Third Coast Bancshares, Inc. — Form 8-K Summary
Business Context and Reporting Period
Third Coast Bancshares, Inc., the parent of Third Coast Bank, SSB, filed a Form 8-K reporting a material private placement and related capital, governance, and investor-rights arrangements. The investment agreement was entered into on September 8, 2022; the Series A and Series B preferred stock certificates were filed and became effective on September 9, 2022. The filing does not report quarterly operating results for a specified period.
Transaction and Key Financial Metrics
- The Company agreed to issue and sell 69,400 shares of Series A Convertible Non-Cumulative Preferred Stock, with a $1,000 liquidation preference per share, plus warrants to purchase 175,000 common shares.
- Gross proceeds are expected to be $69.4 million. Net proceeds are intended for general corporate purposes.
- Series A Preferred Stock carries a 6.75% annual non-cumulative dividend rate, payable when declared by the board and subject to legally available funds.
- Series A Preferred Stock is generally convertible at a $22.50 conversion price, subject to regulatory and Nasdaq ownership limitations. The warrants have a $22.50 exercise price, are exercisable after closing, and expire seven years after issuance.
- The anticipated transaction closing date was September 22, 2022, subject to customary conditions. The filing does not state whether closing subsequently occurred.
- The Company reported an allowance for loan losses of $26.7 million as of June 30, 2022.
- An independent review covered 551 loans totaling $2.94 billion, approximately 80% of the Bank’s commercial loan portfolio. Estimated 30-month cumulative losses through December 31, 2024 were $16.9 million under the baseline scenario and $44.1 million under the most pessimistic scenario.
- The filing provides no revenue, net income, cash-flow, operating-margin, total-debt, or liquidity figures for the comparable prior period.
Material Changes and Capital Structure
- The transaction creates Series A Preferred Stock senior to common stock with respect to dividends and liquidation rights, subject to the terms of the certificate of designation.
- Series B Preferred Stock ranks pari passu with common stock on an as-converted basis for dividends and liquidation distributions and generally has no voting rights.
- Series B Preferred Stock will automatically convert into 44.44 shares of non-voting common stock once the required shareholder approval is obtained and the certificate amendment is filed. It may otherwise convert into common stock subject to ownership limits.
- Conversion and exercise rights are limited by a 9.9% regulatory cap and a 19.9% Nasdaq exchange cap, measured as described in the filing.
- The Company must seek shareholder approval by no later than its 2023 annual meeting for issuances exceeding the exchange cap and for authorization of non-voting common stock.
- Directors and certain executive officers agreed to vote in favor of the required proposals.
- Castle Creek may receive a board representative at the Company and Bank while maintaining at least a 4.9% common-stock-equivalent ownership interest. It also receives specified information, observer, preemptive, and other rights.
Outlook, Risks, Contingencies, and Unusual Items
- The independent loan review was based on proprietary analysis and was not prepared in accordance with GAAP. Its loss estimates depend on economic assumptions, including baseline and pessimistic GDP scenarios.
- Management stated that loans were appropriately risk-rated and that the allowance for loan losses was appropriately determined under GAAP, but acknowledged that incorrect assumptions about collectability could result in additional losses beyond current reserves.
- Additional losses could materially affect the Company’s financial condition and its ability to execute business and financial plans.
- The Series A Preferred Stock is generally redeemable only after the fifth anniversary of issuance, subject to regulatory approval and market-price conditions, although redemption may be permitted if the security ceases to qualify as Additional Tier 1 capital.
- The Company will pay placement-agent fees and reimburse certain expenses. It also agreed to reimburse Castle Creek up to $100,000 of transaction expenses.
- The securities are being offered privately to accredited investors under Section 4(a)(2) and Regulation D and are not registered under the Securities Act at issuance.
- The Company agreed to file a resale registration statement no later than the second anniversary of the closing date, subject to the Registration Rights Agreement.
Investor Verification Checklist
- Verify whether the private placement closed on or after the anticipated September 22, 2022 closing date and confirm the actual securities issued and net proceeds received.
- Review the Series A and Series B certificates of designation for dividend, conversion, redemption, liquidation, and voting terms.
- Confirm shareholder approval and subsequent filing of the non-voting common stock amendment and any issuances above the Nasdaq exchange cap.
- Compare the independent loan review loss scenarios with subsequent charge-offs, provision expense, allowance levels, and nonperforming-loan trends.
- Assess dilution from preferred-stock conversions and warrant exercises, including the effects of the 9.9% regulatory cap and 19.9% exchange cap.
- Review the Registration Rights Agreement, Letter Agreement, and board representation rights for potential governance and future-issuance implications.