Third Coast Bancshares, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 15, 2023. The company is a Texas bank holding company focused on commercial banking for small and medium-sized businesses, operating primarily in Houston, Dallas-Fort Worth, and Austin-San Antonio. It reported 16 branches, including one in Detroit, Texas.
Financial performance and condition
| Metric | FY2022 / December 31, 2022 | Comparison |
|---|---|---|
| Interest income | $153.9 million | +53.0% from FY2021 |
| Net interest income | $116.5 million | +28.6% |
| Net interest margin | 3.82% | 4.65% in FY2021 |
| Net interest spread | 3.57% | 4.50% in FY2021 |
| Provision for loan losses | $12.2 million | $9.9 million in FY2021 |
| Noninterest income | $7.2 million | +48.1% |
| Noninterest expense | $88.3 million | +24.3% |
| Net income | $18.7 million | +63.3%; FY2021: $11.4 million |
| Net income available to common shareholders | $17.2 million | After $1.4 million preferred dividends |
| Diluted EPS | $1.25 | $1.40 in FY2021 |
| Cash from operating activities | $21.8 million | $4.6 million in FY2021 |
| Cash and cash equivalents | $332.0 million | $327.0 million at year-end 2021 |
| Total assets | $3.77 billion | +51.0% year over year |
| Total loans | $3.11 billion | +50.2%; loan-to-deposit ratio 96.0% |
| Total deposits | $3.24 billion | +51.1%; noninterest-bearing deposits $486.1 million |
| Total shareholders’ equity | $381.8 million | $299.0 million at year-end 2021 |
| Borrowings | $30.9 million line of credit; $80.3 million subordinated notes; no FHLB advances | $50.0 million FHLB advances at year-end 2021 |
Loan growth drove higher interest income, but funding costs rose sharply: interest expense increased to $37.5 million from $10.1 million, and the average cost of interest-bearing deposits rose to 1.29% from 0.60%. Loan growth and deposit growth were the main balance-sheet drivers. Commercial and industrial loans were $1.06 billion (34.1% of loans); construction and development loans were $567.9 million (18.3%).
Credit quality indicators included $12.3 million of nonperforming assets, or 0.32% of assets, down from $17.3 million in 2021. The allowance for loan losses was $30.4 million, 0.98% of loans, versus $19.3 million, or 0.93%, a year earlier. Net charge-offs were $1.1 million. The Bank’s regulatory capital ratios exceeded minimums; total capital was 13.8% and Tier 1 leverage was 13.1%, and the Bank was classified as well-capitalized.
Fourth-quarter 2022 unaudited results: net interest income was $32.2 million, provision $2.0 million, noninterest income $1.8 million, noninterest expense $22.6 million, and net income $7.5 million.
Material changes versus prior year
- Loans expanded by $1.04 billion and deposits by $1.09 billion. Total assets rose $1.28 billion.
- Net interest income increased, but margin compressed by 0.83 percentage points as deposit and borrowing costs rose and loan yields declined on an annual average basis. PPP loan fee accretion fell to $2.0 million from $19.2 million.
- Noninterest expense rose $17.3 million, reflecting staffing and branch expansion, occupancy, public-company and regulatory costs. The company opened four branches in 2022 and ended the year with 368 employees, up from 334.
- Allowance coverage increased alongside loan growth. Nonperforming assets declined, mainly from lower accruing restructured loans and sale of foreclosed property.
- The company raised $66.2 million net through a Series A preferred-stock private placement and issued $82.3 million of subordinated notes. Shareholders’ equity increased 27.7%.
- Available-for-sale securities grew to $176.1 million from $26.4 million; year-end unrealized losses were $6.3 million, recorded through other comprehensive income. Management reported no securities as other-than-temporarily impaired.
Outlook, risks, and unusual items
The filing provides no quantified earnings or growth guidance. Management describes a strategy of organic growth, de novo branches, and selective acquisitions, and says it expects to monitor growth to remain within regulatory capital standards. Its commentary emphasizes loan and deposit growth, investment in personnel, and managing interest-rate and credit risks.
- Funding concentration: The 15 largest depositors represented approximately 51.8% of deposits, excluding brokered deposits. Brokered deposits were $188.3 million, or 5.8% of deposits, and were concentrated in one relationship. The loan-to-deposit ratio was 96.0%.
- Credit and concentration risk: Real estate was a primary component of collateral for 61.1% of gross loans; commercial real estate and construction lending are significant. The ten largest loan relationships totaled $346.7 million, or 11.2% of loans.
- Interest-rate and securities risk: Rising rates can raise deposit costs, pressure margin, affect borrower repayment and reduce securities values. Management’s model estimated net interest income would rise 9.99% under an instantaneous +300 basis-point scenario and decline 3.32% under -100 basis points; these are modeled estimates, not forecasts.
- Liquidity and commitments: Unfunded credit commitments and standby letters totaled $1.17 billion. The company reported $19.1 million available under its holding-company line of credit and $719.1 million of FHLB borrowing capacity; capacity is not equivalent to cash on hand.
- Debt and collateral: The $30.9 million line of credit matures in September 2024, bears a floating rate, and is secured by all Bank stock. The $82.3 million subordinated notes mature in 2032; their rate changes from 5.50% fixed to three-month SOFR plus 315 basis points beginning in 2027.
- CECL and other items: Adoption of CECL on January 1, 2023 increased the allowance for credit losses by approximately $4.0 million. FY2022 other expenses included a one-time $900,000 legal settlement. The company also reported $3.5 million of other comprehensive loss, principally reflecting securities valuation changes.
- Other risks: Management identifies Texas-market and real-estate concentration, inflation and economic conditions, deposit retention, operational and cyber risks (including reliance on third-party systems), regulation, and the LIBOR transition. Fourteen loans totaling $64.8 million were LIBOR-indexed at year-end; management was working with customers and counterparties on transition.
Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the consolidated financial statements, but did not provide an internal-control attestation because of the company’s emerging-growth-company transition relief. Management reported no material legal proceedings; ordinary-course claims remain possible.
Important facts for investors to verify
- Deposit stability, renewal pricing, and concentration—especially the largest depositor relationships and the single brokered-deposit relationship.
- Whether loan growth can sustain earnings as deposit costs reprice, and the resulting path of net interest margin and funding mix.
- Credit performance in commercial real estate, construction and development, and large borrower relationships; adequacy of the allowance after CECL adoption.
- Liquidity available under borrowing facilities and the potential draw on the $1.17 billion of unfunded commitments.
- Terms, cost, and potential dilution associated with preferred stock, warrants, subordinated notes, and the Bank-stock-secured credit line.