Third Coast Bancshares, Inc. - Quarter Report: 2022 March (Form 10-Q)

- Draft review and test completed. No issues found.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 001-41028

THIRD COAST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


Texas	46-2135597
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
20202 Highway 59 North, Suite 190 Humble, Texas	77338
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (281) 446-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

TCBX

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 29, 2022, the registrant had 13,457,143 shares of common stock, par value $1.00 per share, outstanding.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements (unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Shareholders' Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56

PART II.	OTHER INFORMATION	57

Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
Signatures		59

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

•

the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief, and Economic Security Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

•

geographic concentration in the Greater Houston market, Dallas-Fort Worth market, and Austin-San Antonio market;

•

interest rate risk and fluctuations in interest rates;

•

our ability to maintain important deposit relationships;

•

our ability to grow or maintain our deposit base;

•

our ability to implement our expansion strategy;

•

changes in key management personnel;

•

credit risk associated with our business;

•

the adequacy of our allowance for loan losses;

•

the amount of nonperforming and classified assets that we hold;

•

market conditions and economic trends generally and in the banking industry;

•

our borrowers’ ability to repay loans;

•

changes in value of the collateral securing our loans;

•

credit risks associated with our real estate and construction lending;

•

changes in the economy affecting real estate values and liquidity;

•

the accuracy of the valuation techniques we use in evaluating collateral;

•

systems failures, fraudulent activity, interruptions or data breaches involving our information technology and communications systems of third parties;

•

the risk of fraud related to our asset-based lending and commercial finance products;

•

our ability to raise additional capital in the future;

•

competition from financial services companies and other companies that offer banking services;

•

natural disasters and other catastrophes;

•

changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;

•

monetary policies and regulations of the Board of Governors of the Federal Reserve System;

•

the development of an active, liquid market for our common stock;

•

fluctuations in the market price of our common stock;

•

additional debt or future issuances of new debt securities or preferred stock; and

•

other factors that are discussed in “Part II – Other Information – Item 1A. Risk Factors.”

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 17, 2022. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward- looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

iii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets


	March 31,			December 31,
(Dollars in thousands, except share and per share data)	2022			2021
ASSETS	(unaudited)
Cash and cash equivalents:
Cash and due from banks	$	369,782		$	326,733
Federal funds sold		1,538			292
Total cash and cash equivalents		371,320			327,025
Interest bearing time deposits in other banks		132			131
Investment securities available for sale		126,218			26,432
Loans, net of allowance for loan loss of $23,312 and $19,295 at March 31, 2022 and December 31, 2021, respectively		2,424,633			2,049,429
Accrued interest receivable		12,648			10,228
Premises and equipment, net		20,846			19,045
Other real estate owned		1,666			1,676
Bank-owned life insurance		26,671			26,528
Non-marketable equity securities, at cost		11,327			7,527
Deferred tax asset, net		4,258			4,123
Core Deposit Intangible, net		1,252			1,292
Goodwill		18,034			18,034
Other assets		21,383			7,942
Total assets	$	3,040,388		$	2,499,412

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing	$	931,622		$	531,401
Interest bearing		1,655,547			1,609,798
Total deposits		2,587,169			2,141,199
Accrued interest payable		387			437
Other liabilities		20,122			7,769
FHLB advances		50,000			50,000
Line of credit - Senior Debt		1,000			1,000
Note payable - Subordinated Debt, net		80,507			—
Total liabilities		2,739,185			2,200,405
Shareholders' equity:
Common stock, $1 par value; 50,000,000 shares authorized; 13,524,244 and 13,481,786 issued; and 13,445,782 and 13,403,324 outstanding at March 31, 2022 and December 31, 2021, respectively		13,524			13,482
Additional paid-in capital		249,775			249,202
Retained earnings		38,116			36,029
Accumulated other comprehensive income		887			1,393
Treasury stock: at cost; 78,462 shares at March 31, 2022 and December 31, 2021		(1,099	)		(1,099	)
Total shareholders' equity		301,203			299,007
Total liabilities & shareholders' equity	$	3,040,388		$	2,499,412

The accompanying notes are an integral part of these consolidated financial statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

(unaudited)


