Operator
Greetings and welcome to the Third Coast Bank First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Natalie Harrison in Investor Relations. 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 2026 results. With me today is Bart Carraway, 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 April 30th, 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, April 23, 2026, 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 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 founder, chairman, president, and CEO, Mr. Bart Carraway. Bart?
Good morning, everyone, and thank you, Natalie. Welcome to the TCBX first quarter 2026 earnings call. I'll begin by discussing the company's progress in the quarter. John will cover the financial performance in more detail. Then Audrey will provide a credit quality update. Then I'll close with a few thoughts on Management's Outlook. As we look at our first quarter, let's start with the broader context. This quarter marked a significant milestone for Third Coast, highlighted by a successful addition of Keystone Bank shares to our platform. The Keystone merger acquisition had a substantial impact on our results this quarter, driving solid growth in loans and deposits, expanding our customer base, and strengthening our presence in the key markets in Central Texas. which translated into an expanded balance sheet. Specifically, assets increased by 23.2%, loans by 19.5%, and deposits by 23.5% from year-end. Equally important is the strength of our underlying business. Our loan pipelines are robust, customer activity is healthy, and the strategic investments we continue to make in our platform are already gaining traction. This includes enhancements to our leadership team and the purposeful build-out of several key divisions. Within our corporate banking group, we have added seasoned, best-in-class relationship bankers in Houston and Dallas, including experienced teams focused on select, dedicated verticals. We also launched our asset-based lending platform, adding to our credit product suite. We believe these will be an important contributor to our loan growth and fee income. In addition, we have expanded our public funds and correspondent banking teams, further diversifying our funding base and expanding our reach across Texas and beyond. While many of these teams are still early in their ramp up, we believe these combined investments position us to drive organic growth at meaningful levels, reinforcing our long-term goals of scalability, disciplined growth, and sustainable profitability. Overall, we believe the first quarter demonstrates headway in building a stronger franchise, while staying true to our fundamentals that have consistently driven our success and performance. With that, I'll turn the call over to John to walk through the financial results and provide additional details on the quarter.
Thank you, Bart, and good morning, everyone. As Bart mentioned, the Keystone transaction is the primary factor influencing the quarter-over-quarter changes in our financial results. Keystone added roughly 20% to our loans and deposits and roughly $3.3 million in merger-related, non-recurring, non-interest expense. I'll focus my comments on providing clarity around those impacts along with our underlying trends. Starting with expenses, our non-interest expenses were higher during the quarter. largely due to Keystone-related items, as well as sign-on bonuses for several recent senior-level hires. During the first quarter of 2026, the company recorded $3.3 million in Keystone merger-related non-interest expenses, primarily consisting of $1.6 million in legal and professional, $1.3 million of salary and benefits, and $400,000 miscellaneous. Additionally, the company recorded $644,000 in salary and benefits attributable to sign-on bonuses during the first quarter. This is the second consecutive quarter of above-average hiring. These expenses are non-recurring and reflect the near-term cost of integrating Keystone and onboarding new talent. Diluted earnings per share for the quarter was $0.88, but excluding merger expenses would have been 102. Also excluding merger expenses, return on average assets would have been 1.25 percent. Net interest income was 53.6 million for the first quarter, marking a 2.7 percent increase from the previous quarter, driven by higher than average earning assets following the merger and offset by a lower net interest margin. The margin decline resulted primarily from the merger, but also from the reversal of $996,000 in accrued interest from two loans placed on non-accruals. Turning to loan growth, excluding Keystone, loans were up approximately $45 million for the quarter, whereas quarterly average balances were up over $100 million. And the second quarter has started even stronger, with April month-to-date loans already up over 100 million. Pipelines are full and some of our new lenders are just getting started. Lastly, I might mention that tangible book value ended the quarter at $31.97, which compares favorably to $31.69, which was the guidance that we gave in October of last year when we announced the acquisition. Most of our expense savings will be realized in the third and fourth quarters of this year. With that, I'll turn the call over to Audrey to discuss asset quality.
