Third Coast Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results cover Third Coast Bancshares and its subsidiaries, including Third Coast Bank and Third Coast Commercial Capital. The company operates 15 branches in Texas and focuses on community banking and commercial lending.
Financial performance and condition
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $43.1 | $24.4 | $102.8 | $74.0 |
| Net interest income | $31.4 | $22.0 | $84.3 | $65.9 |
| Provision for loan losses | $2.9 | $2.3 | $10.3 | $3.8 |
| Noninterest income | $2.5 | $1.0 | $5.5 | $2.8 |
| Noninterest expense | $22.7 | $17.6 | $65.7 | $50.9 |
| Net income | $6.8 | $2.4 | $11.1 | $11.1 |
| Diluted earnings per share | $0.49 | $0.28 | $0.81 | $1.55 |
- Q3 net income rose 183.9%; nine-month net income was nearly unchanged. The nine-month diluted EPS decline occurred alongside a substantially higher weighted-average share count, following the 2021 equity offerings and IPO.
- Net interest margin was 3.77% in Q3 versus 4.49% a year earlier; for the nine months it was 3.85% versus 4.61%. Higher average loan balances lifted interest income, while deposit repricing and borrowing costs pressured margin.
- At September 30, total assets were $3.52 billion, up from $2.50 billion at year-end 2021. Gross loans were $2.97 billion, up 43.7%, and deposits were $2.98 billion, up 39.4%. Loans equaled 99.6% of deposits.
- Cash and cash equivalents were $217.8 million, versus $327.0 million at December 31, 2021. Nine-month operating cash flow was $15.6 million; investing cash outflow was $1.10 billion, largely reflecting loan originations, securities activity and BOLI purchases. Financing cash inflow was $971.2 million, principally from deposit growth and capital/debt issuance.
- Deposits were 17.3% noninterest-bearing, compared with 24.8% at year-end. The average rate paid on interest-bearing deposits was 0.88% for the first nine months; in Q3 it was 1.58%, versus 0.56% in Q3 2021.
- Borrowings totaled $111.2 million: $30.9 million senior line of credit and $80.3 million subordinated debt, net of issuance costs. The company had no FHLB advances outstanding. The $82.3 million subordinated notes carry a 5.5% fixed rate through March 2027, then float at three-month Term SOFR plus 315 basis points, and mature in 2032.
- Shareholders’ equity was $376.4 million, including $69.4 million of Series A preferred stock issued in a private placement that generated $66.3 million net proceeds. The Bank reported a 13.9% total risk-based capital ratio and was classified as well capitalized.
Material changes and notable items
- Loan growth was concentrated in commercial and industrial, commercial real estate, and construction/development lending. Commercial and industrial loans were $1.03 billion, or 34.6% of loans; construction/development loans were $500.9 million.
- The allowance for loan losses increased to $29.1 million, or 0.98% of loans, from $19.3 million, or 0.93%, at year-end. The nine-month provision rose to $10.3 million, primarily reflecting provisioning for new loans. Nonperforming assets fell to $10.3 million from $17.3 million; nonaccrual loans were $9.4 million.
- Q3 noninterest income increased 163% year over year, including SBA loan-sale gains, derivative fees and BOLI earnings. Nine-month noninterest expense increased 28.9%, reflecting staffing and branch expansion, higher regulatory assessments and occupancy costs, among other factors.
- Other expenses included a $900,000 one-time legal settlement and higher check-fraud losses. Management cited a $324,000 nine-month increase in check-fraud losses compared with 2021.
- The company terminated a $200 million cash-flow hedge in August and received a $3.0 million termination fee, which is being accreted into interest expense through July 2027. Available-for-sale securities had $5.1 million of unrealized losses at quarter-end; management stated it did not consider them other-than-temporarily impaired.
- COVID-related modified loans totaled $169.7 million across approximately 300 loans at September 30; related accrued interest receivable was $3.6 million. PPP balances had declined to $1.8 million.
- Off-balance-sheet commitments to extend credit were $1.08 billion, with $21.3 million of standby letters of credit. Management said commitments may expire undrawn and it anticipated no material losses from these activities.
Outlook, risks and controls
The filing provides no specific financial guidance or quantified forecast. Management described growth investment in personnel and branches and expects to monitor growth to remain within regulatory capital standards. Principal risks include interest-rate movements and deposit retention/costs; credit quality and allowance adequacy; real estate and construction exposure; Texas geographic concentration; collateral values; borrower repayment capacity; fraud and cybersecurity; and broader economic and regulatory conditions. The Bank’s interest-rate model showed estimated net interest income sensitivity of positive 11.10% under a +300 basis-point shock and negative 3.73% under a -100 basis-point shock, subject to model assumptions and limitations.
Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the first nine months of 2022. The filing reported no material legal proceedings; management stated ordinary-course litigation was not expected to have a material adverse effect. A quarterly dividend of $3.1875 per Series A preferred share was declared and paid in October 2022, after quarter-end.
Investor verification priorities
- Assess whether loan growth and the 99.6% period-end loan-to-deposit ratio remain supportable as deposit costs rise and noninterest-bearing deposits decline.
- Review credit migration, concentrations in commercial/industrial and real estate lending, the $29.1 million allowance, and the large balance of modified COVID-related loans.
- Reconcile operating earnings and EPS, including the impact of share-count growth, PPP fee runoff, hedge termination accretion and nonrecurring expenses.
- Confirm liquidity sources and availability, including deposit stability, the $1.08 billion of credit commitments, collateral encumbrance and borrowing facilities.
- Review the terms and dilution implications of Series A preferred stock and warrants, and the subordinated notes’ 2027 transition to a floating rate.