THIRD COAST BANCSHARES, INC. 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 theSecurities and Exchange Commission (the "SEC") pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the "Securities Act"), onNovember 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 toThird Coast Bancshares, Inc. , aTexas corporation, and its consolidated subsidiaries, references in this Form 10-Q to the "Bank" refer toThird Coast Bank, SSB , aTexas state savings bank and our wholly owned bank subsidiary, and references in this Form 10-Q to "TCCC" refer toThird Coast Commercial Capital, Inc. , aTexas 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 theSEC pursuant to Rule 424(b) of the Securities Act onNovember 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 inHumble, 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 theGreater Houston market, two branches in theDallas-Fort Worth market, two branches in theAustin -San Antonio market, and one branch inDetroit, Texas . As ofSeptember 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 . OnJanuary 1, 2020 , we acquired 100% of the outstanding stock ofHeritage Bancorp, Inc. and its subsidiary,Heritage Bank , with five branches located inTexas , and mergedHeritage Bancorp, Inc. with and into the Company andHeritage Bank with and into the Bank. The estimated values of assets acquired and liabilities assumed as ofJanuary 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 inTexas , 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 ofTexas .
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
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pandemic and the timing and strength of the global economy's recovery. To
address the economic impact of the pandemic in the
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%. AtSeptember 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 theU.S. government. The Company also participated in the Main Street Lending Program (the "MSLP"), created by theBoard of Governors of theFederal 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. AtSeptember 30, 2021 , outstanding MSLP loans, excluding the 95% portion sold to theFederal 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
OnAugust 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 endedJune 30, 2021 for aggregate proceeds of approximately$5.4 million and 2,710,569 shares issued and sold betweenJuly 1, 2021 andAugust 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 dueSeptember 10, 2022 ; (ii)$11.0 million under a subordinated debt dueJuly 29, 2022 ; and (iii)$2.0 million under a subordinated debt dueSeptember 27, 2022 .
Initial Public Offering
OnNovember 9, 2021 , the Company filed a prospectus with theSEC 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" onNovember 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 onNovember 12, 2021 , and the closing for the shares issued pursuant to the underwriters' option occurred onNovember 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. 43
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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
Net interest income increased$17.7 million , or 36.8%, during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 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 endedSeptember 30, 2020 compared to$1.6 billion for the nine months endedSeptember 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 endedSeptember 30, 2021 and 1.18% for the nine months endedSeptember 30, 2020 . The Company recognized$16.8 million in PPP deferred origination fees for the nine months endedSeptember 30, 2021 through both accretion and forgiveness of the related PPP loans compared to$6.9 million for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 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 endedSeptember 30, 2020 . 44
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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)
Net interest spread is the average yield on interest-earning assets minus the
average rate on interest-bearing liabilities.
(2)
Net interest margin is equal to net interest income divided by average
interest-earning assets.
(3)
Interest earned/paid includes accretion of deferred loan fees, premiums and
discounts. Interest income on loans includes loan fees and discount accretion of
$25.0 million and $12.6 million for the nine months ended September 30, 2021 and
2020, respectively.
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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
$ 7,981 $ 9,744 $ 17,725
Three months ended
Net interest income increased$6.3 million , or 40.2% during the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 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 endedSeptember 30, 2021 , compared to 4.82% for the three months endedSeptember 30, 2020 . The average cost of interest-bearing deposits decreased 40 basis points from 0.96% for the three months endedSeptember 30, 2020 to 0.56% for the three months endedSeptember 30, 2021 . The Company recognized$4.1 million in PPP deferred origination fees for the three months endedSeptember 30, 2021 through both accretion and forgiveness of the related PPP loans compared to$1.6 million for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , net interest margin and net interest spread were 4.49% and 4.34%, respectively, compared to 3.61% and 3.36%, respectively, for the same period in 2020. 46 -------------------------------------------------------------------------------- The following table presents an analysis of net interest income, net interest spread and net interest margin for the periods indicated in the manner presented for the nine months endedSeptember 30, 2021 and 2020 above. For the Three Months Ended September 30, 2021 2020 Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ (Dollars in thousands) Balance Paid(3) Rate Balance Paid(3) Rate Assets Interest-earnings assets: Investment securities$ 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) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (2) Net interest margin is equal to net interest income divided by average interest-earning assets. (3) Interest earned/paid includes accretion of deferred loan fees, premiums and discounts. Interest income on loans includes loan fees and discount accretion of$7.8 million and$3.3 million for the three months endedSeptember 30, 2021 and 2020, respectively. The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. For the Three Months September 30, 2021 compared to 2020 Increase (Decrease) Total Due to Changes In Increase (Dollars in thousands) Volume Rate (Decrease) Interest-earning assets: Investment securities$ 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
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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 endedSeptember 30, 2021 was$3.8 million compared to$2.6 million for the nine months endedSeptember 30, 2020 . The majority of the provision for 2021 was related to provision on newly originated non-PPP loans. The provision for loan losses for the three months endedSeptember 30, 2021 was$2.3 million . No provision to loan losses was recorded for the three months endedSeptember 30, 2020 . The majority of the provision for the three months endedSeptember 30, 2021 was related to newly originated non-PPP loans.
Noninterest Income
Our primary sources of recurring noninterest income are service charges and fees
on deposit accounts, earnings credits on correspondent bank balances, and
earnings from bank-owned life insurance. Noninterest income does not include
loan origination fees, which are recognized in interest income.