	For the Three Months Ended March 31,
(Dollars in thousands, except share and per share data)	2022		2021
Interest income:
Loans, including fees	$	26,682	$	25,198
Investment securities available-for-sale		276		252
Federal funds sold and deposits in other banks		226		175
Total interest income		27,184		25,625
Interest expense:
Deposit accounts		1,844		2,377
FHLB advances and notes payable		130		530
Total interest expense		1,974		2,907
Net interest income		25,210		22,718
Provision for loan losses		4,000		1,500
Net interest income after provision for loan losses		21,210		21,218
Noninterest income:
Services charges and fees		619		472
Other		1,047		278
Total noninterest income		1,666		750
Noninterest expense:
Salaries and employee benefits		13,324		9,963
Data processing and network expense		922		610
Occupancy and equipment expense		1,873		1,196
Legal and professional		1,746		1,115
Loan operations and other real estate owned expense		278		1,023
Advertising and marketing		427		404
Telephone and communications		100		193
Software purchases and maintenance		198		151
Regulatory assessments		645		49
Loss on sale of other real estate owned		—		375
Other		668		439
Total noninterest expense		20,181		15,518
Net income before income tax expense		2,695		6,450
Income tax expense		608		1,354
Net income	$	2,087	$	5,096

Earnings per common share:
Basic earnings per share	$	0.16	$	0.81
Diluted earnings per share	$	0.15	$	0.80

The accompanying notes are an integral part of these consolidated financial statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(unaudited)


	For the Three Months Ended March 31,
(Dollars in thousands)	2022			2021
Net Income	$	2,087		$	5,096
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding loss arising during the period		(590	)		(63	)
Income tax benefit		124			13
Other comprehensive loss on securities		(466	)		(50	)
Unrealized gain (loss) on derivatives:
Unrealized holding loss arising during the period		—			(216	)
Unrealized gain on termination fee from derivatives		—			945
Reclassification adjustment for accretion recorded in interest expense during the period		(51	)		(18	)
Income tax benefit (expense)		11			(149	)
Other comprehensive (loss) income on derivatives		(40	)		562
Total other comprehensive (loss) income		(506	)		512
Total comprehensive income	$	1,581		$	5,608

The accompanying notes are an integral part of these consolidated financial statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders' Equity

(unaudited)


								Accumulated						Less:
			Additional					Other						ESOP-
	Common		Paid in			Retained		Comprehensive			Treasury			Owned
(Dollars in thousands)	Stock		Capital			Earnings		Income (Loss)			Stock			Shares			Total
Balance, December 31, 2020	$	6,350	$	91,462		$	24,605	$	279		$	(978	)	$	(1,302	)	$	120,416
Net income		—		—			5,096		—			—			—			5,096
Share-based compensation		—		69			—		—			—			—			69
Stock options exercised		42		574			—		—			—			—			616
Issuance of common stock to ESOP		10		149			—		—			—			(159	)		—
Net change in fair value of ESOP shares		—		—			—		—			—			(317	)		(317	)
Other comprehensive income, net of tax		—		—			—		512			—			—			512
Balance, March 31, 2021	$	6,402	$	92,254		$	29,701	$	791		$	(978	)	$	(1,778	)	$	126,392
(Dollars in thousands)
Balance, December 31, 2021	$	13,482	$	249,202		$	36,029	$	1,393		$	(1,099	)	$	—		$	299,007
Net income		—		—			2,087		—			—			—			2,087
Share-based compensation		—		279			—		—			—			—			279
Stock options exercised		3		51			—		—			—			—			54
Issuance of common stock to ESOP		11		271			—		—			—			—			282
Restricted stock grants		28		(28	)		—		—			—			—			—
Other comprehensive loss, net of tax		—		—			—		(506	)		—			—			(506	)
Balance, March 31, 2022	$	13,524	$	249,775		$	38,116	$	887		$	(1,099	)	$	—		$	301,203

The accompanying notes are an integral part of these consolidated financial statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)


	For the Three Months Ended March 31,
(Dollars in thousands)	2022			2021
Cash flows from operating activities:
Net income	$	2,087		$	5,096
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,000			1,500
Share based compensation expense		279			69
Loss on sale of other real estate owned		—			375
Amortization of premium on securities, net		8			13
Accretion of fees on derivative instruments		(51	)		(23	)
Accretion of SBA Paycheck Protection Program Fees		(1,350	)		(7,633	)
Depreciation, amortization and accretion		(388	)		77
Earnings on bank-owned life insurance		(144	)		(128	)
Changes in operating assets and liabilities:
Proceeds from sale of loans held for sale		—			2,345
Accrued interest receivable and other assets		(15,862	)		180
Accrued interest payable and other liabilities		12,303			712
Net cash provided by operating activities		882			2,583
Cash flows from investing activities:
Net increase in interest bearing deposits in other banks		—			(2	)
Increase in non-marketable equity securities		(3,800	)		(18	)
Investment securities available-for-sale activity:
Purchases		(101,082	)		—
Maturities, calls and principal paydowns		698			840
Termination fee proceeds from derivative instruments		—			945
Net originations on loans held for investment		(376,993	)		(129,034	)
Net additions to bank premises and equipment		(2,324	)		(399	)
Deposit proceeds from pending sales of foreclosed assets		10			—
Proceeds from sales of foreclosed assets		—			520
Net cash used in investing activities		(483,491	)		(127,148	)
Cash flows from financing activities:
Net increase in deposits		446,060			179,453
Net repayment of FHLB Advances		—			(20,000	)
Proceeds from subordinated debt offering		80,507			—
Repayment of notes payable		—			(375	)
Proceeds from issuance of common stock - ESOP Contributions		282			159
Proceeds from stock options exercised		55			616
Net cash provided by financing activities		526,904			159,853
Increase in cash and cash equivalents		44,295			35,288
Cash and cash equivalents at beginning of period		327,025			203,560
Cash and cash equivalents at end of period	$	371,320		$	238,848

