Third Coast Bancshares, Inc. Q1 FY2026 Earnings Call

Greetings, and welcome to the Third Coast Bank First Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Natalie Hairston, Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our first quarter 2026 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McWhorter, Chief Financial Officer; and Audrey Duncan, Chief Credit Officer. First, a few housekeeping items. There will be a replay of today's call, and it will be available by webcast on the Investors section of our website at ir.thirdcoast.bank. There will also be a telephonic replay available until April 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, 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 Caraway. 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 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 the 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. John?

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 nonrecurring noninterest expense. I'll focus my comments on providing clarity around those impacts, along with our underlying trends. Starting with expenses. Our noninterest 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 noninterest 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 nonrecurring 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 $1.02. Also excluding merger expenses, return on average assets would have been 1.25%. Net interest income was $53.6 million for the first quarter, marking a 2.7% 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 nonaccrual. 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 $31.7, 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. Nonperforming assets to total assets increased by 11 basis points from the prior quarter. The increase in nonperforming assets was primarily due to one CRE loan of approximately $17.1 million being placed on nonaccrual as well as the addition of $1.8 million in purchased credit impaired loans from the Keystone acquisition, which are on nonaccrual. 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 7, 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 nonaccrual 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 1.00% as of the previous quarter end. The increase was primarily due to the day 1 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 actions consistent with the prior year. Commercial and industrial loans are 42% of total loans while construction, development and land loans were 17%, owner-occupied CRE was 11% and nonowner-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, we are positioned 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 $1 million in fees per month and extend our quarterly loan growth target range to $75 million to $125 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. 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.

And your first question comes from Matt Olney with Stephens.

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 nonaccrual impact to 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. Last quarter, I guided to a number in kind of the 3.90% range. And I think Third Coast stand-alone before this interest reversal, that's exactly where we were. So the interest reversal is worth about 4 basis points. And then, of course, we merged with Keystone; their margin was about 3.50%. So you average kind of all that out and assuming nothing unusual next quarter, I think we're about 3.75% for the margin going forward.

Okay. Perfect. Appreciate that, John. And then on the loan growth front, it sounds like 2Q is up 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.

That's a very observational question. I think it's both what you mentioned. One, we have both some new team members and some team members from last year that obviously have good volumes. At the same time, we are seeing some opportunities from some of the disruption in the market. The combination has created a really robust pipeline. In fact, I think the first quarter may have masked a little bit of how good it was because we had an exceptional number of payoffs; 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 where we stand. The market is 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, where we're able to 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.

Yes. And Matt, I might add that 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 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 very much contribute to our growth going forward. But it's not an every-quarter sort of thing. I think the expenses related to that were about $650,000 and we likely—who knows, maybe we have other opportunities, but I don't think it will be of that magnitude. I think most of who we wanted to hire recently, we've hired in the last six months.

If I could add on to that, the folks that we've hired are people that have had long-term relationships with the existing leadership here. These aren't new people that are unknown to us; many either worked with us before or had long-time relationships with us that we've been after for a while. 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.

Yes. 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.

Your next question comes from Michael Rose with Raymond James.

Maybe just following up on net loan growth. It looks like in the quarter, if I exclude Keystone, you were kind of below that $75 million to $100 million range that you talked about previously. Was there any sort of elevated paydowns or anything that may have impacted the organic growth? Or maybe if you can just parse out what it is. And then, I think, Bart, I heard you say given some of the hires that you've made over the past couple of quarters that maybe that range on a go-forward basis is $75 million to $125 million. So a nice kind of uptick there. I assume that there's some time that it will take for some of the newer hires to get ramped up. So should we expect an acceleration to kind of the mid to higher point of that range in the back half of the year? Just trying to frame out the loan growth outlook.

Yes. Early in the quarter, we actually had such strong loan growth that we thought we were going to be above budget on it. But then we had some significant paydowns 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 all in one quarter. They were significant enough that they offset a lot of that growth. I don't expect that to continue. Those headwinds probably occurred in the first quarter. We'll maybe have a few—there are always a few surprise paydowns when somebody sells or what have you. But I think the pipeline has grown such that if we even mirror what we did last quarter, we're going to have pretty strong net loan growth. That's why John and I have been talking that we feel like this year is going to turn out to be a little better than what we even anticipated on loan growth. Having said that, obviously, it's always lumpy. I can't control the timing of when these loans close. But 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 nonaccruals, is that a credit that you previously talked about? I just don't recall, and it seems like you have an appraisal on the property. What's the expectation here for resolution? Is it a couple of quarters? I know it's hard to parse out individual credits, but 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 and we originated it in 2021. It's been on the books and paying for many years. They had a significant decline in occupancy due to a tenant bankruptcy, which precipitated the issue. The LTV is just under 70% 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. Yes, I would think it's probably going to be a couple of 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 mix change was due to the acquisition. But as we think about deposit growth going forward, I think Bart you previously talked about it somewhat matching loan growth. Is that still the expectation?

Yes. One thing I wanted to point out is we had a lot more cash at quarter end because 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. Their investment portfolio 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. The loan-to-deposit ratio was lower for the quarter. We do try to fund to the extent that we can just-in-time, 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. Going forward, I'd expect the loan-to-deposit ratio to creep up a little bit, and we've already reallocated that cash into loans, so that should help the margin as well.

And your next question comes from Woody Lay with KBW.

