Third Coast Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Third Coast is a Texas community bank with 12 branches and a commercial finance subsidiary focused on accounts receivable factoring. Comparisons are with the corresponding 2020 periods, when the Heritage acquisition was included from January 1, 2020.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $24.4m | $19.2m | $74.0m | $59.4m |
| Net interest income | $22.0m | $15.7m | $65.9m | $48.2m |
| Net income | $2.4m | $4.1m | $11.1m | $9.6m |
| Diluted EPS | $0.28 | $0.65 | $1.55 | $1.51 |
| Net interest margin | 4.49% | 3.61% | 4.61% | 4.20% |
- Q3 net interest income rose 40.2%, but net income fell 42.3%, as noninterest expense increased 59.0% and the company recorded $2.3m of loan-loss provision versus none in Q3 2020. Nine-month net income rose 15.6%.
- Nine-month interest income increased 24.5% and net interest income increased 36.8%; management attributed the growth to higher average loans, lower deposit costs and PPP fee income. PPP deferred origination fee recognition was $16.8m in the first nine months of 2021, versus $6.9m in 2020.
- At September 30, total assets were $2.08bn, gross loans $1.61bn, deposits $1.82bn and shareholders’ equity including ESOP-owned shares $206.2m. Since December 31, 2020, assets increased 11.5%, loans 3.6%, deposits 11.1% and equity 69.4%.
- Cash and cash equivalents were $360.6m, up from $203.6m at year-end. Nine-month cash flows were $3.1m provided by operations, $47.8m used in investing and $201.7m provided by financing; cash increased $157.0m.
- Borrowings at quarter-end included $50.3m of FHLB advances and $1.0m of senior debt; subordinated debt was fully repaid in August. At December 31, 2020, FHLB advances were $70.0m and senior and subordinated debt totaled $33.9m.
- The bank’s regulatory capital ratios were 13.0% total capital, 11.9% Tier 1 risk-based and 9.6% Tier 1 leverage; the bank reported that it exceeded well-capitalized thresholds.
Material changes and notable items
- Noninterest expense rose 42.9% for the first nine months, principally from salaries and benefits (+56.4%), occupancy and equipment, and legal and professional fees. Employees increased to 313 from 206 a year earlier. Management said staffing investments were intended to support growth.
- Loan mix shifted as PPP balances declined $219.5m to $171.3m, while non-PPP loans grew $275.8m. Commercial real estate, residential and construction lending expanded; commercial and industrial loans decreased overall, largely because of PPP forgiveness.
- Allowance for loan losses increased to $15.6m, or 1.0% of loans, from $12.0m, or 0.8%, at year-end. Nonperforming loans rose to $17.0m (1.05% of loans) from $12.4m (0.80%); nonaccrual loans were $11.1m. Management attributed the deterioration mainly to several commercial and real estate loans placed on nonaccrual.
- About 576 loans totaling $247.9m remained subject to COVID-related deferral or modification agreements at September 30; $4.9m of accrued interest on these loans remained outstanding and was scheduled for collection at loan maturity. PPP loans are government-guaranteed subject to program requirements.
- The August private placement raised approximately $70.5m; $32.5m was used to repay debt. Subsequent to quarter-end, the November IPO raised $100.6m gross and an estimated $92.0m net, for organic growth, general corporate purposes, regulatory capital and potential acquisitions.
- Operating cash flow was positive, but investing cash flow reflected $39.1m of net loan originations and $6.5m invested in non-marketable securities. Deposit growth and the private placement were major sources of cash and liquidity.
Outlook, risks and controls
The filing provides no quantitative earnings or growth guidance. Management said results for the first nine months are not necessarily indicative of full-year results. It expects deposits to remain the primary funding source and loans the primary use of funds, and says it will monitor growth to maintain regulatory capital compliance.
Key stated risks include COVID-19 and borrower impacts, concentration in Texas markets, credit quality and allowance estimation, real estate and construction exposure, interest-rate changes, deposit retention and growth, competition, technology and cybersecurity failures, fraud, and natural disasters. Interest-rate simulations showed that a parallel +200 basis-point shock could reduce modeled one-year net interest income by 2.78% at September 30, 2021; the model is based on uncertain assumptions. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting. The filing checked “No” to whether all required Exchange Act reports had been filed during the preceding 12 months; investors may wish to clarify this status.
The company reported no material legal proceedings and no material change to previously disclosed risk factors. It stated that it does not expect a material adverse effect from ordinary-course litigation, while acknowledging an unfavorable outcome could be material.
Important facts for investors to verify
- Whether the elevated nonperforming loans and $247.9m of COVID-modified loans show further credit deterioration, and whether the allowance remains adequate.
- How much of reported net interest income and margin is sustainable as PPP balances and fee accretion decline; monitor loan yields, deposit costs and interest-rate sensitivity.
- Whether staffing and other operating-cost increases translate into growth and operating leverage.
- Deposit concentration and stability, including $327.4m of uninsured deposits at September 30, and the funding needs implied by $341.9m of credit commitments and standby letters of credit.
- Final IPO net proceeds and their use, and clarification of the cover-page response indicating required prior-period reports may not all have been filed.