one branch that overlaps with theirs. And eventually that -- one of those branches is going to get eliminated, and we're going to get some cost saves for that. They view us as a platform to where they can do more with what they have. So as John and I were talking about sending some e-mails around this morning is, we have more than our fair share of derivative income and they don't do derivatives at all. So we're giving them tools on the treasury side, on the loan side that we didn't bake in as far as synergies into this deal that are going to be pretty meaningful with us. So no matter what the numbers are, whenever we talk about the accretion side, there's a lot that we feel very comfortable of a buffer, or padding, that we have on the expense side, or the increase in revenue that we're going to be able to get from this transaction to where hands down, we think this is going to be very, very good for us. And not just because of that because we think the market is a very attractive market that's going to enhance our footprint and our value in the overall franchise.

All right. I appreciate the color there. Maybe just given you're going to be busy with the integration over the next couple of quarters. How do you think about the near-term securitization strategy? And then longer term, just with a bigger balance sheet, does this open the door for additional flexibility on the securitization front?

Yes, it does. Woody, good question. I checked with the team earlier this morning, and we are looking at a third securitization. It's probably not going to be a this year transaction and as always, these tend to be customer dependent. But we do think, at this point, it will be likely that we would do a similar securitization in the first quarter next year.

Got it. And then just last for me. You're now at -- pro forma, you'll be at $6 billion, but your continue to be a strong organic grower. Just with $10 billion, that threshold, do you see any expense investments that need to be made as you sort of approach the $10 billion mark?

Well, to be honest with you, I think it's kind of already baked in. I mean, I think our -- the examiners know that we've grown fast and they are kind of -- expect us to incrementally build on all of our controls. And what we're trying to do is be smart about it and building a lot more systems and controls instead of just adding people as we continue to grow. I think we're a long way away from $10 billion, but the expectations are always is that you start putting that in place. And I think that's just normal management and normal processes for us to think about that and continue. And I think it's healthy for the bank to be in a position where we have strong controls and reporting in place, period. So I don't think it's going to be a factor where on the P&L that we're going to see some sort of impact as we continue to grow because I think we're doing it along the way.

We'll go next to Michael Rose with Raymond James.

I wanted to just start on the fee side. Another really good quarter. You guys have had some really good momentum here, but the service charge line item up fairly meaningfully quarter-on-quarter. I assume some of it is seasonal, just given what we saw last third quarter. But would just love any updated thoughts on fee income and some of the ongoing efforts that you've talked about, Bart, over the past year or 2.

Yes. Fees have certainly been a bright spot. Remember, we converted to FIS back in, I guess, it was June. And there's better, bigger products. I mean, it gives us more opportunity to sell things that we weren't before. So we think on both the treasury side and the loan side that -- well, I know for this quarter, I mean that's where a lot of it came from. But going forward, I mean, we're not going to see the same kind of growth quarter-over-quarter. I mean this was a particularly good quarter, but we're pretty confident that our fee income initiatives will continue working out and better treasury products and happier customers and it's just all turning out well.

But probably safe to assume we see a little bit of a step down in the fourth quarter just given some of the seasonal aspects. Is that fair?

Correct. Flat to down a little bit, yes.

Okay. Perfect. And then as you guys have talked about the loan growth story continues to be very, very strong. What's the hiring effort look like at this point to kind of support that high single-digit growth aspect? It seems like every bank that I talked to out there is looking to hire folks. And just wanted to see what your guys' plans are and what the expense build could be kind of related to that?

Yes. I think it's the same story we've talked about for -- like after we went public, obviously, we went on a hiring spree. And then I start talking about the fact that we're going to be very surgical. And once again, I mean, it's continuing down the same path where I think we have become a talent magnet, and that we get a look at a lot of the talent that's in the market that's out there. And certainly, disruptions in the market do help us. But we sort of have our pipeline of people that we want. And I think it's going to be, basically what I would call, almost one-offs or surgical that we get. And these people are going to be highly productive. They probably come with just a small support team, and they're going to generate a lot of productivity for us. And so that's probably from a -- what John and I talked about deploying resources and making sure we control the P&L. We're just getting the highest and best talent that's out there. So we get a return faster. And indeed, some of the people who come on board, I mean, they may be profitable after their first deal or two. So I feel real good about where we are. We're not on a massive hiring spree like we did in the past. But we are still hiring some bankers selectively. And they're just best-in-class folks. And me and Audrey both are like -- we want to make sure not only do they check bucket that are the box, that they are good quality, but they're going to bring the right kind of credits that we want. And so we vet them very, very thoroughly. And I mean, this year has been exceptional. We've made a couple of few hires that I've just -- in 2026, are going to make a big impact for us.