I had a couple of follow-ups on credit. I was just curious, are there any trends to note in criticized or classified loans this quarter?

Well, obviously, the $17.1 million loan was an increase in classifieds for the quarter. We had a couple of CRE loans that 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% to 60% range, and we're not expecting any issues there. Those are actually moving in the right direction.

If you take out $17 million, it really is pretty moderate.

Yes. If you take out the $17 million, 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.

I think the portfolio still looks really good. We're not seeing any macro trends or any micro trends outside of that one property we took back. Other than that, I think we're seeing a really strong economic environment for us. Our customers are pretty stable and navigating through the chaos and disruption that's out there. The portfolio looks pretty good to me.

That's great to hear. And maybe just last for me. We're 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?

I think it's actually going better than expected. It's a good cultural fit. We love the market, and thus far, the teams have rallied and worked well together. I'd say the conversion is scheduled for July. Thus far, it's been going very well. If you remember, we did a core conversion last summer and everybody is already acclimated to change. We're very familiar with our system, so converting a bank onto our system versus doing a whole bank conversion is a lot easier. We have a whole ERM team and project management team that leads this, so it's very organized and we feel like everybody has the up-to-date training to make this pretty seamless.

Woody, as far as the assumptions and the cost saves, we're running two different banks today on two different systems, so that's more expensive. We won't realize any of the data processing cost saves until August, which will be the first month of savings there. Keystone needed a full-blown financial statement audit, so we didn't have any savings there. Going forward, we do expect more. We obviously won't need auditors out there anymore. We won't have duplicate examiners, and the data processing savings will happen in the third quarter. So most of the expense saves are still to come. We had forecast $6 million in savings and a lot of it is in categories like professional fees and data processing fees and things like that.

Your next question comes from Bernard Von Gizycki with Deutsche Bank.

Maybe just on expenses from here, how do we think about the quarterly run rate for the rest of the year, just given some of the lumpy M&A-related costs, which I believe are nonrecurring that you've highlighted? I'm not sure if there's any spillover in other merger-related costs that you want to highlight. And then as those cost saves come in, are they fully realized in 3Q and 4Q, or does that spill over into next year? Just any thoughts you can break out in expenses.

Yes. The last thing first: I think by January 1 of next year, we will have 100% of the cost saves, but some of them we won't have until year-end; some things we're accruing for and some expenses take time to realize. As far as an expense run rate, it's hard to put a precise handle on. You could take this quarter and minus out the $3.3 million and then maybe the extra bonuses that we paid out, that's another $650,000. That's a good starting point, but we're spending time and effort on conversion and merger-related activities, so we're not quite at a point where I can give you a precise run rate number. But it's certainly less than this quarter once you remove merger expenses, and more savings will come as we complete the conversion and other integrations.

Your next question comes from Matt Olney with Stephens.

Just want to go back to the net interest margin outlook. John, I think you said about 3.75%. I was struggling to get to that number. I heard your commentary about the liquidity and the impact of that late in the quarter and what you're seeing in April. Any other color that can help us get to that 3.75% number? Was there any impact of securitization or anything else that can help explain the noise moving from the results in the first quarter to that 3.75% in 2Q?

If you add back the reversal of interest, that's worth about 4 basis points, which helps get you closer to the 3.75%. I think the rest of where I'm thinking we get there is through better loan fees. The loan fees were a little late this quarter; it looks like they're running heavier now. We didn't do a securitization in the first quarter, but we're always looking at them and 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. If we do, it will look similar to the last ones where there's a fair amount of fee income associated with it, and that goes into the margin. I'm not considering securitization in the 3.75% number; that would push it even higher if we were able to do one.

When we start running a little bit higher loan-to-deposit ratio, that will certainly help. Again, we had such a strong start in the quarter and then had the payoffs. That would have made somewhat of a difference on the margin as well. As we're able to dial that in a little bit, I think that's going to help our margin over the next couple of quarters.

Yes. Definitely some noisy trends given all the moving parts, but I appreciate you walking through all the items.

Your next question comes from David Storms with Stonegate.

Just wanted to maybe start with underwriting following the merger. Has there been anything that's been learned either from Keystone's way of doing things or anything in underwriting synergies that can be picked up in underwriting?

I think it's all in process. They had a few products that were a little different from ours, and it's been interesting to see ideas we might be able to adopt and evolve at the same time. Being able to overlay our larger legal lending limits and some of our corporate practices is going to open up some business for them, probably bigger loans and bigger relationships. It's only been a few weeks since we brought them on board, and I think that'll play out as we get integrated. It will be a lot easier when they're on our system as well.

Understood. And then just thinking about long-term NIM trends, before Keystone you were trending in the low 4% range. Is it possible to get back to that range and what would it take?

That's probably optimistic at this point because we have a relatively high cost of funds. The way we would get there would be through more loan fees, which we think is possible. As we get bigger and lead more deals, there'll be more loan fees associated with it that will help the margin, but 4% is probably pretty optimistic for our way of doing business and is likely the upper end of what's achievable.

Thank you. And there are no further questions at this time. I'll hand the floor back to Mr. Caraway for closing remarks.

Well, thank you, operator, and thank you, everybody, for joining us for our 2026 first quarter earnings call. We look forward to talking to you all next quarter. Thank you for your support.

Thank you. This concludes today's call. All parties may disconnect.