Thank you, John, and good morning, everyone. I'd like to provide a summary of asset quality for the first quarter. Non-performing assets to total assets increased by 11 basis points from the prior quarter. The increase in non-performing assets was primarily due to one CRE loan of approximately $17.1 million being placed on non-accrual, as well as the addition of $1.8 million in purchased credit-impaired loans from the Keystone acquisition, which are on non-accrual. This increase was partially offset by a $5 million decline in loans over 90 days past due and still accruing. When placing the $17.1 million loan on nonaccrual, as well as a $602,000 loan, we reversed $996,000 in accrued interest, which impacted our margin. On April 7th, the bank foreclosed on the property, securing the $17.1 million CRE loan. Our LTV on the property, based upon a 2026 appraisal, is just under 70%. It is also worth noting that $5.3 million of our non-accrual loans are fully guaranteed by the SBA. The allowance for credit losses totaled $51.5 million, representing 0.98% of gross loans as of March 31, 2026, compared to $43.9 million, or 1% as of the previous quarter end. The increase was primarily due to the day one allowance related to the Keystone acquisition. We recorded net recoveries of $4,000 in the first quarter. Our loan portfolio remains well diversified and reflects organic production as well as contributions from the Keystone portfolio with allocations consistent with the prior year. Commercial and industrial TRIO loans are 42% of total loans, while construction, development, and land loans were 17%. Owner-occupied CRE was 11%, and non-owner-occupied CRE was 18%. I'd be happy to answer any questions regarding asset quality during our question and answer session. With that, I'll turn the call back to Bart. Bart?
Thank you, Audrey. As we move further into 2026, we are increasingly confident in the direction of the franchise and the strategic foundation we have put in place. We believe we are building one of the best platforms in the country and across our footprint. With our expanded corporate banking, including ABL, along with our public funds and correspondent banking capabilities, which position us to continue scaling the company in a disciplined and thoughtful way. We believe these groups combined with our core teams represent durable, long-term growth engines that will drive organic growth, diversify our balance sheet, and deepen client relationships over time. We believe when these teams gain scale, they will drive even stronger pipelines and profitability, with the potential to generate over a million in fees per month and extend our quarterly loan growth target range to $75 million to $125 million. million. Underpinning all of this is our continuous improvement mindset, which is now deeply embedded across the organization. What started as a 1% improvement challenge has evolved into a culture centered on execution, accountability, and delivering consistency across outcomes for our stakeholders. And we believe that continues to be a key differentiator for Third Coast. Ongoing consolidation across the banking sector continues to strengthen our scarcity value and positions us at the early stages of unlocking additional upside for our franchise. Finally, I want to thank our team for their exceptional work this quarter and extend a warm welcome to our Keystone customers and shareholders. We appreciate your continued support in Third Coast and look forward to building on this momentum. With that, I'll turn the call back over to the operator to begin the question and answer session. Operator?
Operator
Thank you. And at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 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. One moment, please, while we pull for questions. And your first question comes from Matt Olney with Stevens. Please get your question.
Hey, thanks, and good morning. I'll start with the net interest margin. As you guys mentioned, some noisy results this quarter with Keystone, and I heard the commentary about the non-accrual impact of the margin as well. Any color you can give us as far as expectations for the margin in the near term? Sure.
So, Matt, this is John. You know, last quarter I guided to a number in kind of the 390 range, and I think third co's standalone before this interest reversal, that's exactly where we were. So the interest reversal is worth about four basis points, and then, of course, we merged with Keystone. Their margin was about 350. So you average kind of all that out and assuming nothing unusual next quarter, and I think we're about 375 for the margin going forward.
Appreciate that, John. And then on the long growth front, it sounds like two queues off to a really strong start. We'd love to hear more about the drivers of what you're seeing there. Any of this from the new producers hired or market disruption, just more commentary on the pipeline would be helpful. Thanks.
Yeah, Matt, very observational of you. I think it's both what you mentioned. One, we have both some new team members and some team members that we heard last year that are, you know, obviously have some good volumes. And at the same time, we are seeing some opportunities from some of the disruption in the market. And I think the combination has actually, you know, basically really got a really robust pipeline. As a matter of fact, I think the first quarter maybe masked a little bit of how good it was because we had an exceptional number of payoffs or otherwise our loans would have been up quite a bit more. So we're still seeing the pipelines grow right now, and we feel pretty good to where we stand. The market's good. These producers that we're bringing are highly productive and have a loyal customer base. And at the same time, some of the disruption is starting to play out to where we're able to basically compete and win some business that we've been after for a while. So all in all, despite all the other macro headwinds, it's actually looking really good for us in terms of our growth and volumes.
