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10-Q: THIRD COAST BANCSHARES, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Quarterly Report on Form 10-Q (this "Form 10-Q") and in our prospectus filed with the Securities and Exchange Commission (the "SEC") pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the "Securities Act"), on November 9, 2021, related to our initial public offering. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to "we," "our," "us," and the "Company" refer to Third Coast Bancshares, Inc., a Texas corporation, and its consolidated subsidiaries, references in this Form 10-Q to the "Bank" refer to Third Coast Bank, SSB, a Texas state savings bank and our wholly owned bank subsidiary, and references in this Form 10-Q to "TCCC" refer to Third Coast Commercial Capital, Inc., a Texas corporation and wholly owned subsidiary of the Bank.

The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Note Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Risk Factors" included in the prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act on November 9, 2021 and in Item 1A of this Form 10-Q. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Overview

We are a bank holding company with headquarters in Humble, Texas that operates through our wholly owned subsidiary, the Bank, and the Bank's wholly owned subsidiary, TCCC. We focus on providing commercial banking solutions to small and medium-sized businesses and professionals with operations in our markets. Our market expertise, coupled with a deep understanding of our customers' needs, allows us to deliver tailored financial products and services. We currently operate twelve branches, with seven branches in the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas. As of September 30, 2021, we had, on a consolidated basis, total assets of $2.08 billion, total loans of $1.61 billion, total deposits of $1.82 billion and total shareholders' equity, including ESOP-owned shares, of $206.2 million.

On January 1, 2020, we acquired 100% of the outstanding stock of Heritage Bancorp, Inc. and its subsidiary, Heritage Bank, with five branches located in Texas, and merged Heritage Bancorp, Inc. with and into the Company and Heritage Bank with and into the Bank. The estimated values of assets acquired and liabilities assumed as of January 1, 2020 were total assets of $315.9 million, total loans of $259.6 million, and total deposits of $260.2 million. Pursuant to the merger, we issued $50.9 million in common stock and $103,627 in cash and recognized total goodwill of $18.0 million.

As a bank holding company that operates through one segment, community banking, we generate most of our revenue from interest on loans, and customer service and loan fees. We incur interest expense on deposits and other borrowed funds, as well as noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between interest income on interest-earning assets, such as loans and interest-bearing time deposits in other banks, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest spread is the difference between average rates earned on interest-earning assets and average rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing liabilities and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the state of Texas.

COVID-19 Update

The Company has been, and may continue to be, impacted by the COVID-19 pandemic. In recent months, vaccination rates have been increasing and restrictive measures have eased in certain areas. However, uncertainty remains about the duration of the

pandemic and the timing and strength of the global economy's recovery. To address the economic impact of the pandemic in the U.S., multiple stimulus packages have been enacted to provide economic relief to individuals and businesses, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which established the Paycheck Protection Program (the "PPP"), and the American Rescue Plan Act of 2021, enacted in March 2021.

As the pandemic evolves, we continue to evaluate protocols and processes in place to execute our business continuity plans while promoting the health and safety of our employees and continuing to support our customers and communities.

We have been an active participant in all phases of the PPP, administered by the SBA, and have helped many of our customers obtain loans through the program. PPP loans have a two or five-year term and earn interest at 1.0%. At September 30, 2021, outstanding PPP loans, net of deferred loan fees of $4.5 million, were $171.3 million which are included in commercial and industrial loans. Assuming compliance with PPP origination and documentation requirements, loans funded through the PPP program are fully guaranteed by the U.S. government.

The Company also participated in the Main Street Lending Program (the "MSLP"), created by the Board of Governors of the Federal Reserve System (the "Federal Reserve") to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. At September 30, 2021, outstanding MSLP loans, excluding the 95% portion sold to the Federal Reserve and net of deferred loan fees of $1.0 million, were $5.1 million which are included in commercial and industrial loans.