The following table presents, for the periods indicated, the major categories of
noninterest income:
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)
Noninterest
Income:
Service charges
and fees $ 559 $ 443 $ 116 26.2 % $ 1,801 $ 1,202 $ 599 49.8 %
Gain on sale of
SBA loans 175 - 175 100.0 % 175 266 (91 ) (34.2 )%
Earnings on
bank-owned life
insurance 145 87 58 66.7 % 421 265 156 58.9 %
Other 85 103 (18 ) (17.5 )% 426 370 56 15.1 %
Total noninterest
income $ 964 $ 633 $ 331 52.3 % $ 2,823 $ 2,103 $ 720 34.2 %
Nine months ended
The increase in noninterest income of$720,000 for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , was primarily due to the increase in service charges and fees and earnings on bank-owned life insurance. The increase in service charges and fees was primarily due to a$400,000 increase in ATM income and a$252,000 increase in mortgage secondary market fee income. The Company purchased$10.0 million in additional bank-owned life insurance policies during the fourth quarter of 2020 resulting in the increased earnings on bank-owned life insurance in 2021.
Three months ended
The increase in noninterest income of$331,000 for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , was primarily due to the$175,000 gain recognized on the sale of the guarantee portion of one (non-PPP) SBA loan and the increase in service charges and fees on deposit accounts. The increase in service charges and fees on deposits was primarily due to a$79,000 increase in ATM income and a$26,000 increase in non-sufficient funds fees.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, legal and professional fees, data processing and network expenses, regulatory fees, includingFederal Deposit Insurance Corporation ("FDIC") assessments, marketing expenses, and loan operations and repossessed asset related expenses. 48 --------------------------------------------------------------------------------
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Three Months Ended September 30, For the Nine Months Ended September 30,
Increase Increase
(Dollars in thousands) 2021 2020 (Decrease) 2021 2020 (Decrease)
Noninterest Expense:
Salaries and employee
benefits $ 12,138 $ 6,964 $ 5,174 74.3 % $ 34,613 $ 22,136 $ 12,477 56.4 %
Net occupancy and
equipment expenses 1,419 1,098 321 29.2 % 3,810 3,022 788 26.1 %
Other:
Legal and professional
fees 1,164 359 805 224.2 % 3,843 3,048 795 26.1 %
Data processing and
network expenses 844 1,065 (221 ) (20.8 )% 2,274 2,496 (222 ) (8.9 )%
Regulatory assessments 252 336 (84 ) (25.0 )% 595 814 (219 ) (26.9 )%
Advertising and
marketing expenses 422 351 71 20.2 % 1,232 907 325 35.8 %
Loan operations and
other real estate
owned expenses 495 206 289 140.3 % 1,688 1,161 527 45.4 %
Loss on sale of other
real estate owned - - - - 344 - 344 100.0 %
Other expenses 906 719 187 26.0 % 2,540 2,051 489 23.8 %
Total noninterest
expense $ 17,640 $ 11,098 $ 6,542 58.9 % $ 50,939 $ 35,635 $ 15,304 42.9 %
Nine months ended
The increase in noninterest expense of$15.3 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , was primarily due to increases in salaries and employee benefits expense, net occupancy and equipment expenses, and legal and professional expenses and a$344,000 loss on the sale of an other real estate owned property. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were$34.6 million for the nine months endedSeptember 30, 2021 , an increase of$12.5 million , or 56.4%, compared to$22.1 million for the same period in 2020. The increase was due to our investment in additional personnel, which we expect will foster future growth and allow us to accommodate that growth, and increased commissions related to our loan and deposit growth. As ofSeptember 30, 2021 and 2020, the number of employees was 313 and 206, respectively. Net occupancy expenses were$3.8 million and$3.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling$1.3 million and$1.1 million for the nine months endedSeptember 30, 2021 and 2020, respectively. In addition, during 2021, additional building maintenance, landscaping services and janitorial services were completed related to the five branches acquired in the Heritage acquisition and additional office space was leased during 2021 to accommodate the increase in employees. Legal and professional fees were$3.8 million and$3.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase was primarily due to higher audit, consulting, legal, and recruitment costs as a result of growth, regulatory requirements, the PPP loan program and additional personnel.
Three months ended
The increase in noninterest expense of$6.5 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , was primarily due to increases in salaries and employee benefits expense and legal and professional expenses. Salaries and employee benefits were$12.1 million for the three months endedSeptember 30, 2021 , an increase of$5.2 million , or 74.3%, compared to$7.0 million for the same period in 2020. The increase was due to our investment in additional personnel, which we expect will foster future growth and allow us to accommodate that growth and increased commissions related to our loan and deposit growth. During the three months endedSeptember 30, 2021 , the number of employees increased from 265 as ofJune 30, 2021 to 313 as ofSeptember 30, 2021 . During the three months endedSeptember 30, 2020 , the number of employees decreased from 212 as ofJune 30, 2020 to 206 as ofSeptember 30, 2020 . 49 -------------------------------------------------------------------------------- Legal and professional fees were$1.2 million and$359,000 for the three months endedSeptember 30, 2021 and 2020, respectively. The increase was primarily due to higher audit, consulting, legal, and recruitment costs as a result of growth, regulatory requirements, the PPP loan program and additional personnel.