The accompanying notes are an integral part of these consolidated financial statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)


	For the Three Months Ended March 31,
(Dollars in thousands)	2022		2021
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	2,023	$	3,226
Cash paid for income taxes	$	—	$	2,000
Supplemental Disclosure of Noncash Investing and Financing Activities:
Initial recognition of lease liability	$	10,890	$	—
Net increase in fair value of ESOP-owned shares	$	—	$	(317	)

The accompanying notes are an integral part of these consolidated financial statements.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Third Coast Bancshares, Inc. (“Bancshares”), through its subsidiary, Third Coast Bank, SSB, a Texas state savings bank (the “Bank”), and the Bank’s subsidiary, Third Coast Commercial Capital, Inc. (“TCCC”), (collectively known as the “Company”), provide general consumer and commercial banking services through 13 branch offices located in the North, Central and Southeast regions of Texas. Branch locations include: Humble, Beaumont, Port Arthur, Houston, Conroe, Pearland, Lake Jackson, Dallas, Fort Worth, Plano, Detroit, La Vernia and Nixon. The Bank is engaged in traditional community banking activities, which include commercial and retail lending, deposit gathering, and investment and liquidity management activities. The Bank’s primary deposit products are demand deposits, money market accounts and certificates of deposit; its primary lending products are commercial business and real estate, real estate mortgage and consumer loans. TCCC engages in accounts receivable factoring activities. The Company is subject to the regulations of certain government agencies and undergoes periodic examinations by those regulatory authorities.

Basis of Presentation

The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, reporting practices prescribed by the banking industry, and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company's annual consolidated financial statements for the years ended December 31, 2021 and 2020 included in the Company's Annual Report on Form 10-K filed with the SEC on March 17, 2022. The December 31, 2021 consolidated balance sheet has been derived from the audited financial statements for the year ended December 31, 2021.

In the opinion of management, all adjustments that were recurring in nature and considered necessary have been included for fair presentation of the Company’s financial position and results of operations. Operating results for the three months ended March 31, 2022 are not necessarily indicative of results that may be expected for the full year ending December 31, 2022. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

The accompanying unaudited consolidated financial statements include the accounts of Bancshares, the Bank, and TCCC. All significant intercompany transactions and balances have been eliminated in consolidation.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements were issued.

Cash and Cash Equivalents

Cash and cash equivalents include cash, deposits with other financial institutions that have initial maturities of less than 90 days when acquired by the Company and federal funds sold.

Interest Bearing Time Deposits in Other Banks

Interest bearing time deposits in other banks are carried at cost and generally mature between 90 days to one year from purchase date.

Investment Securities Available-For-Sale

Investment securities available-for-sale consist of bonds, notes, and debentures that are not classified as trading securities or held-to-maturity securities. Investment securities available-for-sale are held for indefinite periods of time and carried at fair value, with the unrealized holding gains and losses reported as a component of other comprehensive income (loss), net of tax. Management determines the appropriate classification of investment securities at the time of purchase.

Loans and Allowance for Loan Losses

Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses (“ALLL”). Interest on loans is recognized using the effective interest method and includes amortization of deferred loan origination fees and costs over the life of the loans.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are primarily measured based on the fair value of the underlying collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

The allowance for loan losses is established through a provision for loan losses charged against income. The allowance for loan losses includes specific reserves for impaired loans and an estimate of losses inherent in the loan portfolio at the balance sheet date, but not yet identified with specific loans. Loans deemed to be uncollectible are charged against the allowance when management believes that the collectability of the principal is unlikely and subsequent recoveries, if any, are credited to the allowance. Management’s periodic evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including known inherent risks, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral and current economic conditions.