Yeah, and Matt, I might add that, you know, with the market disruption, that's really what's given us the opportunity to hire a lot of these people that we've talked about over the last couple of quarters. So, you know, we've paid sign-on bonuses to some of these people, again, two quarters in a row. I don't necessarily envision that happening in the second quarter of this year, but many of the people that we hired were exceptional. They were great opportunities, just ones that we couldn't pass up that will, you know, very much contribute to our growth going forward. But it's not an every quarter sort of thing. I think I said the expenses related to that were about $650,000, and we likely, I mean, who knows, maybe we have other opportunities, but I don't think it'll be of that magnitude. I think most of who we wanted to hire recently, we've hired in the last six months.
And if I could add on to that, that like the folks that we've hired are people that have had long term relationships with the existing leadership here. So these aren't new people that are, you know, that are unknown to us or people that we either worked with before or had long time relationships with that we've been after for a while. And once again, similar to what happened right after the pandemic, there's a lot of dislocation and disruption that's allowed us to finally get them over the fence.
Yeah. Okay. Makes sense. And you guys seem to be in a nice spot to take advantage of all disruption. All back in the queue. Thank you. Thank you.
Operator
Your next question comes from Michael Rose with Raymond James.
Please take your question. hey good morning guys thanks for uh taking my questions maybe just following up on uh mass long growth question it looks like in the the quarter um if i exclude keystone um you were kind of below that that 75 to 100 million range that you talked about previously was there any sort of you know elevated paydowns or anything that may have impacted the organic growth or maybe if you can just parse out what it is and then you know i think bart i heard you say you know given some of the hires that you've made over the past couple quarters that that maybe that range on a go forward basis is 75 to 125 so a nice kind of uptick there um i assume that there's um you know some some time that it will take for some of the newer hires to get ramped up so you know should we expect uh an acceleration to kind of the mid to higher point of that range uh in the back half of the year just just trying to frame out the the long growth uh outlook thanks Yeah, good comments.
Early in the quarter, we actually had such strong loan growth that we thought were going to be above budget on it. But then we had some significant pay downs that came through. And the timing of it, we thought, was going to be spread out over a few quarters. And it just happened to be kind of all in one quarter. And they were significant enough that they offset a lot of that growth. So I don't expect that to continue. Those headwinds probably kind of came first quarter. We'll maybe have a few, you know, I always have a few surprise pay downs as somebody sells or what have you. But I think the pipeline has grown that if we even mirror what we did last quarter, we're going to have pretty strong net loan growth. So that's why, you know, John and I and Audre talking that we feel like it's probably going to be this year is going to turn out to be a little better than what we even anticipated on the loan growth. Having said that, obviously, it's always lumpy, you know, can't control the timing of when these loans close. But, you know, prospectively, we look like it's going to be a very strong loan year for us.
Very, very helpful. And then just as it relates to the $17.1 million credit that was added to the Nautic Rule, is that a credit that you previously talked about? I just, I don't remember or recall. And then it seems like you have an appraisal on the property. I mean, what's kind of the expectation here for resolution? Is it a couple quarters? I know it's hard to kind of, you know, parse out individual credits, but, you know, just given the magnitude of size here, just trying to better understand when it could eventually come out of the run rate.
Sure. I can give you some more color on that. I don't think we have talked about the loan previously, but it is a seasoned loan. We originated it in 2021, so it's been on the books and paying for many years. They had a significant decline in occupancy due to a tenant bankruptcy. So, that kind of precipitated the issue there. The LTV, it's just under 70 percent based on a new appraisal within the last 90 days, and that's the as-is value on the current occupancy. We're getting ready to list it with a national broker, and we're working on some additional leases to increase the occupancy. But yeah, I would think, yes, it's probably going to be a couple quarters.
Okay, perfect. I appreciate that, Audrey. Maybe if I could just slip in one more. It looks like on the deposit side, the growth on an organic basis was actually pretty strong. Obviously, some of the mixed change was due to the acquisition. But just as we kind of think about deposit growth, you know, as we move forward. You know, I think, Bart, you previously talked about it, you know, kind of somewhat matching, you know, loan growth. Is that kind of still the expectation there?