Income Tax Expense
The amount of income tax expense we incur is impacted by the amounts of our
pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax
assets and liabilities are reflected at current income tax rates in effect for
the period in which the deferred tax assets and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Income tax expense and effective tax rates for the periods shown below were as
follows:
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2021 2020 2021 2020
Income tax expense $ 617 $ 1,099 $ 2,926 $ 2,547
Effective tax rate 20.6 % 21.0 % 20.9 % 21.0 %
Financial Condition
Total assets were
Loan Portfolio
Our primary source of income is derived through interest earned on loans to small-to medium-sized businesses, commercial companies, professionals and individuals located in our primary market areas. A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our earning assets. As ofSeptember 30, 2021 , total loans were$1.61 billion , an increase of$56.3 million , or 3.63%, compared to$1.56 billion as ofDecember 31, 2020 . The increase in loans was due to growth of non-PPP related loans totaling$275.8 million , primarily commercial and industrial loans and commercial real estate loans, offset by a decrease in PPP loans of$219.5 million due to forgiveness payments received from the SBA. Total loans as a percentage of deposits were 88.8% and 95.2% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Total loans as a percentage of assets were 77.4% and 83.3% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The following table summarizes our loan portfolio by type of loan as of the dates indicated: September 30, 2021 December 31, 2020 (Dollars in thousands) Amount Percent Amount
Percent
Real estate: Commercial real estate: Non-farm non-residential owner occupied$ 361,467 22.4 %$ 353,273 22.7 % Non-farm 345,360 21.4 % 277,804 17.9 % non-residential non-owner occupied Residential 179,971 11.2 % 140,622 9.0 % Construction, development and other 124,548 7.7 % 98,207 6.3 % Farmland 8,309 0.5 % 4,653 0.3 % Commercial and industrial 538,551 33.4 % 645,928 41.5 % Consumer 4,417 0.3 % 4,157 0.3 % Other 49,771 3.1 % 31,448 2.0 % Total loans$ 1,612,394 100.0 %$ 1,556,092 100.0 % Commercial Real Estate Loans. Commercial real estate loans are underwritten primarily based on cash flows of the borrower and, secondarily, the value of the underlying collateral. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the portfolio are located primarily throughout our markets and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry. 50 -------------------------------------------------------------------------------- Owner-occupied commercial real estate loans are a key component of our lending strategy to owner-operated businesses, representing a large percentage of our total commercial real estate loans. Owner-occupied commercial real estate loans increased$8.2 million , or 2.3%, to$361.5 million as ofSeptember 30, 2021 from$353.3 million as ofDecember 31, 2020 . Non-owner-occupied commercial real estate loans are loans for income producing properties and are generally for retail strip centers, office buildings, self-storage facilities, and multi and single tenant office warehouses, all within our markets. Non-owner-occupied commercial real estate loans increased$67.6 million , or 24.3%, to$345.4 million as ofSeptember 30, 2021 from$277.8 million as ofDecember 31, 2020 .
The increases in commercial real estate loans were due to the addition of several lenders in 2021 and increased productivity of existing lenders in response to market demand.
Residential Real Estate Loans. Residential real estate loans consists of 1-4 family residential loans and multi-family residential loans. Our 1-4 family residential loan portfolio is predominately comprised of loans secured by 1-4 family homes, which are investor owned. While we do have some owner-occupied 1-4 family residential loans, we have not historically pursued this product line; however, we do offer limited mortgage products through our mortgage department. Our multi-family residential loan portfolio is comprised of loans secured by properties deemed multi-family, which includes apartment buildings. Our current multifamily loans are to operators who we believe are seasoned and successful and possess quality alternative repayment sources. Residential real estate loans increased$39.4 million , or 28.0%, to$180.0 million as ofSeptember 30, 2021 from$140.6 million as ofDecember 31, 2020 due primarily to continued organic growth. Construction, Development and Other Loans. Construction and development loans are comprised of loans used to fund construction, land acquisition and land development. Historically, the properties securing the portfolio were primarily in theGreater Houston andDallas markets and were generally diverse in terms of type. During 2021, we expanded our construction and development portfolio through the formation of our builder finance group, which provides traditional homebuilder lines secured by lots and single-family homes, and land acquisition and development loans. This group also finances bond anticipation notes and lines of credit to large national institutional tier-one funds that invest equity in various real estate assets. Construction, development and other loans increased$26.3 million , or 26.8%, to$124.5 million as ofSeptember 30, 2021 from$98.2 million as ofDecember 31, 2020 due primarily to the additional productivity from the formation of the builder finance group. Commercial and Industrial Loans. Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and effectively. These loans are primarily made based on the borrower's ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees. Our commercial and industrial loan portfolio consists of loans principally to retail trade, service, and manufacturing firms located in our market areas. In addition, the commercial and industrial loan category includes factored receivables. TCCC provides working capital solutions for small- to medium-sized businesses throughoutthe United States . TCCC provides working capital financing through the purchase of accounts receivables. Our factored receivables portfolio consists primarily of customers in the transportation, energy services and service industries. AtSeptember 30, 2021 andDecember 31, 2020 , outstanding factored receivables were$35.1 million and$23.1 million , respectively. The commercial and industrial loan category also includes indirect auto loans with local dealerships that are funded through our indirect lending department. The loans are with recourse to the dealership and are structured as commercial lines of credit with the dealerships. The loans are approved with the same underwriting criteria as other commercial credits. Any loans under these lines of credit that are past due in excess of 90 days are required to be paid in full by the dealership. AtSeptember 30, 2021 andDecember 31, 2020 , outstanding indirect auto loans included in the commercial and industrial category were$7.3 million and$7.0 million , respectively. InApril 2020 , we began originating loans to qualified small businesses under the provisions of the CARES Act which are included in commercial and industrial loans. Loans covered by the PPP administered by the SBA may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. AtSeptember 30, 2021 andDecember 31, 2020 , outstanding PPP loans, net of deferred loan fees, were$171.3 million and$390.8 million , respectively. Commercial and industrial loans decreased$107.4 million , or 16.6%, to$538.5 million as ofSeptember 30, 2021 from$645.9 million as ofDecember 31, 2020 . The decrease was primarily a result of the net decrease in PPP loans of$219.5 due to payoffs and forgiveness by the SBA offset by continued organic growth in non-PPP loans. 51
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Other Loan Categories. Other categories of loans included in our loan portfolio
include farmland loans, consumer loans, agricultural loans made to farmers and
ranchers relating to their operations and lease financing. None of these
categories of loans represents a material portion of our total loan portfolio.