From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. At the time of restructuring, the Company evaluates the economic and business conditions and collection efforts, and should the collection of interest be doubtful, the loan is placed on non-accrual. Each of these loans is evaluated for impairment and a specific reserve is recorded, as necessary, based on probable losses, taking into consideration the related collateral and modified loan terms and cash flow.

The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Agricultural loans are subject to underwriting standards and processes similar to commercial loans. Agricultural loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farmland, cattle, or equipment, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are generally diverse in terms of type and geographic location primarily throughout the Houston, Dallas, and Beaumont-Port Arthur metropolitan areas. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally, real estate loans are owner occupied which further reduces the Company’s risk.

The Company utilizes methodical credit standards and analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Other loan categories included in our loan portfolio include agricultural loans made to farmers and ranchers relating to their operations and lease financing.

Certain Acquired Loans

Acquired loans purchased from third parties are recorded at their estimated fair value at the acquisition date, and are initially classified as either purchased credit impaired (“PCI”) loans (i.e., loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans (“acquired performing loans”).

Acquired performing loans are accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-20. Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate. The Company’s policy for determining when to discontinue accruing interest on acquired performing loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans described above.

An ALLL is calculated using a methodology similar to that described for originated loans. Acquired performing loans are subsequently evaluated for any required allowance at each reporting date. Such required allowance for each loan is compared to the remaining fair value discount for that loan. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan.

PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company estimates the amount and timing of expected principal, interest and other cash flows for each loan meeting the criteria above and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted. These credit discounts (“nonaccretable marks”) are included in the determination of the initial fair value for acquired loans; therefore, an allowance for loan losses is not recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that are not credit-based (“accretable marks”) are subsequently accreted to interest income over the estimated life of the loans using a method that approximates a level yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date result in a move of the discount from nonaccretable to accretable. Decreases in expected cash flows after the acquisition date are recognized through the provision for loan losses.

For PCI loans after acquisition, cash flows expected to be collected are recast for each loan periodically as determined appropriate by management. If the present value of expected cash flows for a loan is less than its carrying value, impairment is reflected by an increase in the ALLL and a charge to the provision for loan losses. If the present value of the expected cash flows for a loan is greater than its carrying value, any previously established ALLL is reversed and any remaining difference increases the accretable yield, which will be taken into income over the remaining life of the loan. Loan dispositions may include sales of loans, receipt of payments in full from the borrower, or foreclosure. Write-downs are not recorded on the PCI loan until actual losses exceed the remaining non-accretable difference. To date, no write-downs have been recorded for the PCI loans held by the Company. Loans that were considered troubled debt restructurings by the third party prior to the acquisition date are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless or until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

Loans Held for Sale and Servicing Assets

Loans held for sale include mortgage loans originated with the intent to sell on the secondary market. Mortgage loans held for sale are held for an interim period of usually less than 30 days. Accordingly, these loans are carried at aggregate cost and deemed to be the equivalent of fair value based on the short-term nature of the loans. At March 31, 2022 and December 31, 2021, the Company had no loans held for sale.

Certain Small Business Administration (“SBA”) loans are originated and intended for sale in the secondary market. They are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains or losses recognized upon the sale of loans are determined on a specific identification basis and are included in non-interest income. SBA loan transfers are accounted for as sales when control over the loan has been surrendered. Control over such loans is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

The Company has adopted guidance issued by the FASB that clarifies the accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities, in which, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. To calculate the gain or loss on sale of loans, the Company’s investment in the loan is allocated among the retained portion of the loan, the servicing retained, the interest-only strip and the sold portion of the loan, based on the relative fair value of each portion. The gain or loss on the sold portion of the loan is recognized based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion is discounted, with the discount accreted to interest income over the life of the loan.

Servicing assets are amortized over an estimated life using a method that is in proportion to the estimated future servicing income. In the event future prepayments exceed management’s estimates and future cash flows are inadequate to cover the servicing asset, additional amortization would be recognized. The portion of servicing fees in excess of the contracted servicing fees is reflected as interest-only strips receivable, which are classified as available for sale and are carried at fair value. At March 31, 2022 and December 31, 2021, the Company was servicing loans previously sold of approximately $3.7 million and $3.8 million, respectively. The related servicing assets receivable were not material to the consolidated financial statements at March 31, 2022 and December 31, 2021.

Premises and Equipment

Buildings, leasehold improvements, furniture and fixtures, and equipment are carried at cost, less accumulated depreciation, computed principally by the straight-line method based on the estimated useful lives of the related asset. Land is not depreciated. Major replacements and betterments are capitalized while maintenance and repairs are charged to expense when incurred. Gains or losses on dispositions are reflected in income as incurred. A small portion of the building’s floor space is currently leased out to tenants and recognized in income when earned.

