Third Coast Bancshares, Inc. — 2023 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Third Coast is a Texas community banking company operating 16 branches in Greater Houston, Dallas-Fort Worth, Austin-San Antonio and Detroit, Texas; its subsidiary also provides accounts-receivable factoring. Figures below are unaudited; dollars are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $69.4 | $43.1 | $189.5 | $102.8 |
| Net interest income | $35.3 | $31.4 | $102.2 | $84.3 |
| Provision for credit losses | $2.6 | $2.9 | $5.2 | $10.3 |
| Noninterest income | $1.9 | $2.5 | $6.0 | $5.5 |
| Noninterest expense | $27.5 | $22.7 | $73.4 | $65.7 |
| Net income | $5.6 | $6.8 | $23.7 | $11.1 |
| Net income available to common shareholders | $4.4 | $6.8 | $20.2 | $11.1 |
| Basic / diluted EPS | $0.32 / $0.32 | $0.50 / $0.49 | $1.49 / $1.41 | $0.83 / $0.81 |
Q3 net interest margin was 3.71%, versus 3.77% a year earlier; net interest spread was 2.79%, versus 3.40%. For the first nine months, margin was 3.77% versus 3.85%, and spread was 2.91% versus 3.66%. Average loan yield rose to 7.57% in Q3 from 5.59%, while the average rate paid on interest-bearing deposits rose to 4.37% from 1.58%.
For the first nine months, net cash provided by operating activities was $21.5 million (prior year $15.6 million); investing activities used $479.2 million (prior year $1,096.0 million); and financing activities provided $412.2 million (prior year $971.2 million). Cash and cash equivalents ended the period at $286.5 million, down from $332.0 million at year-end 2022.
Financial position, funding and capital
- At September 30, 2023, total assets were $4.216 billion, loans before allowance were $3.560 billion, deposits were $3.647 billion and shareholders’ equity was $400.3 million. Since December 31, 2022, assets increased $442.6 million, loans $452.4 million (14.6%), deposits $410.7 million (12.7%) and equity $18.6 million (4.9%).
- Loans were 97.6% of deposits at period-end; commercial and industrial loans were 36.2% of the portfolio, and construction, development and other real estate loans were 18.4%.
- Interest-bearing deposits were $3.147 billion. Time deposits were $603.4 million, up from $216.0 million at year-end 2022; $481.1 million of time deposits were in denominations of $250,000 or more. Estimated uninsured time deposits were $476.3 million. The Bank reported uninsured customer deposits equal to 32.5% of non-brokered deposits, down from 36.7% at year-end 2022.
- Borrowings totaled $116.4 million: $35.9 million under a senior line of credit and $80.5 million of subordinated debt. The $50 million senior facility matures September 10, 2024; subordinated notes mature in 2032 and carry a 5.5% fixed rate through March 2027, then a floating rate.
- Available borrowing capacity included $369.2 million through the FHLB, $14.1 million on the senior line, $1.2 billion through the Federal Reserve Discount Window arrangement, and $33.0 million through federal funds lines. No FHLB, Discount Window or federal funds advances were outstanding at quarter-end.
- The Bank’s regulatory capital ratios remained above “well capitalized” thresholds: total risk-based capital 13.49%, Tier 1 leverage 12.62%, and common equity Tier 1 12.48%. Consolidated company ratios were 12.72%, 9.79% and 8.01%, respectively.
Material changes and notable items
- Q3 net interest income increased 12.5% year over year as loan growth and higher loan yields more than offset sharply higher deposit and borrowing costs. Nine-month net interest income rose 21.2%; management attributed the increase to loan growth and repricing, partly offset by funding costs.
- Despite higher net interest income, Q3 net income fell 17.6% year over year. Noninterest expense increased 21.0%, while noninterest income declined 26.5%. Nine-month net income increased 113.0%, reflecting higher net interest income and lower credit-loss provision compared with 2022.
- Q3 expense growth included higher salaries, occupancy, legal and professional costs, and $400,000 of ACH and check fraud losses. Management also cited severance costs related to third-quarter workforce reductions. Average employees were 373 in Q3 versus 361 a year earlier.
- The allowance for credit losses was $38.1 million, or 1.07% of gross loans, versus $30.4 million, or 0.98%, at year-end 2022. The January 1, 2023 CECL adoption added $4.0 million to the allowance and reduced retained earnings by $3.2 million after tax. Nine-month net recoveries were $268,000.
- Nonperforming loans were $16.4 million, up from $12.3 million at year-end; nonaccrual loans were $14.0 million. The nonperforming-loan ratio rose to 0.46% from 0.39%. Management said the loans were well secured and expected minimal losses; a $2.0 million loan more than 90 days past due at quarter-end was renewed and current in October.
- Available-for-sale securities had $9.44 million of unrealized losses at quarter-end, attributed by management to higher market interest rates; no credit-loss allowance was recorded. The portfolio’s fair value was $201.0 million, versus $176.1 million at year-end.
- The company recorded $364,000 of Q3 gains on securities sales. It also recognized $1.2 million of reductions in interest expense during the first nine months from accretion of gains on previously terminated cash-flow hedges; a $200 million swap was terminated in May 2023, producing a $5.0 million gain being accreted over the remaining hedge term.
Outlook, risks and contingencies
The filing provides no specific earnings, growth or margin guidance. Management noted that interim results are not necessarily indicative of full-year results. The Bank received Federal Reserve approval on October 26, 2023 to convert to a state bank under the name Third Coast Bank; the conversion remained subject to Texas regulatory approvals.
Key stated risks include interest-rate fluctuations and resulting margin or valuation effects; retaining and growing deposits, including uninsured and wholesale funding; credit quality, collateral values and allowance adequacy; real estate and construction exposure; and the company’s concentration in Texas markets. The company also cited potential effects of banking-industry confidence concerns and additional regulatory scrutiny. Its rate-sensitivity model estimated that an instantaneous +200 basis-point rate shock would reduce one-year net interest income by 0.65% and fair value of equity by 4.07% at September 30, 2023. Management cautioned that model assumptions are uncertain and actual results may differ.
Management reported no material legal proceedings and stated that ordinary-course litigation was not expected to have a material adverse effect, while noting that an unfavorable outcome could be material. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether deposit growth and funding mix remain stable, particularly given higher time-deposit balances, uninsured deposits and rising deposit costs.
- Whether loan growth sustains earnings without further margin compression as deposit pricing adjusts and interest rates change.
- Trends in nonaccrual, past-due and criticized loans, especially commercial and industrial and real-estate exposures, and the adequacy of the CECL allowance.
- Whether the $400,000 fraud loss is isolated and whether the company’s operational controls prevent recurrence.
- Completion and implications of the proposed state-bank conversion, including required Texas approvals.
- Capital and liquidity resilience relative to loan growth, commitments to extend credit of $1.362 billion, and market or regulatory developments.