The contractual maturity ranges of loans in our loan portfolio and the amount of
such loans with fixed and floating interest rates in each maturity range as of
the date indicated are summarized in the following tables:
As of September 30, 2021
Five Years After
One Year One Through Through Fifteen
(Dollars in thousands) or Less Five Years Fifteen Years Years Total
Real estate:
Commercial real estate:
Non-farm non-residential
owner occupied $ 20,688 $ 106,017 $ 70,745 $ 164,017 $ 361,467
Non-farm non-residential
non-owner occupied 33,027 152,765 43,510 116,058 345,360
Residential 24,490 61,800 25,458 68,223 179,971
Construction, development
and other 35,152 50,636 24,866 13,894 124,548
Farmland 2,591 2,971 1,196 1,551 8,309
Commercial and industrial 167,790 299,820 58,447 12,494 538,551
Consumer 1,363 2,359 695 - 4,417
Other 18,369 31,402 - - 49,771
Total loans $ 303,470 $ 707,770 $ 224,917 $ 376,237 $ 1,612,394
Amounts with fixed rates $ 109,363 $ 555,074 $ 32,009 $ 35,690 $ 732,136
Amounts with floating
rates $ 194,107 $ 152,696 $ 192,908 $ 340,547 $ 880,258
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans that are accruing over 90
days past due, restructured loans - accruing, and foreclosed assets. Generally,
loans are placed on nonaccrual status when they become more than 90 days past
due and/or collection of principal or interest is in doubt. The following table
presents information regarding nonperforming assets at the dates indicated:
As of As of
September 30, December 31,
(Dollars in thousands) 2021 2020
Nonaccrual loans(1) $ 11,077 $ 7,257
Loans > 90 days and still accruing 561 752
Restructured loan-accruing 5,319 4,395
Total nonperforming loans $ 16,957 $ 12,404
Other real estate owned and repossessed assets 1,676 3,367
Total nonperforming assets$ 18,633 $ 15,771 Ratio of nonaccrual loans to total loans 0.69 % 0.47 % Ratio of nonperforming loans to total loans 1.05 % 0.80 % Ratio of nonperforming loans to total assets 0.81 % 0.66 % Ratio of nonperforming assets to total assets 0.89 % 0.84 % Ratio of nonperforming loans to total loans plus OREO 1.05 % 0.80 % Ratio of allowance for loan losses to nonaccrual loans 140.57 % 165.07 % (1)
Restructured loans-nonaccrual are included in nonaccrual loans.
We had$18.6 million in nonperforming assets as ofSeptember 30, 2021 compared to$15.8 million as ofDecember 31, 2020 , and we had$17.0 million in nonperforming loans as ofSeptember 30, 2021 compared to$12.4 million as ofDecember 31, 2020 . The increase in nonperforming assets was primarily attributable to the placement of several commercial and real estate loans on nonaccrual during 2021 as a result of continued deteriorating financial performance for the identified loans. We believe that the value recorded for each of the properties held in other real estate owned is adequately supported by recent appraisals. 52
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The following table summarizes our nonaccrual loans by category as of the dates
indicated:
As of As of
September 30, December 31,
(Dollars in thousands) 2021 2020
Nonaccrual loans by category:
Commercial and industrial $ 9,162 $ 4,155
Real estate: Commercial real estate owner occupied 1,032
1,944
Commercial real estate non-owner occupied 353
385
Construction, development and other 251 264 Residential 133 85 Consumer - - Other - - Purchased credit impaired 146 424 Total nonaccrual loans$ 11,077 $ 7,257
COVID-19 Loan Deferments
During March of 2020 and to help mitigate the anticipated effects of the COVID-19 pandemic on certain borrowers, we began offering deferral modifications of principal and/or interest payments for varying periods, but typically no more than 90 days. After 90 days, customers were able to apply for an additional deferral, and a small portion of our customers requested such an additional deferral. AtSeptember 30, 2021 , we had approximately 576 loans totaling$247.9 million that had deferral and modification agreements due to COVID-19 whereby principal and/or interest payments during a specified period were deferred to the end of each of the loan terms. Subsequent to the approved deferral period, customers resumed their regular payments. The CARES Act provides banks an option to elect to not account for certain loan modifications related to COVID-19 as troubled debt restructurings if the borrowers were not more than 30 days past due atDecember 31, 2019 . In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status. AtSeptember 30, 2021 ,$4.9 million in accrued interest receivables related to these loans remained outstanding and will be collected at the end of each loan term.
Risk Gradings
As part of the on-going monitoring of the credit quality of the Company's loan
portfolio and methodology for calculating the allowance for loan losses,
management assigns and tracks risk gradings as indicated below that are used as
credit quality indicators.
