Third Coast Bancshares, Inc. Q3 FY2025 Earnings Call

Greetings, and welcome to the Third Coast Bancshares Third Quarter Earnings Conference Call. 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.

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 the $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.

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 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 shows 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 a 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 to the operator to begin the question-and-answer session. Operator?

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 that expires 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 overcommit. 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, one of those branches is going to get eliminated, and we're going to get some cost savings 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 emails 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 you're continuing 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?

To be honest, I believe it's already anticipated. Our examiners recognize our rapid growth and expect us to gradually enhance our controls. Our strategy is to implement more systems and controls instead of just hiring more staff as we expand. Although we are still a considerable distance from reaching $10 billion, there is an expectation to start establishing these measures. This is standard management practice for us, and I believe it is beneficial for the bank to maintain strong controls and reporting. Therefore, I don't foresee any significant impact on the P&L as we continue to grow, as we are addressing this 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 is 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 two.

Yes, fees have been a positive aspect. We transitioned to FIS back in June, which has provided us with better and larger products. This transition opens up more opportunities for sales that we didn't have previously. We believe that both our treasury and loan segments saw significant contributions this quarter. However, looking ahead, we don't expect to see the same level of growth in the upcoming quarters. This quarter was particularly strong, but we're optimistic that our fee income strategies will continue to yield positive results, supported by improved treasury products and satisfied customers. Everything is progressing 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. I just wanted to see what your guys' plans are and what the expense build could be related to that?

Yes, I believe we're following the same narrative we've discussed since going public. Initially, we ramped up our hiring, but now we are being very strategic. We continue to attract top talent and have access to many candidates in the market. Market disruptions work to our advantage, and we have a specific group of individuals we're interested in. Our approach now involves selective hiring, focusing on high-quality candidates who usually require minimal support yet can deliver significant productivity. From our discussions about resource allocation and managing our finances, we're concentrated on securing the best talent to ensure a quicker return on investment. In fact, some new hires might start generating profit after their initial projects. I feel positive about our current position. While we're not on an extensive hiring spree like in the past, we are selectively bringing in some outstanding bankers. Both Audrey and I are committed to ensuring they not only meet our quality standards but also bring the right kind of credentials we value. This year has been remarkable, and we've made key hires that will have a significant impact in 2026.

That's great to hear. And kudos to the success and ongoing momentum 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 what additional deals at some point beyond this one makes sense? And specifically, 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 we are discussing the same points as before. The initial deal with Heritage was a standout for us, as it exceeded $1 billion and significantly contributed to our scaling and efficiency. It enhanced our market presence, doubled our branches, and many individuals from that team have taken on crucial leadership positions within our organization. I anticipate a similar outcome with Keystone. Jeff, my counterpart there, is an excellent banker, and the talent at that bank is impressive. They even surpassed my expectations regarding the quality of their customer base. In some respects, they are performing beyond their capacity. Given the alignment in culture, I believe we will realize numerous benefits from this merger, potentially even more than I expect. However, this does set a high standard. The deal must be financially beneficial for us and must also provide a solid cultural fit. It needs to meet numerous criteria, and such opportunities are quite rare. Therefore, I would say that the threshold for any future deals will be elevated. They have to make sense for us, and several factors must align. We will continue to focus on our organic growth strategy that we've previously shared. We are opportunists and will evaluate various deals as they come. John and I assessed a deal earlier this year and finished third in a competitive bidding process, which we accepted without issue. We will approach our next steps with a disciplined mindset. Overall, I believe it will remain consistent with our current direction.

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. Historically, our margin has been in the 3.70% to 3.80% range, which increased significantly due to the securitizations, though those were one-time fees we do not expect in the future. This quarter, while not directly connected to those securitizations, follows a similar trend with loans paying off. We have recorded a substantial amount of loans this year that included significant fees we capitalized. Our capitalized fees have reached a record $19 million. I may be slightly conservative in estimating a margin of 3.90% to 3.95%, but that represents a significant increase from the first quarter. Recently, I noticed that our margin went up by 1 basis point after the Fed cut rates, indicating we are slightly asset sensitive. I believe we will exceed our expectations. We proactively reduced rates on all possible deposit accounts and have room for further reductions. Our relatively low noninterest-bearing balance allows us to reduce rates on a larger portion of total deposits. This was the case during previous Fed rate cuts, and I anticipate the same for future cuts. Additionally, we have become a bit less asset sensitive due to the increased size of our securities portfolio. Our investment purchases have been well-timed, and our portfolio yield stands at 6%, which I believe will generate substantial income in the coming year.

Okay, that's helpful, John. Can you remind us what portion of the securities portfolio will be variable and should be considered with down rates?

Yes. It's close to $600 million, with about $200 million of that being variable. One thing that is somewhat difficult to predict is the number of securities that have been called recently. However, we do not anticipate significant changes in the portfolio. Essentially, we have $206 million in held to maturity, all of which is floating, while the majority of the rest 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 appreciate anything that you're still seeing 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 numbers, 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 consider as well. Our primary goal is to continue to build around the Texas Triangle. In Austin, there are only two independent community banks with over $500 million in assets, which reflects a scarcity value. We're fortunate to have Keystone because it gives us a foothold in that market, allowing us to access a growing customer base from community to middle market, particularly as other banks consolidate. This was a rare opportunity. We will definitely look at our other markets as well. We have talked about being a talent magnet, and we're finally seeing that we can attract exceptional bankers from much larger banks. This talent magnet status allows us to grow organically. I believe we are becoming a platform magnet for other banks, providing them with the opportunity to take the next step if they choose to partner with us. We have the infrastructure, technology, and systems in place for those looking to grow their market. Cultural fit and partnership are key for us. I hope we can continue to focus on the Texas Triangle, possibly expanding into adjacent areas as we seek opportunities that add shareholder value. Ultimately, we want to make our franchise more valuable. I'm not certain if that was your question, but it's a good one. I believe we can be a great partner for other banks, and the Keystone merger may lead to more inquiries from banks exploring new avenues.

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 a 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, we have a solid customer base that we're pleased with. Audrey and I discussed our comfort level with the loans, and we also brought in Gateway for a loan review, which yielded very positive results. Gateway assessed 80% of their commercial loan portfolio, and the outcomes were highly favorable. You're right; they do maintain very strong asset quality.

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.