Third Coast Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results are for the company and its banking subsidiaries, operating as a Texas-focused community bank with 16 branches and a commercial finance subsidiary.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $3.96 billion | $3.77 billion at Dec. 31, 2022 |
| Total loans | $3.33 billion | $3.11 billion at Dec. 31, 2022 |
| Total deposits | $3.41 billion | $3.24 billion at Dec. 31, 2022 |
| Net interest income | $34.1 million for Q2; $66.9 million for six months | Q2 2022: $27.7 million; six months 2022: $52.9 million |
| Net income | $8.9 million for Q2; $18.1 million for six months | Q2 2022: $2.3 million; six months 2022: $4.4 million |
| Net income available to common shareholders | $7.7 million for Q2; $15.8 million for six months | $2.3 million and $4.4 million, respectively, in 2022 |
| Basic / diluted EPS | Q2: $0.57 / $0.53; six months: $1.16 / $1.08 | Q2 2022: $0.17 / $0.16; six months 2022: $0.33 / $0.32 |
| Net interest margin | Q2: 3.82%; six months: 3.80% | Q2 2022: 3.77%; six months 2022: 3.90% |
| Cash and cash equivalents | $268.0 million | $332.0 million at Dec. 31, 2022 |
| Total borrowings | $111.3 million | $111.2 million at Dec. 31, 2022 |
- Growth and earnings: Q2 net interest income rose 22.9% year over year and net income rose 290.5%. For the first half, net interest income increased 26.4% and net income increased 315.5%. Growth in loan balances and yields drove interest income higher, partly offset by sharply higher deposit and borrowing costs.
- Rates and funding costs: Q2 loan yield was 7.29%, versus 4.73% a year earlier; the average rate paid on interest-bearing deposits rose to 3.87% from 0.62%. Six-month deposit expense was $47.0 million versus $5.3 million. Six-month net interest spread declined to 2.98% from 3.73%.
- Credit: The allowance for credit losses was $37.2 million, or 1.12% of loans, compared with $30.4 million, or 0.98%, at year-end. The first-half provision was $2.6 million versus $7.4 million in 2022; first-half net recoveries were $292,000. Nonperforming loans were $10.0 million, or 0.30% of loans, versus $12.3 million, or 0.39%, at year-end. Commercial and industrial loans accounted for $7.2 million of nonaccrual loans.
- Cash flow: First-half operating cash flow was $18.5 million; investing cash use was $252.3 million and financing cash inflow was $169.8 million. Cash declined $64.0 million. Investing included $224.9 million of net loan originations; deposits increased $172.1 million.
- Capital and liquidity: Shareholders’ equity was $395.9 million. The Bank reported a 12.99% total risk-based capital ratio and 13.06% Tier 1 leverage ratio and remained “well capitalized.” Available borrowing capacity included $425.7 million under FHLB arrangements, $1.2 billion at the Federal Reserve Discount Window, and $33.0 million in federal funds lines; no advances were outstanding under these facilities at quarter-end.
Material changes and unusual items
- Loans grew 7.3% and deposits 5.3% from year-end. Commercial and industrial loans increased 10.0%; the loan-to-deposit ratio was 97.8%, up from 96.0%.
- Deposit mix shifted toward time deposits: time deposits totaled $500.6 million, compared with $216.0 million at year-end. Deposits of $250,000 or more totaled $406.3 million. The company reported approximately $1.0 billion of uninsured deposits.
- Adoption of CECL on January 1, 2023 increased the loan allowance by $4.0 million and reduced retained earnings by $3.2 million after tax. The filing says no allowance was needed for available-for-sale securities or off-balance-sheet commitments.
- Available-for-sale securities had $9.5 million of gross unrealized losses, attributed by management to market interest rates rather than credit deterioration. The company reported no securities-related credit allowance.
- A $200 million cash-flow hedge entered in March was discontinued in May; a $5.0 million gain is being amortized from accumulated other comprehensive income into interest expense over the original hedge term. It was not described as a current-period operating gain.
- Noninterest income increased 80.1% in Q2 to $2.3 million, partly reflecting higher bank-owned life insurance earnings and other income. First-half noninterest expense increased 6.8% to $45.9 million, with higher personnel, occupancy, technology and marketing costs.
- Management intends to transition out of auto finance as the portfolio pays down. The portfolio was $44.1 million, or 1.3% of loans, at quarter-end.
Outlook, risks and contingencies
The filing provides no specific earnings, margin, loan-growth or deposit-growth guidance. Management says it expects to monitor growth to remain within regulatory capital standards and expects the auto-finance transition to free capital for higher-earning assets. Its interest-rate simulation estimated net interest income would increase 11.23% under an immediate 300-basis-point rise and decline 4.38% under a 100-basis-point fall over 12 months; management cautions that model assumptions are uncertain and actual results may differ.
Key risks include interest-rate volatility, deposit retention and growth, uninsured-deposit exposure, economic and real-estate conditions, credit quality and collateral values, and the company’s concentration in Texas markets. The filing added that banking-sector turmoil could weaken customer confidence, drive deposits to larger banks or higher-yielding investments, and prompt additional regulatory scrutiny and costs. Management reported no material legal proceedings and considered potential liabilities from ordinary-course matters not likely to have a material adverse effect. Disclosure controls were deemed effective, with no materially affecting changes in internal control reported for the quarter.
Important facts for investors to verify
- Whether deposit costs continue to rise and how deposit mix, wholesale funding and uninsured deposits affect liquidity and net interest margin.
- Loan credit trends, including commercial real estate and C&I risk grades, nonaccrual balances, charge-offs and the adequacy of the CECL allowance.
- Interest-rate sensitivity assumptions and the effects of securities’ unrealized losses, deposit behavior and terminated hedge-gain amortization.
- Progress and expected costs or savings from winding down auto finance, alongside branch, staffing and technology expense trends.
- Preferred-stock dividends and dilution: preferred dividends reduced Q2 common earnings by $1.2 million, and diluted share counts include convertible preferred stock and other dilutive securities.