Completion of $70.5 Million Private Placement

On August 27, 2021, the Company completed the issuance and sale of 2,937,876 shares of its common stock for aggregate proceeds of approximately $70.5 million, consisting of 227,307 shares issued and sold during the six months ended June 30, 2021 for aggregate proceeds of approximately $5.4 million and 2,710,569 shares issued and sold between July 1, 2021 and August 27, 2021 for aggregate proceeds of approximately $65.1 million, in a private placement in reliance upon the exemption from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. The Company used a portion of the net proceeds from the private placement to repay $32.5 million of outstanding indebtedness, consisting of (i) $19.5 million under the Company's senior debt due September 10, 2022;

Initial Public Offering

On November 9, 2021, the Company filed a prospectus with the SEC relating to the initial public offering of 3,500,000 shares of the Company's common stock, par value $1.00 per share (or 4,025,000 shares if the underwriters were to exercise in full their option to purchase additional shares). The Company's common stock began trading on the NASDAQ Global Select Market under the symbol "TCBX" on November 9, 2021.

We issued and sold an aggregate of 4,025,000 shares of our common stock, including 525,000 shares of common stock sold pursuant to the underwriters' full exercise of their option to purchase additional shares, in our initial public offering at a public offering price of $25.00 per share, for aggregate gross proceeds of $100.6 million before deducting underwriting discounts and estimated offering expenses, and estimated aggregate net proceeds of approximately $92.0 million after deducting underwriting discounts and estimated offering expenses, which expenses are not yet finalized. The initial closing of our initial public offering occurred on November 12, 2021, and the closing for the shares issued pursuant to the underwriters' option occurred on November 17, 2021. In connection with the closing of our initial public offering, we issued an aggregate of 45,750 shares of restrictive stock to our directors and executive officers. We intend to use the net proceeds from our initial public offering to support our organic growth and for general corporate purposes, including maintenance of our required regulatory capital and potential future acquisition opportunities.







        Results of Operations
        Our results of operations depend substantially on net interest income and
        noninterest income. Other factors contributing to our results of operations
        include our level of our noninterest expenses, such as salaries and employee
        benefits, occupancy and equipment and other miscellaneous operating expenses.
        See the analysis of the material fluctuations in the related discussions that
        follow.
                              For the Three Months Ended September 30,                   For the Nine Months Ended September 30,
        (Dollars in                                            Increase                                                  Increase
        thousands)        2021              2020              (Decrease)              2021             2020             (Decrease)
        Interest
        income         $    24,399       $    19,242     $  5,157        26.8 %    $    73,955       $  59,387     $ 14,568        24.5 %
        Interest
        expense              2,397             3,544       (1,147 )     (32.4 )%         8,021          11,178       (3,157 )     (28.2 )%
           Net
        interest
        income              22,002            15,698        6,304        40.2 %         65,934          48,209       17,725        36.8 %
        Provision
        for loan
        losses               2,323                 -        2,323       100.0 %          3,823           2,550        1,273        49.9 %
        Noninterest
        income                 964               633          331        52.3 %          2,823           2,103          720        34.2 %
        Noninterest
        expense             17,641            11,098        6,543        59.0 %         50,938          35,635       15,303        42.9 %
        Income
        before
        income taxes         3,002             5,233       (2,231 )     (42.6 )%        13,996          12,127        1,869        15.4 %
        Income tax
        expense                617             1,099         (482 )     (43.9 )%         2,926           2,547          379        14.9 %
        Net income     $     2,385       $     4,134     $ (1,749 )     (42.3 )%   $    11,070       $   9,580     $  1,490        15.6 %
        


Net Interest Income

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest-earning assets and interest-bearing liabilities, respectively. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact our net interest income. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders' equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Nine months ended September 30, 2021 vs. Nine months ended September 30, 2020

Net interest income increased $17.7 million, or 36.8%, during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020 primarily due to an increase in average loans and lower average rates paid on interest-bearing deposits as well as increase in income from PPP loans. Average loans was $1.4 billion for the nine months ended September 30, 2020 compared to $1.6 billion for the nine months ended September 30, 2021 with the increase primarily due to loan growth in commercial and industrial loans and commercial real estate loans. The average cost of interest-bearing deposits was 0.63% for the nine months ended September 30, 2021 and 1.18% for the nine months ended September 30, 2020. The Company recognized $16.8 million in PPP deferred origination fees for the nine months ended September 30, 2021 through both accretion and forgiveness of the related PPP loans compared to $6.9 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, net interest margin and net interest spread were 4.61% and 4.45%, respectively, compared to 4.20% and 3.91%, respectively, for the nine months ended September 30, 2020.