That's great to hear. And kudos to the success and ongoing momemtum as we move forward. Maybe just one final one for me. I didn't necessarily think that a deal was in the cards for you guys. I know the currency is a little bit depressed, but glad to see the transaction. Maybe now pro forma $6 billion, if you can describe kind of would additional deals at some point beyond this one makes sense? And specifically, what would you -- what would you kind of look for? I assume it looks something like this in terms of size, but would just love kind of a schematic of how we should think about M&A for you guys?

Yes. I think it's the same thing we've been talking about. The first deal we did with Heritage, we called it the unicorn because it was just such a great thing for us. It put us over $1 billion. It certainly helped us scale and efficiencies. It helped us with our market presence. It doubled our branches. And the people that were there, a lot of them have become very valuable members for us in leadership roles. And I view the same thing that's going to happen with Keystone. And Jeff, my counterpart there, is a great banker. And they have -- they're loaded with talent at that bank. And quite frankly, they even surprised me, it's kind of the level of their customer base. I mean, in some ways, they're kind of punching above their weight class too. And because of the cultural fit with it, I think we're going to get a lot of positives, even more than what I think, out of this merger. And -- but it sets the bar very high, right? So it's got to be financially rewarding for us, but it also has to be a great cultural fit. It's got to be the right -- it's got to check a lot of boxes. And those deals are really hard to come by. So what I would say is the bar for another deal is going to be pretty high. It's got to make sense for us. And there's a lot of other things that has to happen. So we're going to continue to execute on the organic story that we've been telling you all about. And we're opportunists. We'll look at a lot of deals, and we'll see where we're at. I mean, John and I have talked about, we looked at the deal earlier this year. And we came in third out of three on a bid process with it. And we're okay with that. We're just going to be very, very disciplined about what we do next with stuff. And so I think it's just more of the same.

[Operator Instructions] And we'll go next to Matt Olney with Stephens.

First question for John around the margin. You gave us the margin expectations for the fourth quarter. Any more details you can provide as far as kind of what's behind that? I just assume it's more of a normalized level of loan fees that you mentioned were elevated this quarter. Anything beyond that? And then just other assumptions behind that with respect to interest rates and additional Fed cuts? And just remind us where you are as far as your rate sensitivity?

Yes. If you look back at our margin over time, we were kind of in the 3.70% to 3.80% range and really jumped up when we did those securitizations. And those were onetime fees that we're obviously not forecasting going forward. This quarter, I mean, it wasn't directly tied to those securitizations, but kind of the same concept of loans paying off. We've booked a lot of loans this year that had a lot of fees that we capitalized. I think I said in my comments that our capitalized fees are now a record $19 million. So maybe I'm being a little conservative in saying 3.90% to 3.95%, but that's still a pretty big jump from where we were just back in the first quarter. Now when I look at the margin on a monthly basis, after the Fed cut rates, our margin did go up 1 basis point. So our Q is going to show that we're slightly asset sensitive. But I think we're going to outperform our assumptions. We pretty aggressively cut rates on all the deposit accounts that we could. And I think we have more to give, if that makes sense. Having a relatively low noninterest-bearing balance, means that we can cut rates on a higher percentage of our total deposits. That's certainly what happened when the Fed cut rates the first time. It's what happened when they cut rates last year, it's what I think will happen when they cut rates this next time. And we've probably become a little bit less asset sensitive just because of the securities that we've been purchasing. Our securities book is much bigger than it was a year ago, and I think that will help in the rates down that -- we had pretty good timing on our investment purchases and our yield on that portfolio is 6%. And I think it's going to throw off a lot of income next year.

Okay. That's helpful, John. And then you mentioned that securities portfolio. What -- remind us what portion of that is going to be variable that we should consider with down rates?

