Third Coast Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Third Coast is a Texas community bank holding company operating 14 branches, with lending concentrated in Texas and an accounts-receivable factoring subsidiary.
Financial performance and condition
Amounts in millions, except per-share data and ratios.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $32.5 | $23.9 | $59.7 | $49.6 |
| Net interest income | $27.7 | $21.2 | $52.9 | $43.9 |
| Provision for loan losses | $3.4 | — | $7.4 | $1.5 |
| Noninterest income | $1.3 | $1.1 | $2.9 | $1.9 |
| Noninterest expense | $22.8 | $17.8 | $43.0 | $33.3 |
| Net income | $2.3 | $3.6 | $4.4 | $8.7 |
| Diluted EPS | $0.16 | $0.55 | $0.32 | $1.35 |
- Q2 net interest income rose 30.8%, primarily on loan growth, but net income declined 36.6% as provision and operating expenses increased. For the first half, net interest income rose 20.5%, while net income fell 49.8%.
- Net interest margin was 3.77% in Q2 versus 4.39% a year earlier; six-month margin was 3.90% versus 4.67%. The company attributed margin pressure partly to lower PPP fee accretion and funding costs.
- At June 30, total assets were $3.36 billion, loans $2.75 billion, deposits $2.90 billion, and shareholders’ equity $302.0 million. Since year-end 2021, assets increased 34.4%, loans 32.9%, and deposits 35.4%.
- Cash and cash equivalents were $320.2 million, down from $327.0 million at year-end. First-half operating cash flow was $5.0 million; investing cash outflow was $848.0 million and financing cash inflow was $836.1 million.
- Total borrowings were $129.2 million: $18.0 million of FHLB advances, $30.9 million senior line-of-credit debt, and $80.4 million subordinated notes, net of issuance costs. The senior debt was due September 10, 2022. The $82.3 million subordinated notes issued in March carry a 5.50% fixed rate through March 2027, then float at three-month Term SOFR plus 315 basis points through 2032.
- The Bank reported regulatory capital ratios above well-capitalized minimums: total risk-based capital 12.4%, Tier 1 risk-based 11.6%, CET1 11.6%, and Tier 1 leverage 12.5%.
Material changes and credit quality
- Loan growth was led by commercial and industrial, construction and development, and commercial real estate lending. Non-PPP loans grew $753.2 million, partly offset by a $72.8 million decline in PPP balances.
- Loan-loss provision rose to $7.4 million for the first half, which management said primarily reflected provisioning for new loans. The allowance was $26.7 million, or 0.97% of loans, versus $19.3 million, or 0.93%, at year-end.
- Nonperforming assets declined to $11.0 million from $17.3 million at year-end; nonperforming loans were 0.40% of total loans. Classified substandard loans were $19.9 million, compared with $20.3 million at year-end.
- Operating expenses increased 29.0% for the first half. Salaries and benefits rose 21.5%, and employees numbered 353 versus 265 a year earlier; occupancy, professional fees, and regulatory assessments also increased.
- Unrealized losses on available-for-sale securities were $2.4 million at June 30, versus a $1.0 million unrealized gain at year-end. The resulting first-half other comprehensive loss was $2.7 million.
Outlook, risks and unusual items
- The filing provides no quantified earnings or growth guidance. Management describes ongoing organic growth and continued investment in personnel, branches, and operations.
- Key risks include interest-rate changes, deposit retention and funding costs, credit quality and allowance estimates, real estate and construction exposure, and geographic concentration in Texas markets. Management’s June 30 rate-simulation model estimated net interest income would increase 6.54% under an immediate +200 basis-point shock and decline 4.30% under a −100 basis-point shock; modeled outcomes depend on assumptions and may differ from actual results.
- Uninsured deposits were $108.9 million at June 30. Commitments to extend credit were $1.08 billion, up from $606.2 million at year-end; standby letters of credit were $10.6 million. Commitments may not be drawn, but represent potential funding and credit exposure.
- Noninterest expense included a $900,000 one-time legal settlement and $114,000 of check-fraud losses for the first half; Q2 also included a $350,000 loss on sale of foreclosed real estate. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Approximately 400 COVID-related modified loans totaling $190.4 million remained at June 30; $4.0 million of related accrued interest was outstanding. PPP loans were $8.8 million, and MSLP loans, excluding the portion sold to the Federal Reserve, were $3.2 million.
- After quarter-end, the FHLB exercised a call option on an $18.0 million advance, which the company paid off on August 1, 2022. A new $200 million, five-year cash-flow hedge became effective July 9, with the company paying a fixed 2.626% and receiving a floating federal funds rate on floating-rate deposits.
Important facts for investors to verify
- Whether rapid loan and deposit growth is sustainable and how deposit pricing affects net interest margin as rates change.
- Credit performance in commercial and industrial, commercial real estate, and construction lending; adequacy of the allowance as the portfolio expands.
- Funding and repayment plans for the senior line of credit due September 2022, and the effect of the FHLB advance payoff and new swap.
- Whether increased staffing, branch, regulatory, and other operating costs yield growth sufficient to improve earnings, and whether the legal settlement and other unusual expenses recur.
- Potential liquidity consequences if a portion of the $1.08 billion in credit commitments is drawn, and sensitivity to uninsured deposit movement.