The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods.







                                                               For the Nine Months Ended September 30,
                                                          2021                                         2020
                                          Average        Interest       Average        Average        Interest       Average
                                        Outstanding       Earned/       Yield/       Outstanding       Earned/       Yield/
        (Dollars in thousands)            Balance         Paid(3)        Rate          Balance         Paid(3)        Rate
        Assets
        Interest-earnings assets:
        Investment securities           $     27,400     $     778          3.80 %   $      4,493     $      68          2.02 %
        Loans, gross                       1,603,555        72,660          6.06 %      1,375,582        58,628          5.69 %
        Federal funds sold and other
        interest-
          earning assets                     282,065           517          0.25 %        151,419           691          0.61 %
        Total interest-earning assets      1,913,020        73,955          5.17 %      1,531,494        59,387          5.18 %
        Less allowance for loan
        losses                               (13,211 )                                    (10,154 )
        Total interest-earning
        assets, net of
          allowance                        1,899,809                                    1,521,340
        Noninterest-earning assets           114,310                                       82,743
        Total assets                    $  2,014,119                                 $  1,604,083
        Liabilities and Shareholders'
        Equity
        Interest-bearing liabilities:
        Interest-bearing deposits       $  1,400,424     $   6,613          0.63 %   $  1,099,976     $   9,686          1.18 %
        Notes payable                         29,475         1,080          4.90 %         31,079         1,171          5.03 %
        FHLB advances                         53,115           328          0.83 %         47,135           321          0.91 %
        Total interest-bearing
        liabilities                        1,483,014         8,021          0.72 %      1,178,190        11,178          1.27 %
        Noninterest-bearing deposits         380,645                                      307,678
        Other liabilities                      9,134                                        7,441
        Total liabilities                  1,872,793                                    1,493,309
        Shareholders' equity,
        including ESOP
          owned shares                       141,326                                      110,774
        Total liabilities and
        shareholders' equity            $  2,014,119                                 $  1,604,083
        Net interest income                              $  65,934                                    $  48,209
        Net interest spread(1)                                              4.45 %                                       3.91 %
        Net interest margin(2)                                              4.61 %                                       4.20 %
        


(1)

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.







                                                                   For the Nine Months Ended
                                                              September 30, 2021 compared to 2020
                                                              Increase (Decrease)              Total
                                                               Due to Changes In              Increase
        (Dollars in thousands)                             Volume              Rate          (Decrease)
        Interest-earning assets:
        Investment securities                           $        346       $        364     $        710
        Loans, gross                                           9,653              4,379           14,032
        Federal funds sold and other interest-earning
        assets                                                   595               (769 )           (174 )
        Total increase in interest income               $     10,594       $      3,974     $     14,568
        Interest-bearing liabilities:
        Interest-bearing deposits                       $      2,634       $     (5,707 )   $     (3,073 )
        Notes payable                                            (61 )              (30 )            (91 )
        FHLB advances                                             40                (33 )              7
        Total increase (decrease) in interest expense   $      2,613       $     (5,770 )   $     (3,157 )
        Increase in net interest income                 $      7,981       $      9,744     $     17,725
        


Three months ended September 30, 2021 vs. Three months ended September 30, 2020

Net interest income increased $6.3 million, or 40.2% during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to higher average loan yields and lower average rates on interest-bearing deposits as well as increase in income from PPP loans. Average yield on loans was 6.11% for the three months ended September 30, 2021, compared to 4.82% for the three months ended September 30, 2020. The average cost of interest-bearing deposits decreased 40 basis points from 0.96% for the three months ended September 30, 2020 to 0.56% for the three months ended September 30, 2021. The Company recognized $4.1 million in PPP deferred origination fees for the three months ended September 30, 2021 through both accretion and forgiveness of the related PPP loans compared to $1.6 million for the three months ended September 30, 2020. For the three months ended September 30, 2021, net interest margin and net interest spread were 4.49% and 4.34%, respectively, compared to 3.61% and 3.36%, respectively, for the same period in 2020.