Yes. So I guess, it's close to $600 million, there's about $200 million of that that's variable. Now one thing that's maybe a little hard to predict is we have had a lot of securities called recently. But we don't expect big changes in the portfolio. But basically what we -- held to maturity, Matt. So the $206 million we have in held to maturity, that's all floating, right? And pretty much everything else is fixed.

Okay. And then you touched on some deposit pricing competition in your markets. Anything else to add there? And then same thing for loan pricing competition. Just to appreciate anything that you're still in the market more recently?

We are feeling more confident about deposit growth than we had in quite some time. And this is going to be good core deposit growth where I think we're going to be able to start paying down some of our brokered deposits and improve the cost of funds there a little bit. And we may not be talking about huge number, but saving 10 basis points on tens, or hundreds of millions of dollars. I mean, it can add up in a hurry. But that's kind of what I envision over the next couple of quarters. Remember in recent years, we have one particular seasonal customer. And it seems like every year, they send us more and more in deposits. And those funds, we're kind of already seeing them out there on the horizon, talking to the customer that those will be coming. And I think we'll let some of our brokers roll off and replace it with those. And again, they're not cheap deposits, but they'll be a little less expensive than what we currently have. So that will be a little bit of a tailwind to the margin.

Moving next to Dave Storms with Stonegate.

Just wanted to kind of ask two maybe around the merger. Could you maybe talk a little bit more about your comfortability with your geographical footprint? And maybe getting back to that last question. Are there any MSAs that you would target to expand into now that you really shored up your presence in Austin?

That's a really good question and something we think about as well. I think our primary goal is to continue to build around the Texas Triangle with that. And Austin, if you look at the market, if I'm correct, if you look at independent community banks, there was really only two independent community banks over $500 million in assets. So we talk about scarcity value a lot with it. And in Austin is a prime example of that. It's -- we're so lucky with Keystone to be able to get that because it gives us a foothold in that off the market and gives us some assets there, which I think the market that's growing, that is -- has a lot of opportunity for -- to go get some of these different customers from community to middle market side of it, especially as the other banks get bigger and there's more consolidation. So that was kind of a rare opportunity that worked. We would certainly look at our other markets. But we talked a little bit about being a talent magnet. And I think the market, and we have finally seen, that we're able to acquire bankers that are just exceptional. That are working for much larger banks. And being that talent magnet certainly affords us to be able to grow organically. But I kind of think we're almost like a platform magnet for some of these other banks now. We give certain banks the opportunity, if they want to take it to the next step, we have the infrastructure, the technology, now the systems in place that if they're looking for a partnership with it, we offer a platform for them to continue to do what they want to do and grow a certain market. So some of this is about cultural fit and about a partnership that would make a difference for us. And I hope we can continue in that Texas Triangle with all of it, but it could be adjacent to that. Or we're opportunists and look at things that add shareholder value. I mean, ultimately, the way we look at it is what are we going to do that's going to make this franchise more valuable. So I don't know if you were going there, Dave, with it. But it was a really good question that I think it's -- I think we're proving up that we can be a very good partner for other banks. And I'm not so sure that with the Keystone merger that that's not going to open up more phone calls to me about banks that are -- now have another avenue.

That's great color. One more for me, if I could. Just looking at some of the view of the Keystone credit profile. It looks like they do have really high-quality credit profile, strong asset quality. Is there anything that they're doing that you can see that they're doing now, kind of before you get your hands on it, that you think could be mapped over to Third Coast and improve your underwriting, improve your asset quality even further?

Yes. So what I would tell you is we really have a good customer base there that we're happy with. And Audrey and I talked about, we wanted to -- we looked at the loans, we felt comfortable. But we also engaged Gateway to do a loan review. And it came out really well, right, Audrey? I mean...

Yes. Gateway looked at 80% of their commercial loan portfolio and the results were very, very favorable. But you're correct. They have very strong asset quality.

So I think what it is, is, again, we layer the tools on top of what they're doing. And I think we can get more wallet share out of some of their large customers. Give them some more products to go out there and compete with some of the bigger banks now. So I'm pretty excited about to see what they're able to do with our additional tools.

This now concludes our question-and-answer session. I would like to turn the floor back to Bart Caraway for closing comments.

Thank you, Carrie. I appreciate that, and thanks, everybody, for your interest in Third Coast Bancshares, and we look forward to talking 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.