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TC

Third Coast Bancshares, Inc. (TCBX)·Q2 2024 Earnings Summary

Executive Summary

  • Record profitability with diluted EPS of $0.63 and basic EPS of $0.70; net income rose to $10.8M as NIM edged up 2 bps to 3.62% and the efficiency ratio improved 272 bps QoQ to 61.39% .
  • Deposit mix improved: noninterest-bearing demand deposits rose $40.5M QoQ to 12.0% of total, though total deposits fell 4.8% sequentially to $3.86B (seasonality and pricing mix) .
  • Credit costs rose: NPL ratio increased to 0.65% (from 0.58%), driven by one $7.9M CRE relationship placed on nonaccrual (69% LTV; management does not anticipate loss); net charge-offs increased to 0.20% of average loans (annualized) .
  • Outlook intact with tighter expense discipline: management reaffirmed >10% NII growth and lowered OpEx growth outlook to <5%; NIM guided stable around ~3.60%, loan pipelines $50–$100M per quarter, loan-to-deposit ratio targeted 95–98% .
  • Note on estimates: S&P Global consensus estimates were unavailable during this session; therefore, beats/misses vs Street cannot be confirmed (see Estimates Context).

What Went Well and What Went Wrong

  • What Went Well

    • Efficiency and profitability: “Efficiency Ratio continues to improve” to 61.39%; record EPS; ROAA ~0.97% .
    • Mix improvement: noninterest-bearing DDAs rose $40.5M QoQ to 12.0% of deposits; book value and tangible book value per share increased QoQ to $26.99 and $25.60, respectively .
    • Cost discipline and tech enablement: “commitment to improving profitability through operational efficiencies” and adoption of “advanced technologies” to streamline operations and stabilize expenses (CEO) .

  • What Went Wrong

    • Deposit outflows: total deposits declined 4.8% QoQ to $3.86B (mix improved but balances fell); average deposit cost rose 13 bps QoQ to 4.22% .
    • Credit normalization: NPLs rose to $24.4M (0.65% of loans) vs 0.58% in Q1; net charge-offs increased to $1.83M (0.20% annualized) .
    • Loan growth muted by paydowns/strategy: loans grew only $12M QoQ as TCBX let lower-spread municipal BANs run off (-$40M) and expects ~$40M more runoff in Q3 to zero (CFO) .

Financial Results

MetricQ2 2023Q1 2024Q2 2024
Net Interest Income ($MM)$34.096 $38.079 $38.858
Noninterest Income ($MM)$2.280 $2.343 $2.888
Total Net Revenue ($MM) (NII + Noninterest)$36.376 $40.422 $41.746
Net Income ($MM)$8.891 $10.367 $10.796
Basic EPS ($)$0.57 $0.68 $0.70
Diluted EPS ($)$0.53 $0.61 $0.63
Net Interest Margin (%)3.82% 3.60% 3.62%
Efficiency Ratio (%)65.52% 64.11% 61.39%
ROAA (%) annualized0.96% 0.95% 0.97%

Segment (Loan Portfolio) breakdown (period-end balances, $MM):

CategoryQ2 2023Q1 2024Q2 2024
CRE – Non-farm Non-residential Owner-Occupied$513.9 $510.3 $499.9
CRE – Non-farm Non-residential Non-Owner-Occupied$547.1 $598.3 $612.3
Residential$310.8 $345.9 $349.5
Construction, Development & Other$595.6 $725.2 $756.6
Farmland$24.2 $29.7 $31.0
Commercial & Industrial$1,164.6 $1,350.3 $1,361.4
Consumer$2.9 $2.4 $2.2
Municipal & Other$175.0 $184.2 $145.2
Total Loans$3,334.3 $3,746.2 $3,758.2

Key KPIs and Credit Metrics:

KPIQ2 2023Q1 2024Q2 2024
Cost of Deposits (%)—4.09% 4.22%
Noninterest-Bearing Deposits (% total)—10.5% 12.0%
Loan-to-Deposit Ratio (%)—92.5% (Q1-end, CFO) 97% (Q2)
NPLs / Total Loans (%)0.30% 0.58% 0.65%
NPAs / Total Assets (%)0.25% 0.47% 0.55%
Net Charge-offs / Avg Loans (annualized, %)0.01% 0.08% 0.20%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Interest Income growth (YoY)FY 202410–15% (Q4 call) “Exceed 10%” reiterated (Q1 & Q2 commentary) Narrowed to ≥10%
Noninterest Expense growth (YoY)FY 20245–10% (Q4 call) <5% (Q1 and reiterated Q2) Lowered
Net Interest Margin2024Flat into Q2 (Q1 call) ~3.60% range, stable across scenarios (Q2 call) Maintained/stable
Loan GrowthFY 2024 / per quarter$300–$400M FY (Q1) $50–$100M per quarter; pipeline strong (Q2) Reframed; maintained
Loan-to-Deposit Ratio202494–98% (Q1 call) ~95–98% (Q2) Maintained
Effective Tax RateQ3 2024—~22.5% (Q2) New
Rate Sensitivity2024More neutral; 5-year swap added in Q4 Shifted to ~0.9% liability sensitive (Q2) Tilted to liability sensitive