The following table summarizes the internal ratings of our loans as of the dates
indicated:
September 30, 2021
Purchased
(Dollars in Special Credit
thousands) Pass Mention Substandard Impaired Doubtful Total
Real estate:
Commercial real
estate:
Non-farm
non-residential owner
occupied $ 350,054 $ 6,988 $ 4,425 $ - $ - $ 361,467
Non-farm
non-residential
non-owner occupied 326,199 8,392 7,346 3,423 - 345,360
Residential 179,360 - 529 82 - 179,971
Construction,
development and other 120,169 - 251 4,128 - 124,548
Farmland 8,309 - - - - 8,309
Commercial and
industrial 525,100 4,760 8,484 207 - 538,551
Consumer 4,394 23 - - - 4,417
Other 49,771 - - - - 49,771
Gross loans $ 1,563,356 $ 20,163 $ 21,035 $ 7,840 $ - $ 1,612,394
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December 31, 2020
Purchased
(Dollars in Special Credit
thousands) Pass Mention Substandard Impaired Doubtful Total
Real estate:
Commercial real
estate:
Non-farm
non-residential owner
occupied $ 335,442 $ 12,189 $ 5,642 $ - $ - $ 353,273
Non-farm
non-residential
non-owner occupied 255,468 12,706 5,730 3,900 - 277,804
Residential 139,743 - 861 18 - 140,622
Construction,
development and other 93,817 - 267 4,123 - 98,207
Farmland 4,653 - - - - 4,653
Commercial and
industrial 629,093 6,144 9,847 270 574 645,928
Consumer 4,157 - - - - 4,157
Other 31,448 - - - - 31,448
Gross loans $ 1,493,821 $ 31,039 $ 22,347 $ 8,311$ 574 $ 1,556,092 Allowance for Loan Losses We maintain an allowance for loan losses that represents management's best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature and volume of our loan portfolio, overall portfolio quality, industry or borrower concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates, among other factors. Please see "- Critical Accounting Policies - Allowance for Loan Losses" below and "Part I - Financial Information - Item 1. Financial Statements - Note 3." As ofSeptember 30, 2021 , the allowance for loan losses totaled$15.6 million , or 1.0% of total loans. As ofDecember 30, 2020 , the allowance for loan losses totaled$12.0 million , or 0.8% of total loans. The increase in our allowance for loan losses of$3.6 million , or 30.0%, was primarily due to loan loss provisions related to$275.8 million in non-PPP loan growth and specific reserves of$1.0 million for impaired loans in 2021.
The following tables present, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
For the Three Months Ended For the Nine Months Ended September
September 30, 30,
(Dollars in thousands) 2021 2020 2021 2020
Allowance for loan loss at
beginning of period $ 13,394 $ 10,088 $ 11,979 $ 8,123
Provision for loan loss 2,323 - 3,823 2,550
Charge-offs:
Commercial and industrial (145 ) - (315 ) (616 )
Consumer - - - (7 )
Other (2 ) - (20 ) -
Total charge-offs (147 ) - (335 ) (623 )
Recoveries:
Commercial real estate:
Non-farm non-residential owner
occupied - (4 ) - -
Commercial and industrial 1 2 100 33
Consumer - - 2 3
Other - - 2 -
Total recoveries 1 (2 ) 104 36
Net (charge-offs) recoveries (146 ) (2 ) (231 ) (587 )
Allowance for loan losses at
end of period $ 15,571 $ 10,086 $ 15,571 $ 10,086
Ratio of net (charge-offs)
recoveries to average loans(1) (0.04 )% (0.00 )% (0.02 )% (0.06 )%
(1)
Interim periods annualized.
During the three and nine months ended
54
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The allowance for loan losses by loan category as of the dates indicated was as
follows:
September 30, 2021 December 31, 2020
% Loans in % Loans in
(Dollars in thousands) Amount Each Category Amount Each Category
Real estate:
Commercial real estate:
Non-farm non-residential owner
occupied $ 3,577 22.4 % $ 2,608 22.7 %
Non-farm non-residential
non-owner occupied 4,881 21.4 % 3,107 17.9 %
Residential 994 11.2 % 1,218 9.0 %
Construction, development and
other 855 7.7 % 932 6.3 %
Farmland 40 0.5 % 32 0.3 %
Commercial and industrial 5,010 33.4 % 3,858 41.5 %
Consumer 6 0.3 % 35 0.3 %
Other 208 3.1 % 189 2.0 %
$ 15,571 100.0 % $ 11,979 100.00 %
Securities
Our investment portfolio consists of state and municipal securities,
mortgage-backed securities, and corporate bonds classified as available for
sale. The carrying value of such securities is adjusted for unrealized gain or
loss, and any gain or loss is reported on an after-tax basis as a component of
other comprehensive income in shareholders' equity.
The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:
September 30, 2021
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gain Loss Fair Value
Investment securities available for sale:
State and municipal securities $ 1,089 $ 9 $ - $ 1,098
Mortgage-backed securities 836 28 - 864
Corporate bonds 23,559 922 (12 ) 24,469
$ 25,484 $ 959 $ (12 ) $ 26,431
December 31, 2020
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gain Loss Fair Value
Investment securities available for sale:
State and municipal securities $ 1,881 $ 14 $ (1 ) $ 1,894
Mortgage-backed securities 1,005 23 - 1,028
Corporate bonds 22,571 321 (219 ) 22,673
$ 25,457 $ 358 $ (220 ) $ 25,595 As of
The mortgage-backed securities held include Fannie Mae, Freddie Mac, andGinnie Mae securities. We do not hold any preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in our investment portfolio. As ofSeptember 30, 2021 andDecember 31, 2020 , our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages. Our management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. The contractual maturities of the mortgage-backed securities held range from 2022 to 2046 and are not a reliable indicator of the expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The terms of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to 55 -------------------------------------------------------------------------------- experience heavy prepayments of principal, and, consequently, the average life of the security is typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of the security. Therefore, schedules of maturities for mortgage-backed securities have been excluded from this disclosure. The amortized cost and estimated fair value of securities available for sale atSeptember 30, 2021 , by contractual maturity, are shown below: September 30, 2021 Amortized Estimated Cost Fair Value Due in one year or less$ 662 $ 664 Due from one year to five years 427 434 Due from five years to ten years 23,559 24,469 24,648 25,567 Mortgage-backed securities 836 864$ 25,484 $ 26,431 The weighted average life of our investment portfolio was 6.65 years with an estimated modified duration of 5.57 years as ofSeptember 30, 2021 . The weighted average life of our investment portfolio was 7.97 years with an estimated modified duration of 6.49 years as ofDecember 31, 2020 .
