Third Coast Bancshares' Q3 2025: Contradictions Emerge on Loan Growth, NIM Forecasts, and Securitization Impact

Date of Call: July 27, 2023

Financials Results

• EPS: $0.53 diluted EPS, down 4% sequentially (Q1 $0.55)
• Gross Margin: Net interest margin 3.82%, up 3 bps sequentially and up 5 bps year-over-year

Guidance:

• Expect $100M–$200M net loan growth from now through year-end.
• Non-interest expense for remainder of 2023 anticipated around ~$24M (flattish).
• Margins may compress modestly (management estimated ~5 bps down next quarter) but balance-sheet growth should lift net interest income.
• Exiting Auto Finance to save ~$500k and redeploy ~$40M of loans into higher-yielding assets.
• Continue conservative balance-sheet management: prioritize deposit growth, liquidity and efficient capital allocation.

Business Commentary:

* Strong Loan and Deposit Growth Amid Selectivity: - Total loans held for investment grew to $3.33 billion, 3.8% higher sequentially and 21.3% more than a year ago. Deposits reached $3.41 billion, 2.6% over the prior quarter and 17.6% more than the same period last year. - For the remainder of 2023, net loan growth is expected to be $100 million to $200 million, limited by deposit growth and disciplined credit/rate selection.

• Net Interest Margin Improvement and Outlook:

  • Net interest margin improved 3 basis points quarter-over-quarter and 5 basis points year-over-year to a strong 3.82%, driven by increased loan yields.

  • The margin is expected to face pressure in the coming quarters, possibly down 5 basis points, but balance sheet growth is expected to offset this, keeping net interest income on an upward trend (up about $1 million per quarter over the last year).

• Credit Quality and Provisioning:

  • Nonperforming assets to total assets were 25 basis points, the same as the prior quarter and down from 33 basis points in Q2 2022. Nonperforming loans to loans held for investment were 30 basis points, down 10 basis points from the prior year period.
  • Under the new CECL methodology, the loan loss provision for Q2 was $1.4 million, with the Allowance for Credit Losses (ACL) to total loans increasing to 1.12% from 97 basis points in Q2 2022.

• Expense Management and Strategic Initiatives:

  • Non-interest expense totaled $23.8 million for Q2 2023, up from $22 million in Q1 2023. For the remainder of 2023, non-interest expense is expected to be in the range of $24 million.
  • The company is exiting its Auto Finance division, realizing $500,000+ in direct expense savings, and reallocating the $40 million in loans to higher-earning assets, demonstrating a focus on efficient capital allocation and cost discipline. Recent efforts also include buying $20 million in bank sub debt at yields above 10% to enhance portfolio returns.

• Balance Sheet Composition and Risk Management:

  • Office exposure (non-owner occupied) is 2% of total loans, with owner occupied at 2.3% and medical office at 1.5%. All office loans are in Texas except a small loan, and the portfolio has handled market conditions well with minimal classified assets.
  • The company has $1.7 billion in available borrowing lines, providing a coverage ratio of 1.7:1, and continues to manage liquidity conservatively. Unwinding of pay-fixed swaps has provided a 70 basis point benefit to interest expense.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted improving NIM (3.82%, +3 bps Q/Q, +5 bps YoY), loans up 3.8% sequentially and 21.3% YoY, deposits +2.6% Q/Q and +17.6% YoY, tangible book value rose to $22.82, and strong asset quality (nonperforming assets 25 bps, down from 33 bps).

Q&A:

• Question from Graham Dick (Piper Sandler): Update on loan growth guidance for the year and outlook for margin pressure in the back half?
  Response: Management expects $100M–$200M net loan growth for the remainder of the year; anticipates modest margin pressure (roughly ~5 bps potential decline next quarter) but believes balance-sheet growth will raise net interest income.

• Question from Bernard Von Gizycki (Deutsche Bank): Can you discuss the sequential increase in fees (derivative fees) and the Mayfair partnership to provide enhanced FDIC insurance—any updates on uninsured deposits and who bears costs?
  Response: Derivative fee pickup is from customer hedges and opportunistic, not expected as a consistent run-rate; the Mayfair partnership (and similar fin-tech deposit relationships) is driving deposit growth via enhanced FDIC services and is expected to grow, with Third Coast serving as the depository institution for those relationships.

• Question from Jordan Ghent (Stephens Inc): What is your CRE/office exposure and any credit migration or special mention movement this quarter?
  Response: Office exposure is minimal: ~2% non-owner occupied, ~2.3% owner-occupied, ~1.5% medical (mostly Texas); portfolio remains stable with only one small classified office loan — no material credit migration reported.

• Question from Michael Rose (Raymond James): On expense outlook — are you signaling hiring will slow and what offsets keep run rate flattish? Also, rationale and impact of exiting auto finance?
  Response: Non-interest expense expected around $24M; management is monitoring lines for efficiencies, will slow/optimize hiring where needed; exiting auto finance yields ~$500k in direct savings and redeploys ~$40M to higher-earning loans to improve returns and operating leverage.

• Question from Unidentified Analyst (KBW): You targeted 1% ROA—how committed are you to that target given divestiture of auto finance and balance-sheet optimization?
  Response: Management says they are ahead of schedule (YTD ROA ~99 bps), view 1% as a baseline rather than a ceiling, and aim to exceed it through balance-sheet optimization and line-by-line performance improvements.