Third Coast Bancshares, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The company is a Texas bank holding company focused on commercial banking for small and medium-sized businesses, operating through Third Coast Bank and Third Coast Commercial Capital. It reported 12 Texas branches and $2.50 billion in year-end assets. The common stock began trading on Nasdaq as TCBX in November 2021.
Financial results and condition
Dollar amounts are in millions unless stated otherwise.
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Interest income | $100.6 | $82.2 | +22.3% |
| Net interest income | $90.6 | $67.9 | +33.4% |
| Net interest margin | 4.65% | 4.24% | +0.41 percentage points |
| Provision for loan losses | $9.9 | $7.6 | +$2.4 |
| Noninterest income | $4.9 | $2.7 | +81.9% |
| Noninterest expense | $71.0 | $47.4 | +49.8% |
| Net income | $11.4 | $12.1 | -5.7% |
| Diluted earnings per share | $1.40 | $1.91 | Decreased |
- Year-end balance sheet: Assets were $2.50 billion, loans $2.07 billion, deposits $2.14 billion and shareholders’ equity $299.0 million. Assets grew 33.9%, loans 32.9% and deposits 31.1% from year-end 2020.
- Funding and liquidity: Cash and cash equivalents were $327.0 million, compared with $203.6 million a year earlier. The loan-to-deposit ratio was 96.6%. Noninterest-bearing deposits were $531.4 million, or 24.8% of deposits. The bank also reported $50.0 million of FHLB advances, $1.0 million drawn on its senior line of credit, and $29.9 million available on that line.
- Debt and capital: Total borrowings fell to $51.0 million from $103.9 million. The bank’s Tier 1 leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 12.3%, 12.6%, 12.6% and 13.5%, respectively; it met the well-capitalized standards.
- Cash flow: Operating activities provided $4.6 million; investing activities used $500.1 million; financing activities provided $618.9 million. Cash increased $123.5 million during the year.
Material changes and notable items
- Net interest income increased largely due to loan growth, lower deposit funding costs and PPP-related income. The company recognized $19.2 million of PPP deferred origination fees in 2021, versus $10.2 million in 2020.
- Annual net income declined despite higher net interest income: noninterest expense rose 49.8%, including a 66.2% increase in salaries and benefits, as employees increased to 334 from 213. Provision for loan losses also increased.
- Fourth-quarter net income was $0.4 million, versus $2.4 million in Q3 2021. Q4 included a $6.1 million provision for loan losses; the filing does not identify this provision as a one-time item.
- Non-PPP loans grew $821.8 million, while PPP loans declined $309.2 million as forgiveness payments were received. At year-end, PPP loans were $81.6 million, net of deferred fees.
- Construction, development and other loans rose to $320.3 million from $98.2 million, in part following formation of a builder finance group. Commercial and industrial loans were $611.3 million, or 29.5% of gross loans; real estate-secured loans were approximately 66.4% of gross loans.
- The company completed a $70.5 million private placement and a November IPO with $92.0 million in net proceeds. It used part of the private-placement proceeds to repay $32.5 million of debt; IPO proceeds were intended for growth, regulatory capital and general corporate purposes.
- A $100 million cash-flow hedge swap facility was terminated in February 2021; the company received a $945,000 termination fee, which is being accreted into interest expense through 2025.
Outlook, risks and contingencies
- The filing provides no specific financial guidance or quantified forecast. Management describes plans for organic growth, de novo branching and potential acquisitions, subject to funding, staffing, integration and regulatory approval.
- Management said COVID-19 uncertainty continued. Approximately 500 loans totaling $223.7 million remained subject to COVID-related deferral or modification agreements at year-end; $4.4 million of related accrued interest was due at loan maturity. The filing cautions that economic effects, borrower performance and PPP compliance or fraud could affect results.
- Credit quality warrants attention: nonperforming assets were $17.3 million, or 0.69% of assets, up from $15.8 million; nonperforming loans were $15.6 million, or 0.75% of loans. The allowance was $19.3 million, or 0.93% of loans. Management attributed the increase in nonperforming assets mainly to several commercial and real estate loans placed on nonaccrual.
- Funding concentration is material: the 15 largest depositors represented approximately 34.8% of deposits, brokered deposits 10.7%, and one brokered relationship 9.8%. Unfunded commitments and standby letters of credit totaled $620.3 million.
- Principal stated risks include interest-rate and margin sensitivity, Texas market and real-estate concentration, commercial real estate and construction credit exposure, deposit retention, loan-loss estimates, cybersecurity and third-party systems, and the effects of regulation and competition. Adoption of CECL was scheduled for fiscal years beginning after December 15, 2022; management had not yet evaluated its potential effect.
- The company reported no material legal proceedings and management considered any liability from ordinary-course matters unlikely to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements. The 10-K did not include management’s ICFR assessment or an auditor attestation because of the transition period for newly public companies.
Important facts for investors to verify
- How much 2021 earnings and net interest margin depended on PPP fee accretion, and how results perform as that income runs off.
- Whether rapid loan growth—particularly in construction/development and commercial real estate—maintains underwriting quality, and whether the allowance adequately reflects risk.
- Trends in nonaccrual loans, criticized credits, COVID-modified loans and recoveries, including the concentration of credit exposure among large relationships.
- Stability and cost of deposits, especially the largest depositor and brokered-deposit relationships, alongside the high loan-to-deposit ratio and unfunded commitments.
- Post-IPO dilution and capital deployment, the company’s plans for growth or acquisitions, and the effectiveness of financial-reporting controls as public-company requirements phase in.