Deposits
Total deposits as ofSeptember 30, 2021 were$1.82 billion , an increase of$182.1 million , or 11.1%, compared to$1.63 billion as ofDecember 31, 2020 . The increase was primarily due to continued growth in our primary market areas and the increase in commercial lending relationships for which we also seek deposit balances offset by a decrease in time deposits resulting from a reduction in interest rates paid. Noninterest-bearing deposits as ofSeptember 30, 2021 were$364.4 million , an increase of$37.1 million , or 11.3%, compared to$327.4 million as ofDecember 31, 2020 . Total interest-bearing account balances as ofSeptember 30, 2021 were$1.45 billion , an increase of$145.1 million , or 11.1%, from$1.31 billion as ofDecember 31, 2020 .
The components of deposits as of the dates shown below were as follows:
As of September 30, As of December 31,
2021 2020
(Dollars in thousands) Amount Percent Amount Percent
Interest-bearing deposits $ 1,121,604 77.3 % $ 909,992 69.7 %
Savings 30,170 2.1 % 22,261 1.7 %
Time deposits $100,000 and over 282,858 19.5 % 356,803 27.3 %
Time deposits less than $100,000 16,901 1.1 % 17,414 1.3 %
Total interest-bearing deposits $ 1,451,533 79.9 % $ 1,306,470 80.0 %
Noninterest-bearing demand
deposits $ 364,418 20.1 % $ 327,361 20.0 %
Total deposits $ 1,815,951 100.0 % $ 1,633,831 100.00 %
The following table sets forth the Company's estimated uninsured time deposits by time remaining until maturity as of the dates indicated:
As of
September 30,
(Dollars in thousands) 2021
Three months or less $ 41,656
Over three months through six months 42,456
Over six months through twelve months 43,295
Over twelve months 10,719
Total $ 138,126
56
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The following table presents the average balances and average rates paid on deposits for the periods indicated:
Nine Months Ended Year Ended
September 30, 2021 December 31, 2020
Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate
Noninterest-bearing deposits $ 380,645 - $ 310,357 -
Interest-bearing demand deposits
26,282 0.28 % 19,877 0.21 %
Time deposits $100,000 and over 329,155 0.65 % 382,232 1.58 %
Time deposits less than $100,000 17,296 0.53 % 13,976 1.45 %
Total interest-bearing deposits $ 1,400,424 0.63 % $ 1,150,723 1.07 %
Total deposits $ 1,781,069 0.50 % $ 1,461,080 0.84 %
The ratio of average noninterest-bearing deposits to average total deposits for
the nine months ended
Borrowings
We have the ability to utilize short-term and long-term borrowings to supplement deposits used to fund our lending and investment activities, each of which is discussed below. Notes Payable - Senior Debt. OnAugust 30, 2019 , the Company renewed a$5.0 million promissory note with a third party lender and extended the maturity date toAugust 30, 2020 . OnDecember 24, 2019 , the Company modified the terms of the agreement whereby the note was increased to$10.0 million , and the interest rate was reduced from a floating rate of Wall Street Journal US Prime Rate, plus 0.50%, to a fixed rate of 4.75%. At maturity, the note was renewed and extended toAugust 31, 2021 , in the amount of$10.0 million . The note bore interest at a fixed rate of 4.25%. Interest was payable quarterly on the 30th day of February, May, August and November. All principal and unpaid interest was due upon maturity. As ofDecember 31, 2020 , the outstanding principal balance was$10.0 million . The note was secured by 100% of the outstanding stock of the Bank and was senior in rights to the$13.0 million in subordinated debt described below. OnMarch 21, 2018 , the Company renewed a$15.0 million promissory note to the same third party lender and extended the maturity date toMarch 10, 2021 . OnDecember 24, 2019 , the Company modified the terms of the note whereby the fixed interest rate was reduced from 6.00% to 4.75%. Quarterly principal payments of$375,000 plus interest were due and payable on the 10th day of March, June, September, and December through maturity date ofMarch 10, 2021 . As ofDecember 31, 2020 , the outstanding principal balance was$10.9 million . The note was secured by 100% of the outstanding stock of the Bank and was senior in rights to the$13.0 million in subordinated debt described below. OnMarch 10, 2021 , the two aforementioned notes totaling$20.9 million were consolidated into a new revolving line of credit loan with the same third party lender with new funds of$10.0 million for a total facility of$30.9 million . The note bears interest at the Wall Street Journal US Prime Rate, as such changes from time to time, with a floor rate of 4.00% per annum. Interest is payable quarterly on the 10th day of March, June, September and December through maturity date ofSeptember 10, 2022 . All principal and unpaid interest is due at maturity. As ofSeptember 30, 2021 , the outstanding principal balance was$1.0 million . The note is secured by 100% of the outstanding stock of the Bank and was senior in rights to the$13.0 million in subordinated debt described below until the subordinated debt was paid in full duringAugust 2021 . Notes Payable - Subordinated Debt. OnSeptember 27, 2018 , the Company entered into subordinated note purchase agreements providing for the issuance of a$3.0 million and a$2.0 million subordinated promissory note to two shareholders of the Company. Quarterly interest payments were due on the 27th day of March, June, September, and December. The notes bore interest at a fixed rate of 5.00% and 6.00%, respectively. OnJuly 29, 2019 , the aforementioned$3.0 million note scheduled to mature onSeptember 27, 2019 was retired and replaced with a new subordinated promissory note to the same shareholder in the amount of$4.0 million . The note bore interest at a fixed rate of 5.00% through maturity ofJuly 29, 2020 . Upon maturity, the note was renewed and increased to$11.0 million with a fixed rate of 6.00%. All principal and unpaid interest was due at maturity onJuly 29, 2022 . OnSeptember 27, 2020 , the aforementioned$2.0 million note scheduled to mature onSeptember 27, 2020 was renewed and extended toSeptember 27, 2022 at a fixed rate of 6.00%. All principal and unpaid interest is due at maturity. The notes were subordinate and junior in rights to the senior indebtedness described above. InAugust 2021 , the principal and unpaid interest on both notes were paid in full. 57
-------------------------------------------------------------------------------- Also onJuly 29, 2019 , the Company entered into a subordinated note purchase agreement providing for the issuance of a$2.0 million subordinated promissory note to a shareholder of the Company. Quarterly interest payments were due on the 29th day of January, April, July, and October. The note bore interest at a fixed rate of 5.00% and matured onJuly 29, 2020 . All principal and unpaid interest was paid at maturity.
