Third Coast Bancshares, Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2022, compared with Q1 2021; balance-sheet comparisons are against December 31, 2021. The Texas community banking company operates 13 branches and provides commercial and retail banking, lending, deposits, and accounts-receivable factoring.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / Dec. 31, 2021 |
|---|---|---|
| Interest income | $27.2 million | $25.6 million, Q1 2021 |
| Net interest income | $25.2 million; up 11.0% | $22.7 million, Q1 2021 |
| Net interest margin | 4.09% | 4.97%, Q1 2021 |
| Provision for loan losses | $4.0 million | $1.5 million, Q1 2021 |
| Noninterest income / expense | $1.7 million / $20.2 million | $0.8 million / $15.5 million, Q1 2021 |
| Net income / diluted EPS | $2.1 million / $0.15 | $5.1 million / $0.80, Q1 2021 |
| Total assets | $3.04 billion | $2.50 billion |
| Loans, gross / net | $2.45 billion / $2.42 billion | $2.07 billion / $2.05 billion |
| Total deposits | $2.59 billion | $2.14 billion |
| Cash and cash equivalents | $371.3 million | $327.0 million |
| Total shareholders’ equity | $301.2 million | $299.0 million |
Cash flow. Q1 operating cash flow was $0.9 million; investing activities used $483.5 million, largely reflecting loan growth and securities purchases; financing activities provided $526.9 million, including $446.1 million of deposit growth and $80.5 million net proceeds from subordinated notes. Cash increased $44.3 million during the quarter.
Debt and capital. At quarter-end, borrowings totaled $131.5 million: $50.0 million of FHLB advances, $1.0 million under a senior line, and $80.5 million of subordinated notes, net of issuance costs. The company issued $82.3 million principal amount of 5.50% fixed-to-floating subordinated notes due 2032; they are intended to qualify as Tier 2 capital. The Bank reported a 13.2% total risk-based capital ratio and was classified as well capitalized.
Material changes and drivers
- Net income fell 59.0% year over year even as net interest income rose. Higher loan-loss provision and operating expenses outweighed increased net interest income and noninterest income.
- Average loans increased to $2.21 billion from $1.60 billion, supporting interest income; however, the average loan yield declined, and PPP fee accretion fell to $1.3 million from $7.6 million.
- Net interest margin declined to 4.09% from 4.97%. Management attributed NII growth to loan growth and lower average interest-bearing deposit costs, partly offset by reduced PPP income.
- Loans grew $379.2 million from year-end, primarily in construction and development, commercial real estate, and commercial and industrial lending. PPP balances declined $54.9 million to $26.7 million.
- Deposits rose $446.0 million, including a $400.2 million increase in noninterest-bearing deposits. Securities rose $99.8 million after a $100 million Treasury purchase.
- Noninterest expense increased $4.7 million, led by salaries and benefits (+$3.4 million), occupancy and equipment, legal and professional costs, and regulatory assessments. Staffing increased to 339 from 236 year over year; the company opened its thirteenth branch.
- Nonperforming assets decreased to $12.4 million from $17.3 million at year-end, mainly due to lower restructured loans. Nonperforming loans were 0.44% of total loans; the allowance was $23.3 million, or 0.95% of loans.
Outlook, risks, and unusual items
- The filing gives no numerical earnings, growth, or margin guidance. Management said added personnel are intended to support future growth and expects deposits to remain the primary funding source and loans the primary use of funds.
- Interest-rate sensitivity is material: modeled net interest income increased 9.13% under an instantaneous +200 basis-point shock and 14.35% under +300 basis points; modeled results depend on assumptions and may differ from actual outcomes.
- Key disclosed risks include Texas market concentration, interest-rate changes, maintaining and growing deposits, credit quality and allowance adequacy, commercial real estate and construction exposure, borrower repayment and collateral values, technology and fraud risks, competition, and COVID-19-related effects.
- Approximately 400 loans totaling $211.7 million remained subject to COVID-19-related payment deferrals at March 31, 2022; $4.3 million of related accrued interest was outstanding. PPP loans are government-guaranteed subject to program requirements.
- Off-balance-sheet commitments to extend credit were $891.9 million and standby letters of credit were $9.5 million. Management anticipated no material losses from these activities.
- The company adopted lease accounting on January 1, 2022, recording approximately $11.0 million of right-of-use assets and $10.9 million of lease liabilities. It was evaluating the expected-credit-loss standard effective for it in 2023.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material legal proceedings or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether rapid loan growth, particularly in commercial and industrial, commercial real estate, and construction lending, is accompanied by stable credit performance and adequate reserves.
- Whether deposit growth and its mix—especially the increase in noninterest-bearing balances and the level of uninsured deposits—are sustainable as rates change.
- Whether lower margin and materially higher operating costs improve as PPP fee income fades and recent hiring and branch expansion contribute to revenue.
- The terms, regulatory-capital treatment, and future interest expense implications of the $82.3 million subordinated-note issuance, including the floating-rate reset beginning in 2027.
- Exposure associated with deferred-payment loans, unfunded commitments, FHLB call options, and the company’s Texas geographic concentration.