The following table presents an analysis of net interest income, net interest spread and net interest margin for the periods indicated in the manner presented for the nine months ended September 30, 2021 and 2020 above.







                                                              For the Three Months Ended September 30,
                                                          2021                                         2020
                                          Average        Interest       Average        Average        Interest       Average
                                        Outstanding       Earned/       Yield/       Outstanding       Earned/       Yield/
        (Dollars in thousands)            Balance         Paid(3)        Rate          Balance         Paid(3)        Rate
        Assets
        Interest-earnings assets:
        Investment securities           $     31,588     $     265          3.33 %   $      5,344     $      36          2.68 %
        Loans, gross                       1,553,517        23,940          6.11 %      1,575,593        19,075          4.82 %
        Federal fund sold and other
        interest
          earning assets                     360,723           194          0.21 %        150,806           131          0.35 %
        Total interest-earning assets      1,945,828        24,399          4.97 %      1,731,743        19,242          4.42 %
        Less allowance for loan
        losses                               (13,466 )                                    (10,088 )
        Total interest-earning
        assets, net of
          allowance                        1,932,362                                    1,721,655
        Noninterest-earning assets           138,687                                       87,596
        Total assets                    $  2,071,049                                 $  1,809,251
        Liabilities and Shareholders'
        Equity
        Interest-bearing liabilities:
        Interest-bearing deposits       $  1,423,418     $   2,023          0.56 %   $  1,246,390     $   3,005          0.96 %
        Notes payable                         21,278           262          4.89 %         33,018           428          5.16 %
        FHLB advances                         55,418           112          0.80 %         51,522           111          0.86 %
        Total interest-bearing
        liabilities                        1,500,114         2,397          0.63 %      1,330,930         3,544          1.06 %
        Noninterest-bearing deposits         386,727                                      358,915
        Other liabilities                      9,440                                        7,026
        Total liabilities                  1,896,281                                    1,696,871
        Shareholders' equity,
        including ESOP-
          owned shares                       174,768                                      112,380
        Total liabilities and
        shareholder's equity            $  2,071,049                                 $  1,809,251
        Net interest income                              $  22,002                                    $  15,698
        Net interest spread(1)                                              4.34 %                                       3.36 %
        Net interest margin(2)                                              4.49 %                                       3.61 %
        


(1)

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.







                                                                      For the Three Months
                                                               September 30, 2021 compared to 2020
                                                              Increase (Decrease)               Total
                                                               Due to Changes In               Increase
        (Dollars in thousands)                            Volume              Rate            (Decrease)
        Interest-earning assets:
        Investment securities                           $       177       $          52      $        229
        Loans, gross                                           (216 )             5,081             4,865
        Federal funds sold and other interest-earning
        assets                                                  183                (120 )              63
        Total increase in interest income               $       144       $       5,013      $      5,157
        Interest-bearing liabilities:
        Interest-bearing deposits                       $       436       $      (1,418 )    $       (982 )
        Notes payable                                          (151 )               (15 )            (166 )
        FHLB advances                                             9                  (8 )               1
        Total increase (decrease) in interest expense   $       294       $      (1,441 )    $     (1,147 )
        Increase (decrease) in net interest income      $      (150 )     $       6,454      $      6,304
        


Provision for Loan Losses

The provision for loan losses is an expense we use to maintain an allowance for loan losses at a level which is deemed appropriate by management to absorb inherent losses on existing loans.

The provision for loan losses for the nine months ended September 30, 2021 was $3.8 million compared to $2.6 million for the nine months ended September 30, . . .

Dec 22, 2021

COMTEX_399430337/2041/2021-12-22T16:26:33

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