Our cost of notes payable was 4.90% and 5.03% for the nine months ended
Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by FHLB stocks, real estate loans and investment securities. As ofSeptember 30, 2021 andDecember 31, 2020 , total borrowing capacity under this arrangement was$529.4 million and$474.8 million , respectively. FHLB advances of$50.3 million were outstanding atSeptember 30, 2021 and$70.0 million outstanding atDecember 31, 2020 . Our cost of FHLB advances was 0.83% for the nine months endedSeptember 30, 2021 and 0.89% for the year endedDecember 31, 2020 . In addition, letters of credit with the FHLB in the amount of$120.5 million and$109.5 million were outstanding atSeptember 30, 2021 andDecember 31, 2020 , respectively. The letters of credit are used to collateralize public fund deposit accounts in excess ofFDIC insurance limits.
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events.
For the nine months ended
As ofSeptember 30, 2021 , we maintained federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate of$50.5 million in federal funds. As ofDecember 31, 2020 , we maintained federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate of$20.5 million in federal funds. The Company had no advances outstanding under these lines of credit atSeptember 30, 2021 andDecember 31, 2020 . The following table illustrates, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods indicated. Average assets were$2.01 billion for the nine months endedSeptember 30, 2021 and$1.67 billion for the year endedDecember 31, 2020 . For the Nine For the Year Months Ended Ended September 30, December 31, 2021 2020 Sources of Funds: Deposits: Noninterest-bearing 18.9 % 18.6 % Interest-bearing 69.5 % 68.9 % FHLB advances 2.6 % 3.0 % Notes payable 1.5 % 2.4 % Other liabilities 0.5 % 0.4 % Shareholders' equity, including ESOP-owned shares 7.0 % 6.7 % Total 100.0 % 100.0 % Uses of Funds: Loans, net 79.0 % 85.1 % Securities (available for sale and held to maturity) 1.3 % 1.0 % Federal funds sold and other interest-earning assets 14.0 % 9.1 % Other noninterest-earning assets 5.7 % 4.8 % Total 100.0 % 100.0 % Average noninterest-bearing deposits to average deposits 21.4 % 21.2 % Average total loans to average deposits 90.0 % 98.1 %
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.
58
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As of September 30, 2021 , we had $329.3 million in outstanding commitments to
extend credit and $12.5 million in commitments associated with outstanding
standby and commercial letters of credit. As of December 31, 2020 , we had $162.4
million in outstanding commitments to extend credit and $1.7 million in
commitments associated with outstanding standby and commercial letters of
credit. Since commitments associated with letters of credit and commitments to
extend credit may expire unused, the total outstanding may not necessarily
reflect the actual future cash funding requirements.
As of September 30, 2021 and December 31, 2020 , we had no exposure to future
cash requirements associated with known uncertainties or capital expenditure of
a material nature. As of September 30, 2021 , we had cash and cash equivalents of
$360.6 million , compared to $203.6 million as of December 31, 2020 . The increase
was primarily due to an increase in deposits of $182.1 million and proceeds from
our private placement offering of $70.5 million offset by a decrease in
borrowings of $52.6 million and loan growth of $56.3 million .
Capital Resources
Total shareholders' equity, including ESOP-owned shares, increased to$206.2 million as ofSeptember 30, 2021 , compared to$121.7 million as ofDecember 31, 2020 , an increase of$84.5 million , or 69.4%. This increase was primarily the result of$11.1 million in net income for the nine months endedSeptember 30, 2021 as well as the issuance of 3,013,388 shares of our common stock, consisting of 75,512 shares issued in connection with the exercise of stock options and warrants and 2,937,876 shares issued in our private placement offering. Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution's financial soundness. We are required to comply with certain risk-based capital adequacy guidelines issued by theFederal Reserve and theFDIC . As of each ofSeptember 30, 2021 and 2020, andDecember 31, 2020 , the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized" for purposes of theFDIC's prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us. The following table presents the regulatory capital ratios for the Bank as of the dates indicated. Actual Minimum Capital Requirement Minimum with Minimum To September December Capital Capital Be Well 30, 2021 31, 2020 Requirement Buffer CapitalizedThird Coast Bank, SSB Tier 1 leverage capital (to average assets) 9.61% 9.70% 4.0% 4.0% 5.0% Common equity tier 1 capital (to risk weighted assets) 11.89% 11.51% 4.5% 7.0% 6.5% Tier 1 capital (to risk weighted assets) 11.89% 11.51% 6.0% 8.5% 8.0% Total capital (to risk weighted assets) 12.96% 12.54% 8.0% 10.5% 10.0%
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on most of our assets and liabilities, and the market value
of all interest-earning assets and interest-bearing liabilities, other than
those which have a short term to maturity. Interest rate risk is the potential
of economic losses due to future interest rate changes. These economic losses
can be reflected as a loss of future net interest income and/or a decrease in
current fair market values. The objective is to measure the effect on net
interest income and to adjust the balance sheet to minimize the inherent risk
while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the
ordinary course of business. We do not enter into instruments such as leveraged
derivatives, financial options, financial future contracts or forward delivery
contracts for the purpose of reducing interest rate risk. Based upon the nature
of our operations, we are not subject to foreign exchange or commodity price
risk. We do not own any trading assets.