Yeah. So, Michael, one thing that I wanted to point out there, you know, we had a lot more cash at quarter end. And, you know, the reason for that is we sold the Keystone investment portfolio 100% of it, thinking that we were going to fund up a bunch of loans and replace it before quarter end, and that didn't happen because we had those big loan payoffs. So their investment portfolio, it was roughly $75 million. In April, our loans were up more than $100 million, so that's going to be a big help to the margin. And just the fact that the loan-to-deposit ratio was lower for the quarter, we do try to fund to the extent that we can just in time funding and we really thought we were going to have more loan fundings. We weren't expecting the payoffs. They almost all came out of one lender's portfolio who's no longer with the bank, and we weren't sad to see those loans pay off. But going forward, I'd expect the loan-to-deposit ratio to creep up a little bit more, and we've already reallocated that cash into loans, so that should help the margin as well.
Okay, yeah, that helps explain. I appreciate the color and context.
Operator
And your next question comes from Woody Lay with KBW. Please do your question.
Hey, thanks for taking my question.
I had a couple of follow-ups on credit. I was just curious, are there any friends to note and criticize your classified ones this quarter?
Well, obviously, the $17.1 million, that was an increase in classifieds for the quarter. Um, we had, um, a couple of CRE loans that, uh, were downgraded during the quarter, but they are both current now. We've got low LTVs on current appraisals. Those LTVs are closer to the 50, 60 percent, and we're not expecting any issues there. Those are actually moving in the right direction.
And if you take out the $17 million, it really is, you know, pretty moderate.
Yeah, if you take out the $17 million, in fact, classifieds were up about $15 million. So we actually had some net reduction there if you excluded that $17 million. Our NPAs actually would have declined 15 basis points had it not been for the $17 million loan.
So I think I would comment that I still feel the portfolio looks really good. I mean, we're not seeing any macro trends or any micro trends on it. I think the story was the one property we took back. Other than that, I think we're seeing some really strong economic environment for us. We're seeing basically our customers very stable and navigating through all the chaos and disruption that's out there. Portfolio looks pretty good, I think.
That's great to hear. And maybe just last for me, I was just looking for an update on how the integration of Keystone is going, when core conversion is scheduled, and do you still feel good about all the assumptions that were laid out at deal announcement?
Yeah, I mean, I think it's actually going better than expected. It's a good cultural fit. We love the market, and, you know, thus far, the team's really kind of rallied and kind of worked well together. I'd say the conversion is going to be in July, and thus far it's been going very, very well. If you remember, we did do a core conversion last summer, and so I guess everybody's already, you know, acclimated to change, and we're very familiar with our system. So, you know, converting a bank onto our system versus doing a whole bank conversion is a whole lot easier. So, and by the way, you know, we have a whole ERM team and project management team that, you know, kind of rides herd on this. And so it's very organized and, you know, we feel like everybody has the up-to-date training to be able to make this pretty seamless.
Yeah, and Woody, as far as the assumptions and the cost saves, you know, we, you know, we're running two different banks today on two different systems. So, obviously, that's more expensive, so we won't realize any of the cost saves from data processing until August will be the first month of savings there. You know, Keystone needed a full-blown financial statement audit, so we didn't have any savings there. So, going forward, we do expect more. We obviously don't need auditors out there anymore. We won't have examiners, obviously. The data processing will happen in the third quarter. Most of the expense saves are still to come. I think we had forecast $6 million in savings, and a lot of it is those couple of categories, the professional fees and the data processing fees and things like that.
All right. Well, I appreciate you all taking my questions. Thank you.
Operator
Your next question comes from Bernard von Gischke with Deutsche Bank. Please state your question.
Hey, guys. Good morning. Maybe just on expenses from here, how do we think about maybe whether it's a quarterly run rate for the rest of the year or how to think about it just from here until the end of the year, just given some of the lumpy M&A-related costs, which I believe they're non-recurrent that you've highlighted. Not sure if there's any spillover in other merger-related costs that you want to highlight. And then just those cost saves as they come in? Are they fully realized in 3Q and 4Q, or does that spill over in 27? Just any thoughts you can break out in expenses?
Yeah, so the last thing first, I think by January 1st of the next year, we will have 100% of the cost saves, but some of them we won't have until year end, some things that we're accruing for, some expenses. But, you know, as far as expense run rate. It's hard to put a handle on. I mean, obviously, you could take this quarter and minus out the $3.3 million and then maybe the extra, you know, bonuses that we paid out. That's another $650,000. I mean, that's kind of a good starting point for that. But, you know, we're spending time and effort on, you know, conversion, merger-related stuff. So, we're not quite to a point where I can give you a good run rate number, but it's certainly this quarter minus the merger expenses and probably more than that.
