Third Coast Bancshares (NASDAQ:TCBX) used its first-quarter 2026 earnings call to highlight the early impact of its Keystone Bancshares acquisition, along with management’s outlook for loan growth, expenses, net interest margin and credit quality as the combined company begins integration.
Keystone acquisition drove balance sheet growth
Founder, Chairman, President and CEO Bart Caraway said the quarter marked “a significant milestone” with the addition of Keystone, which he said expanded Third Coast’s presence in key Central Texas markets and “translated into an expanded balance sheet.” Caraway said that from year-end, assets increased 23.2%, loans rose 19.5% and deposits grew 23.5%.
Earnings, expenses, and planned cost savings
Chief Financial Officer John McWhorter said the Keystone transaction was the main driver of quarter-over-quarter changes. He said Keystone added roughly 20% to loans and deposits and resulted in approximately $3.3 million in merger-related, non-recurring non-interest expense during the quarter.
McWhorter broke out the merger-related expenses as primarily:
- $1.6 million in legal and professional costs
- $1.3 million in salaries and benefits
- $400,000 in miscellaneous items
McWhorter also cited $644,000 in salary and benefits tied to sign-on bonuses during the quarter, noting it was the second consecutive quarter of above-average hiring. He characterized both merger expenses and the bonuses as non-recurring items tied to integration and onboarding.
Diluted earnings per share were $0.88, McWhorter said, but excluding merger expenses would have been $1.02. Excluding merger expenses, return on average assets would have been 1.25%, according to the CFO.
On the timing of expense savings, McWhorter said most savings should be realized in the third and fourth quarters of 2026, and later added that he expects 100% of cost saves to be in place by Jan. 1 of next year. In response to questions about whether deal assumptions remained intact, McWhorter said the company is currently operating “two different banks today on two different systems,” which is “more expensive,” and that savings from data processing should begin in August following a core conversion planned for July. He also referenced expectations for savings related to professional fees, including audit and other categories, reiterating that “most of the expense saves are still to come.”
McWhorter also pointed to tangible book value of $31.97 at quarter end, comparing it favorably to the $31.69 guidance the company provided in October when the acquisition was announced.
Net interest margin outlook and fee income expectations
Net interest income totaled $53.6 million in the first quarter, up 2.7% from the prior quarter, which McWhorter attributed to higher-than-average earning assets after the merger, partially offset by a lower net interest margin.
McWhorter said the margin decline was driven primarily by the Keystone merger as well as the reversal of $996,000 in accrued interest from two loans placed on nonaccrual, which he said was worth about four basis points of margin. In response to analyst questions, he said Third Coast “standalone” prior to the interest reversal was around the 3.90% range, consistent with his prior-quarter guidance, while Keystone’s margin was about 3.50%. “You average all that out,” he said, and assuming nothing unusual, “we’re about 3.75% for the margin going forward.”
In a follow-up, McWhorter said additional support for margin could come from better loan fees, which he said were “a little light this quarter” but appear to be running heavier. He also said the company did not complete a securitization in the first quarter, but noted management is “always looking at it” and said it was “more likely than not” another securitization could occur in the second quarter. He added that he was not including any potential securitization benefit in the 3.75% margin expectation.
Regarding fee income, McWhorter said the company guided to $4 million for the quarter and came in “almost exactly” at that level. He said he expects fee income to be “a little bit higher going forward,” but emphasized Third Coast is “not a huge fee income shop,” and suggested a range of $4 million to $4.5 million.
Loan growth drivers and deposit dynamics
McWhorter said that excluding Keystone, loans grew by approximately $45 million in the quarter, while quarterly average balances rose by more than $100 million. He also said the second quarter started “even stronger,” with April month-to-date loans up over $100 million. Caraway attributed the momentum to a mix of new and recently hired producers, as well as “opportunities from some of the disruption in the market,” which management said has also enabled the bank to recruit talent.
Caraway said first-quarter net growth was held back by an “exceptional number of payoffs,” adding that early in the quarter the company expected to be “above budget” on loan growth before the paydowns came through. He told analysts he does not expect that level of payoff headwinds to continue, while also cautioning that growth can be “lumpy” depending on closing timing.
On deposits and liquidity, Caraway said Third Coast ended the quarter with more cash because it sold “100%” of Keystone’s investment portfolio, which he said was roughly $75 million, expecting to redeploy proceeds into loan fundings that did not materialize before quarter end due to the payoffs. He said that as loans rebuild—pointing to April’s growth—the loan-to-deposit ratio should “creep up” and benefit margin.
Credit quality: one large CRE credit moved to nonaccrual
Chief Credit Officer Audrey Spaulding said non-performing assets as a percentage of total assets increased 11 basis points from the prior quarter, driven mainly by a single commercial real estate loan of approximately $17.1 million moving to nonaccrual, plus the addition of $1.8 million in purchased credit-impaired loans from the Keystone acquisition that are also on nonaccrual. The increase was partially offset by a $5 million decline in loans 90 days past due and still accruing.
Spaulding said that when the $17.1 million loan and a separate $602,000 loan were placed on nonaccrual, the bank reversed $996,000 in accrued interest, which impacted margin. She also said the bank foreclosed on the property securing the $17.1 million loan on April 7, and that the loan-to-value based on a 2026 appraisal is just under 70%.
In the Q&A, Spaulding said the company had not previously discussed the loan. She described it as a seasoned credit originated in 2021 that experienced a “significant decline in occupancy due to a tenant bankruptcy.” She said the appraisal was completed within the prior 90 days and reflected “as-is value on the current occupancy.” The bank is preparing to list the property with a national broker and is working on leasing to increase occupancy, and Spaulding said resolution will likely take “a couple of quarters.”
She also noted $5.3 million of nonaccrual loans are fully guaranteed by the SBA.
The allowance for credit losses totaled $51.5 million, or 0.98% of gross loans as of March 31, 2026, compared with $43.9 million, or 1.0%, at the previous quarter end. Spaulding said the increase was primarily due to the “day one allowance” related to the Keystone acquisition. The company recorded net recoveries of $4,000 in the quarter, she added.
Management said the broader portfolio remains diversified, with Spaulding outlining the mix as 42% commercial and industrial, 17% construction/development/land, 11% owner-occupied CRE and 18% non-owner occupied CRE. In discussing criticized and classified trends, Spaulding said the $17.1 million credit was the primary driver of an increase in classifieds, while two other CRE loans were downgraded but remained current with loan-to-value ratios closer to 50% to 60%. Caraway said that excluding the $17 million credit, trends were “pretty moderate,” adding that management was not seeing broader macro or micro deterioration in the portfolio.
Looking ahead, Caraway said the company is “increasingly confident” in its trajectory and expects its expanded capabilities in corporate banking, asset-based lending, public funds and correspondent banking to support disciplined growth. He also said that as newer teams scale, they have the “potential to generate over $1 million in fees per month” and could extend the company’s quarterly loan growth target range to $75 million to $125 million.
About Third Coast Bancshares (NASDAQ:TCBX)
Third Coast Bancshares, Inc operates as a bank holding company for Third Coast Bank, SSB that provides various commercial banking solutions to small and medium-sized businesses, and professionals. The company's deposit products include checking, savings, individual retirement, and money market accounts, as well as certificates of deposit. It also offers commercial and industrial loans, equipment loans, working capital lines of credit, guaranteed loans, auto finance, letters of credit, commercial and residential real estate, and construction, development, and other loans.
