Third Coast Bancshares, Inc. (NASDAQ: TCBX) is a rapidly growing community bank headquartered in Humble, Texas, with a strong presence in the Greater Houston, Dallas-Fort Worth, and Austin-San Antonio markets. The company demonstrated impressive financial performance, reporting annual net income of $33.4 million, annual revenue of $266.5 million, annual operating cash flow of $39.1 million, and annual free cash flow of $32.6 million in its most recent fiscal year.
Financials
In the second quarter of 2024, Third Coast Bancshares reported net income of $10.8 million, a 10.5% return on equity, and a record diluted earnings per share of $0.63. The company's net interest income grew 8.2% on an annualized basis, despite modest loan growth of $12 million for the quarter. Management attributed the lower-than-expected loan growth to higher-than-anticipated paydowns, particularly in the bank's tax-free municipal loan portfolio.
Loan Portfolio
The company's loan portfolio remains well-diversified, with commercial and industrial (C&I) loans representing 36% of the total, construction, development, and land loans at 20%, and owner-occupied and non-owner-occupied commercial real estate (CRE) loans at 13% and 16%, respectively. The bank's office portfolio, which makes up 3.8% of total loans, is primarily composed of Class B properties with some owner-occupied C-space, all located within the company's Texas footprint. The average loan-to-value (LTV) ratio for the office portfolio is approximately 60%, while the average LTV for medical office loans is around 55%.
Asset Quality
Regarding asset quality, Third Coast Bancshares reported a slight increase in nonperforming loans to total loans to 0.65% from 0.58% in the previous quarter, primarily due to one $7.9 million relationship being placed on nonaccrual. However, the bank's management noted that the combined LTV on this relationship is 69% based on 2024 appraisals and they do not anticipate a loss. Classified assets declined 33.4% during the second quarter, driven by the payoff of a $14.6 million substandard loan. Net charge-offs for the quarter totaled $1.8 million, with the majority related to a $1.2 million charge-off on a Main Street Lending program loan.
Operational Excellence
The company's focus on operational excellence and cost management has yielded positive results, with non-interest expenses declining for three consecutive quarters. Management is targeting a non-interest expense base in the $26 million range, which, coupled with expected net interest income growth of over 10%, should lead to further improvements in the company's efficiency ratio, which stood at 61.4% in the second quarter.
Outlook
Looking ahead, Third Coast Bancshares expects loan growth of $50 million to $100 million per quarter, driven by a robust pipeline. The company has also been proactive in managing its interest rate risk, shifting from a 1.4% asset-sensitive position to a 0.9% liability-sensitive position. This adjustment was made in anticipation of potential rate cuts, with management aiming to position the balance sheet in a more neutral stance.
The company's geographic footprint in the Texas triangle region, comprising the Greater Houston, Dallas-Fort Worth, and Austin-San Antonio markets, provides a solid foundation for growth. These markets have demonstrated resilience and continued economic expansion, which should benefit Third Coast Bancshares' lending and deposit-gathering activities.
Third Coast Bancshares has also been focused on expanding its branch network, having opened two new locations in the second quarter to bring its total to 18 branches. Management indicated that they have one more branch opening planned for the near future, after which they do not have any additional branch expansions in the works.
The company's strong capital position, with a Tier 1 leverage ratio of 11.8% and a total risk-based capital ratio of 13.3% as of March 31, 2024, provides ample flexibility to support future growth initiatives and withstand potential economic headwinds. Additionally, Third Coast Bancshares' focus on building a diverse deposit base, with a loan-to-deposit ratio of 97% as of the end of the second quarter, enhances its liquidity and funding profile.
Risks and Challenges
Risks to the investment thesis include potential softening in the Texas economy, increased competition in the company's markets, and the ability to maintain strong asset quality and credit underwriting standards as the loan portfolio grows. Additionally, the company's reliance on its Texas markets exposes it to regional economic fluctuations and potential natural disasters, such as the recent impact of Hurricane Beryl.
Conclusion
Overall, Third Coast Bancshares has demonstrated impressive financial performance, with strong profitability, improving efficiency, and a well-diversified loan portfolio. The company's strategic focus on operational excellence, prudent risk management, and targeted geographic expansion positions it well for continued growth and value creation for shareholders. As the company navigates the evolving economic landscape, investors should closely monitor its ability to execute on its growth plans while maintaining robust credit quality and operational efficiency.