Okay, got it. And then what about like fee income? Just any thoughts on, you know, with the new hires, obviously with Keystone, just any things we should be thinking about going forward or how we can think about for the rest of the year and fee income?
Yeah, so we guided to $4 million for the quarter, and that's almost exactly where we were. I think it'll be a little bit higher going forward, but again, we're not a huge fee income shop, so it's not going to be materially different. I think it's going to be between that four and four and a half million range. Thanks for taking my questions.
Operator
Thank you. Your next question comes from Matt Olney with Stevens. Please take your question.
Hey, thanks for taking the follow-up. Just want to go back to the net interest margin outlook, John, I think you said that 375. I was struggling to get to that number. I heard your commentary about the liquidity and the impact of that kind of late in the quarter and so far early what you're seeing in April. Any other color that can help us get to that 375 number? Was there any impact of securitization or anything else that can help kind of speak to the noise that we saw and moving from the results in the first quarter to that 375 in 2Q?
Yeah, I think if you, you know, add back the reversal of interest, that's going to be worth about four basis points. So it's not too terribly far from the 375 just to start with. I think the rest of where I'm thinking we get there is through better loan fees. The loan fees were a little light this quarter. It looks like they're running heavier. We didn't talk about securitizations. We obviously didn't do one in the first quarter, but we are, you know, we're always looking at it, working on them. I can't say for sure that we'll do one in the second quarter, but I think the odds are probably more likely than not that we will be able to do another securitization this quarter. And if we do, it'll look similar to the last ones where there's a fair amount of fee income associated with it, and that goes into the margin. And I'm not considering that in the 375 number. That would push it even higher if we were able to do that.
And when we start running a little bit higher loan-to-deposit ratio, that will certainly help. Again, we had such a strong start the first part of the quarter. If we hadn't had the payoffs, I think that would have made, you know, somewhat of a difference on the margin as well. And as we're able to kind of dial that in a little bit, you know, I think that's going to kind of help our margin over the next couple of quarters.
Yeah. Well, definitely some noisy trends given all the moving parts, but I appreciate you kind walking through all the items. Thanks, guys.
Operator
Thank you. Your next question comes from Dave Storms with Stonegate. Please get your question.
Morning, and thank you for taking my questions. Just wanted to maybe start with maybe some underwriting following the merger. Has there been anything that's been learned either from the Keystone way of doing things or the Third First way of doing things or maybe any synergies that can be picked up in underwriting?
I think it's all kind of in process. So they had a few products a little different from ours that's been kind of interesting that we might be able to, you know, take and evolve. And at the same time, you know, I think being able to overlay our bigger legal lending limit and some of the things that we do, particularly on the corporate side of it, is going to open up some business for them on some probably bigger loans and bigger relationships. But it's only been, you know, a few weeks since we, you know, brought them on board. And I think that's, you know, going to play out as we kind of get this thing integrated. And it'll be a lot easier when they're on our system as well.
And then just thinking about the long-term NIM trends, you know, before Keystone, you were trending in the plus 4% range. I guess, what would it take to get the portfolio back to that? Again, thinking over the longer term.
I'm sorry, I didn't follow the question, Dave.
No, sorry. Just long-term NIM trends. I know you're talking about maybe three and three quarters, but just before the merger, you were around 4%, a little north of that. Is it possible to get back to that range, and kind of what would that take?
That's probably optimistic at that point because we have a relatively high cost of funds. I mean, the way we would get there would be through more loan fees, which we think is possible. I mean, that certainly would be a goal, an aspirational sort of goal number. We think as we get bigger and lead more deals, there'll be more loan fees associated with it that'll help the margin. But 4% is probably pretty optimistic for our way of doing business. And I think it's way up here anyway.
Thanks for taking my questions.
Operator
Thank you. And there are no further questions at this time. I'll hand the floor back to Mr. Carraway for closing remarks.
Well, thank you, Diego. And thank everybody for joining us for our earnings call, first one in 2026, and look forward to talking to you all next quarter. Thank you for your support.
Operator
Thank you. This concludes today's call. I'll pardon me to disconnect.
