Third Coast Bancshares, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing also reports unaudited fourth-quarter results. Third Coast is a Texas-based community bank holding company serving businesses and professionals through 16 branches, primarily in Greater Houston, Dallas–Fort Worth, and Austin–San Antonio. The filing was signed March 7, 2024.
Financial results and position
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Total interest income | $266.5 million | $153.9 million |
| Net interest income | $139.5 million | $116.5 million |
| Net interest margin | 3.73% | 3.82% |
| Provision for credit losses | $6.3 million | $12.2 million |
| Noninterest income | $8.2 million | $7.2 million |
| Noninterest expense | $99.8 million | $88.3 million |
| Net income | $33.4 million | $18.7 million |
| Net income available to common shareholders | $28.7 million | $17.2 million |
| Basic / diluted earnings per common share | $2.11 / $1.98 | $1.28 / $1.25 |
| Total assets | $4.40 billion | $3.77 billion |
| Total loans | $3.64 billion | $3.11 billion |
| Total deposits | $3.80 billion | $3.24 billion |
| Shareholders’ equity | $412.0 million | $381.8 million |
FY2023 net cash provided by operating activities was $39.1 million; investing activities used $529.5 million and financing activities provided $570.3 million. Cash and cash equivalents ended the year at $411.8 million, up from $332.0 million.
At year-end, borrowings totaled $119.4 million: $38.9 million drawn on a $50 million holding-company line of credit and $80.6 million of subordinated notes, net of issuance costs. There were no FHLB advances outstanding. Available borrowing capacity included $565.1 million from the FHLB, $11.1 million on the line of credit, $1.2 billion through the Federal Reserve Discount Window arrangement, and $36.5 million of federal funds lines.
The Bank’s regulatory capital ratios remained above applicable minimums and it was classified as well capitalized. At December 31, 2023, the Bank’s CET1 ratio was 12.52%, total capital ratio 13.49%, and leverage ratio 11.91%. The Company’s corresponding reported ratios were 8.06%, 12.66%, and 9.23%.
Fourth-quarter snapshot
For Q4 2023, net interest income was $37.3 million, provision for credit losses $1.1 million, noninterest income $2.2 million, noninterest expense $26.4 million, and net income $9.7 million. Q4 2022 net income was $7.5 million. The filing does not provide a clear Q4 net interest margin value in the supplied text.
Changes versus the prior comparable period
- FY2023 net income rose 79.0% and net interest income rose 19.8%. Loan growth and higher loan yields increased interest income, while higher deposit rates substantially increased funding costs.
- Average loan yield increased to 7.39% from 5.43%; average cost of interest-bearing deposits rose to 4.13% from 1.29%. Net interest margin declined to 3.73% from 3.82%, and net interest spread declined to 2.86% from 3.57%.
- Loans grew 17.1% and deposits 17.5%. Demand deposits increased overall, but noninterest-bearing deposits fell 5.5% to $459.6 million as customers shifted funds into interest-bearing accounts.
- Noninterest expense increased 13.0%, including higher salaries, occupancy, technology, and professional costs. Salaries included severance costs related to third-quarter workforce reductions.
- Nonperforming assets increased to $17.3 million from $12.3 million, or 0.39% of assets versus 0.32%. The allowance for loan losses rose to $37.0 million, or 1.02% of loans, from $30.4 million, or 0.98%.
Outlook, risks, and notable items
- Outlook: Management describes a strategy of organic growth, de novo branching, and potential acquisitions, but provides no specific numerical earnings, margin, loan-growth, or deposit-growth guidance.
- Funding and liquidity risks: The loan-to-deposit ratio was 95.7%. The 15 largest depositors represented about 40.0% of deposits; brokered deposits were $499.9 million (13.1%); estimated uninsured deposits were $1.08 billion. The Bank reported uninsured customer deposits equal to 32.7% of non-brokered deposits.
- Credit and concentration risks: Real estate was a primary component of collateral for 59.9% of gross loans; construction and development loans were 19.1% of loans, and commercial and industrial loans 34.7%. Special-mention and substandard loans rose to $47.3 million and $24.0 million, respectively, from $13.0 million and $17.3 million.
- Rate sensitivity: Management’s year-end simulation estimated that a parallel 300-basis-point rate increase would reduce net interest income by 0.35% over 12 months and fair value of equity by 5.91%. The model is assumption-dependent and actual results may differ.
- Unusual/accounting items: The January 1, 2023 adoption of CECL increased the loan allowance by $4.0 million and reduced retained earnings by $3.2 million after tax. The Company recorded $482,000 in securities-sale gains and recognized a $5.0 million gain on termination of a cash-flow hedge, with the latter being accreted into interest expense over time. The Company reported $526,000 of ACH, debit-card, and check fraud losses.
- Charter conversion: The Bank received required approvals to convert from a Texas state savings bank to a Texas banking association; the conversion was expected to become effective March 13, 2024. Management noted that the change may increase examination, reporting, and compliance costs.
- Legal and controls: The Company reported no material legal proceedings and management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements, but did not attest to internal-control effectiveness because the Company is an emerging growth company.
Important facts for investors to verify
- Whether deposit retention and funding costs stabilize, particularly among large, uninsured, and brokered depositors.
- Whether loan growth is accompanied by deterioration in criticized loans, nonaccruals, collateral values, or credit-loss provisions.
- How net interest margin and earnings respond to changing rates and continued deposit repricing.
- Whether the Bank’s charter conversion was completed as expected and what additional costs or requirements resulted.
- The terms and implications of the Series A preferred stock, including its dividends and potential dilution; FY2023 preferred dividends were $4.7 million.
- Repayment or refinancing of the $38.9 million line of credit, secured by all Bank stock and maturing September 10, 2024, as well as the subordinated notes’ transition to a floating rate in 2027.