Third Coast Bancshares, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2023. Third Coast operates a Texas community banking business through 16 branches across Greater Houston, Dallas–Fort Worth, and Austin–San Antonio, with commercial banking and receivables factoring operations. Comparisons below are with Q1 2022 for income and cash flow, and December 31, 2022 for balance-sheet measures.
Key financial metrics
- Revenue and earnings: Interest income was $57.4 million, up 111% year over year; net interest income was $32.8 million, up 30%. Noninterest income was $1.9 million, up 14%. Net income was $9.2 million, versus $2.1 million; income available to common shareholders was $8.1 million after $1.2 million of preferred dividends. Basic and diluted EPS were $0.60 and $0.55, respectively, compared with $0.16 and $0.15.
- Margins and expenses: Net interest margin fell to 3.79% from 4.09%; net interest spread fell to 3.01% from 3.95%. Average loan yield rose to 6.90% from 4.90%, while the average rate on interest-bearing deposits increased to 3.45% from 0.46%. Noninterest expense rose 9% to $22.0 million.
- Assets and lending: Total assets were $3.86 billion, up 2.3% from year-end. Gross loans were $3.21 billion, up 3.4%; growth was concentrated in construction and development, commercial and industrial, and commercial real estate. Loans were 96.7% of deposits. Commercial and industrial loans comprised 34.6% of gross loans and construction, development and other loans 19.5%.
- Credit quality: The allowance for credit losses was $35.9 million, or 1.12% of loans, compared with $30.4 million, or 0.98%, at year-end. Nonperforming loans were $9.5 million (0.30% of loans), down from $12.3 million at year-end; management attributed the decrease partly to loan payoffs and changed restructuring accounting.
- Deposits, liquidity and debt: Deposits were $3.32 billion, up 2.7%; noninterest-bearing deposits were $516.9 million. Cash and cash equivalents were $310.9 million, down from $332.0 million. Total borrowings were $111.3 million: a $30.9 million senior line balance and $80.4 million of subordinated debt; there were no FHLB advances outstanding. The company reported $745 million of FHLB borrowing capacity and $36.5 million of federal funds lines, with no advances on those lines. Outstanding commitments to extend credit and standby letters of credit totaled $1.26 billion.
- Capital: Shareholders’ equity was $387.0 million. The Bank reported a 13.3% total risk-based capital ratio and a 12.3% common equity tier 1 ratio, and remained classified as well capitalized.
- Cash flow: Operating activities provided $8.0 million, investing activities used $114.2 million, and financing activities provided $85.2 million. Cash declined by $21.1 million during the quarter.
Material changes versus comparable periods
- Higher loan balances and yields drove interest income growth, while sharply higher deposit costs and interest on debt raised interest expense. The increase in interest expense outpaced the improvement in net interest income, contributing to lower net interest margin and spread.
- Q1 2023 provision for credit losses was $1.2 million, versus $4.0 million in Q1 2022. Separately, adoption of CECL on January 1, 2023 increased the allowance by $4.0 million and reduced retained earnings by $3.2 million after tax.
- Noninterest expense increased by $1.9 million, including higher occupancy, data processing and employee costs. Management cited branch openings and additional staffing as contributors.
- Available-for-sale securities had $7.4 million of gross unrealized losses at March 31, 2023, versus $6.3 million at year-end. Management attributed the losses to higher market interest rates, recorded no credit-loss allowance, and said it did not intend to sell the securities or expect to be required to sell them before recovery.
- Uninsured deposits were $179.6 million, down from $279.1 million at year-end. The filing also reports uninsured customer deposits at 30.7% of non-brokered deposits, versus 36.6% at year-end.
Outlook, commentary and risks
- The filing provides no specific financial guidance or quantified forecast. Management says Q1 results are not necessarily indicative of full-year results and expects deposits to remain the primary funding source and loans the primary use of funds.
- Management described loan growth as reflecting commercial lending demand and productivity, including construction and development and commercial and industrial lending. It also cited staffing and branch investments intended to support future growth.
- Key risks include interest-rate movements and deposit pricing, maintaining deposit relationships, regional banking confidence and deposit outflows, credit quality and collateral values, and exposure to Texas markets and real estate. Recent bank failures may affect customer confidence; the company anticipates possible increased regulatory scrutiny and costs.
- COVID-related payment deferrals covered approximately 221 loans totaling $143.0 million; about $3.2 million of related accrued interest was outstanding and scheduled for collection at loan maturity. Management reported no material legal proceedings and judged ordinary-course litigation unlikely to materially affect the financial statements.
- A new $200 million, five-year pay-fixed cash flow hedge was entered into in March 2023. Interest-rate sensitivity modeling showed estimated net interest income increasing 3.07% under a +200 basis-point shock and decreasing 4.68% under a −100 basis-point shock; model results depend on assumptions and may differ from actual outcomes.
Important facts for investors to verify
- Track deposit composition, pricing, uninsured balances and the company’s ability to retain and grow deposits amid banking-sector uncertainty.
- Assess whether loan growth and higher asset yields can offset deposit-cost increases and sustain margins.
- Review credit trends, especially commercial and industrial and real estate exposures, criticized loans, CECL assumptions and collateral valuations.
- Confirm liquidity capacity and the potential funding needs associated with $1.26 billion of commitments, while distinguishing commitments from expected draws.
- Monitor capital ratios, borrowing costs and the effect of preferred dividends and potential dilution from convertible preferred stock, options and warrants.
- Evaluate the duration and recovery risk of unrealized securities losses and the sensitivity of results to interest-rate and deposit-behavior assumptions.