Earnings Call Themes & Trends

TopicQ4 2023 (Q-2)Q1 2024 (Q-1)Q2 2024 (Current)Trend
Technology/OperationsNew platforms; workforce/expense actions; gains in AOCI Automation/software; 1% initiative “Advanced technologies” driving efficiencies (CEO) Improving
Deposit Mix/NIBDeposit campaign success; NIB down QoQ NIB fell to 10.5%; deposit initiatives ongoing NIB up to 12.0%; mix improved Improving
Rate Sensitivity/NIMSwap executed; neutral stance NIM expected flat into Q2 Shifted to 0.9% liability sensitive; NIM ~3.60% More liability sensitive
Credit QualityNPAs ~0.39%; low net C/O NPLs up modestly; ACL 1.02% NPLs up to 0.65% due to one CRE relationship, no expected loss Slightly weaker but controlled
Expense Discipline/EfficiencyExpenses down QoQ; positive op leverage <5% OpEx growth focus Third straight OpEx decline; sub-60% efficiency in sight Improving
Branch/Footprint—Opened Austin branch Opened Austin & The Woodlands; one more potential Selective expansion
Municipal LoansGrowth in Q4 Down $15M -$40M run-off; another ~$40M to zero in Q3 Running off

Management Commentary

  • “Third Coast's second quarter performance highlights our commitment to improving profitability through operational efficiencies… adoption of advanced technologies… improved metrics, including increased margins, stabilized expenses, and a more favorable deposit mix” — Bart Caraway, CEO .
  • “Moved from 1.4% asset sensitive to 0.9% liability sensitive… loan-to-deposit ratio was 97%… expect effective tax rate ~22.5% in Q3” — John McWhorter, CFO .
  • “Classified assets declined $20M or 33.4%… NPLs increased to 0.65% due primarily to one $7.9M CRE relationship… LTV 69% and we do not anticipate a loss” — Audrey Duncan, CCO .
  • “We continue to expect [loan] growth of $50 million to $100 million per quarter… net interest income growth to exceed 10%… noninterest expense growth of less than 5%” — CEO .
  • On efficiency: “Once we get to 60%, our next goal is going to be 58% or 56%… growing top line faster than expenses will continue for many quarters” — CFO .

Q&A Highlights

  • Loan outlook and municipal runoff: Loan growth came in below projections due to higher paydowns and choice not to bid on low-spread municipal BANs; ~$40M muni runoff in Q2 and another ~$40M expected in Q3 to zero; loan pipeline $50–$100M per quarter .
  • NIM trajectory: Q2 NIM slightly better than expected; mix was the driver; NIM expected around ~3.60% whether rates stay or the Fed cuts (CFO) .
  • Expenses and efficiency: OpEx run-rate targeted $26–$26.5M; sub-60% efficiency ratio possible by Q3/Q4 with modest growth and flat expenses (CFO/CEO) .
  • Deposit mix/NIB and branches: Focused initiatives to grow NIBs despite tough backdrop; added two de novo branches (Austin, The Woodlands); one more potential location .
  • Fees: SBIC income was unusually high this quarter (~$0.6M) and volatile; underlying loan fee momentum expected to keep total fees around ~$2.5M/quarter (CFO) .

Estimates Context

  • S&P Global (Capital IQ) consensus estimates for Q2 2024 EPS and revenue were unavailable during this session due to request limits; therefore, we cannot confirm beat/miss vs Street this quarter. Values would ordinarily be sourced from S&P Global and compared to actuals reported above. Values retrieved from S&P Global were unavailable in this session.

Key Takeaways for Investors

  • Mix-led operating leverage: NIM stability (~3.60%), rising NIB mix, and disciplined OpEx (<5% growth) underpin improving efficiency; a sub-60% ratio in the near term would be a visible catalyst .
  • Growth quality over quantity: Modest loan growth as low-yield municipal balances roll off should support loan yield and NIM resilience, even if balances are “lumpy” (CFO) .
  • Credit normalization manageable: Higher NPLs stem from a specific CRE relationship with strong collateral (69% LTV) and no expected loss; NCOs up but within conservative ranges; ACL steady at 1.02% .
  • Balance sheet positioned for rate cuts: Shift to mild liability sensitivity and prior swap actions reduce downside NIM risk if the Fed eases; deposit repricing strategy in place (CFO) .
  • Capital accretion and flexibility: Bank upstreamed $10M to the HoldCo and paid down $7M of 7.85% debt; loan-to-deposit ratio targeted 95–98% supports self-funded growth .
  • Watch list items: Sequential deposit declines and rising average deposit costs; further trajectory of NIB growth and fee normalization post-SBIC strength are key to near-term multiples .
  • Medium-term thesis: Continued efficiency gains, stable NIM, and conservative credit management in attractive Texas markets argue for improving ROA/ROE and potential re-rating as TCBX executes on sub-60% efficiency and sustained NII growth .

Additional References (Q2 Source Documents)

  • Q2 2024 press release and financial tables .
  • Q2 2024 8-K (Item 2.02; includes Exhibit 99.1 press release) .
  • Q2 2024 earnings call transcript (prepared remarks and Q&A) .
  • Prior quarter references: Q1 2024 press release/call and Q4 2023 press release/call .