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Our exposure to interest rate risk is managed by the Bank's Asset Liability and
Investment Committee , in accordance with policies approved by the Bank's board
of directors. The committee formulates strategies based on appropriate levels of
interest rate risk. In determining the appropriate level of interest rate risk,
the committee considers the impact on earnings and capital on the current
outlook on interest rates, potential changes in interest rates, regional
economies, liquidity, business strategies and other factors. The committee meets
regularly to review, among other things, the sensitivity of assets and
liabilities to interest rate changes, the book and market values of assets and
liabilities, unrealized gains and losses, purchase and sale activities,
commitments to originate loans and the maturities of investments and borrowings.
Additionally, the committee reviews liquidity, cash flow flexibility, maturities
of deposits and consumer and commercial deposit activity. Management employs
methodologies to manage interest rate risk, which include an analysis of
relationships between interest-earning assets and interest-bearing liabilities
and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analyses to test the
interest rate sensitivity of net interest income and fair value of equity, and
the impact of changes in interest rates on other financial metrics. Contractual
maturities and re-pricing opportunities of loans are incorporated in the model,
as are prepayment assumptions, maturity data and call options within the
investment portfolio. The average life of our non-maturity deposit accounts are
updated annually and are incorporated into the model. The assumptions used are
inherently uncertain and, as a result, the model cannot precisely measure future
net interest income or precisely predict the impact of fluctuations in market
interest rates on net interest income. Actual results will differ from the
model's simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and the application and
timing of various management strategies.
On a monthly basis, we run simulation models including a static balance sheet.
The models test the impact on net interest income and fair value of equity from
changes in market interest rates under various scenarios. Under the static
model, rates are shocked instantaneously and ramped rate changes over a 12-month
horizon based upon parallel and non-parallel yield curve shifts. Parallel shock
scenarios assume instantaneous parallel movements in the yield curve compared to
a flat yield curve scenario. In addition to the monthly reports, we also run
various scenarios based on market trends and management analysis needs. These
special reports include stress test reports, reports to test the deposit decay
rates and growth reports based on budget. Our internal policy regarding internal
rate risk simulations currently specifies that for instantaneous parallel shifts
of the yield curve, estimated net income at risk for the subsequent one-year
period should not decline by more than 25.0% for a 200 basis point shift and
35.0% for a 300 basis point shift.
The following tables summarize the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:
As of September 30, 2021 As of December 31, 2020
Percent Change
Percent Change Percent Change in Net Percent Change
Change in Interest Rates in Net Interest in Fair Value Interest in Fair Value
(Basis Points) Income of Equity Income of Equity
+ 300 (3.11)% 16.72% (1.68)% 20.30%
+ 200 (2.78)% 11.18% (1.91)% 13.36%
+ 100 (1.93)% 5.72% (1.48)% 6.82%
Base - - - -
-100 4.67% (1.93)% 5.20% (2.77)%
The results are primarily due to behavior of demand, money market and savings
deposits during such rate fluctuations. We have found that, historically,
interest rates on these deposits change more slowly than changes in the discount
and federal funds rates. This assumption is incorporated into the simulation
model and is generally not fully reflected in a gap analysis. The assumptions
incorporated into the model are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model's simulated results due to timing, magnitude
and frequency of interest rate changes as well as changes in market conditions
and the application and timing of various strategies.
Critical Accounting Policies
Our financial reporting and accounting policies conform to GAAP. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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-------------------------------------------------------------------------------- Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in Note 1 - Nature of Operations and Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included elsewhere in this Form 10-Q. We believe that of our accounting policies, the following may involve a higher degree of judgment and complexity: Allowance for Loan Losses. The allowance for loan losses represents management's estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, the Company estimates losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, the Company assesses the risk inherent in the Company's loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels. Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management's assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Company's loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management's assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on the Company's allowance, and therefore the Company's financial position, liquidity or results of operations. Transfers of Financial Assets. Management accounts for the transfers of financial assets as sales when control over the assets has been surrendered. Control is surrendered when the assets have been isolated, a transferee obtains the right to pledge or exchange the transferred assets and there is no agreement to repurchase the assets before their maturity. Management believes the loan participations sold subject to this guidance met the condition to be treated as a sale.Goodwill and Core Deposit Intangibles.Goodwill represents the excess of cost over fair value of net assets acquired in a business combination.Goodwill is not amortized and is evaluated for impairment at least annually and on an interim basis if an event triggering impairment may have occurred. Core deposit intangibles are acquired customer relationships arising from bank acquisitions and are amortized on a straight-line basis over their estimated useful life. Core deposit intangibles are tested for impairment whenever events or changes in circumstances indicate the carrying amount of assets may not be recoverable from future undiscounted cash flows.
Recently Issued Accounting Pronouncements
See "Part I - Financial Information - Item 1. Financial Statements - Note 1."
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