Operating Leases

The Company leases certain office space and stand-alone buildings which are recognized as operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. Lease liabilities represent the Company's liability to make lease payments under these leases on a discounted basis and are amortized on a straight-line basis over the lease term for each related lease agreement. Right-of-use assets represent the Company's right to use, or control the use of, leased assets for their lease term and are amortized over the lease term of the related lease agreement. See further discussion of Accounting Standards Update, or ASU 2016-02, Leases (Topic 842) below. The Company does not recognize short-term operating leases on the consolidated balance sheets. A short-term lease has a term of 12 months or less and does not have a purchase option that is likely to be exercised.

Other Real Estate Owned

Other real estate owned represents properties acquired through or in lieu of loan foreclosure and are initially recorded at fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs relating to holding other real estate owned and subsequent adjustments to the value are expensed. Operating and holding expenses of such properties, net of related income, are included in loan operations and other real estate owned expense on the accompanying consolidated statements of income. Gains or losses on dispositions are reflected in income as incurred.

Bank-Owned Life Insurance

The Company has purchased life insurance policies on certain employees. These bank-owned life insurance (“BOLI”) policies are recorded in the accompanying consolidated balance sheets at their cash surrender values. Income from these policies and changes in the cash surrender values are reported in the accompanying consolidated statements of income.

Non-Marketable Securities

The Company has restricted non-marketable securities which represent investment in Federal Home Loan Bank (“FHLB”) stock, Federal Reserve Bank (“FRB”) stock and Texas Independent Bank (“TIB”) stock. These investments are not readily marketable and carried at cost, which approximates fair value. As a member of the FHLB, FRB and TIB systems, the Company is required to maintain minimum level of investments in stock, based on the level of borrowings and other factors. Both cash and stock dividends are reported as income.

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 as of December 31 and on an interim basis if an event triggering impairment may have occurred.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Core deposit intangibles are acquired customer relationships arising from bank acquisitions and are amortized on a straight-line basis over their estimated useful life of ten years. 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.

Derivative Financial Instruments

The Company enters into certain derivative financial instruments as part of its hedging strategy. Certain interest rate swap instruments are used for asset and liability management related to the Company’s commercial customers’ financing needs. These instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Other interest rate swap instruments are used to mitigate overall interest rate risk and are designated as cash flow hedges. Changes in the net fair value are recognized in other comprehensive income. All derivatives are carried at fair value in either other assets or other liabilities (see Note 17 – Derivative Financial Instruments).

Business Combinations

The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100% of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Adjustments identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. Acquisition related costs are expensed as incurred.

Comprehensive Income

Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. Other than net income, comprehensive income includes the net effect of changes in the fair value of securities available-for-sale and certain derivative instruments designated as cash flow hedges.

Revenues from Contracts with Customers

The Company’s revenues from services such as deposit related fees, wire transfer fees, interchange fees, ATM fees, and merchant fee income are presented within non-interest income in the accompanying consolidated statements of income and are recognized as revenue as the Company satisfies its obligation to the customer.

Advertising and Marketing Expenses

Advertising and marketing expenses consist of the Company’s advertising in its local market area and are expensed as incurred. Advertising and marketing expenses were $427,000 and $404,000 for the three months ended March 31, 2022 and 2021, respectively, and are included within noninterest expense in the accompanying consolidated statements of income.

Income Taxes

The Company files a consolidated income tax return with its subsidiary. Federal income tax expense or benefit is allocated on a separate return basis.

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to 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.

Share-Based Compensation

Compensation expense for stock options is based on the fair value of the award on the measurement date, which, for the Company, is the date of the grant and is recognized ratably over the service period of the award. The fair value of stock options is estimated using the Black-Scholes option-pricing model.

Basic and Diluted Earnings Per Common Share

Earnings per common share is computed in accordance with ASC Topic 260, “Earnings Per Share.” Basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

average common shares used in calculating diluted earnings per common share for the reported periods is provided in Note 16 – Earnings Per Common Share.

Reclassification

Certain amounts in prior period consolidated financial statements may have been reclassified to conform to current period presentation. These reclassifications are immaterial and have no effect on net income, total assets or shareholders’ equity.

Recently Adopted Accounting Standards

The Company adopted ASU 2016-02 - “Leases” (Topic 842) on January 1, 2022 using the effective date as the date of initial adoption. The Company elected to apply certain practical expedients for transition, and under those expedients the Company did not reassess prior accounting decisions regarding the identification, classification and initial direct costs leases existing at the effective date. The Company also elected to use hindsight in determining the lease term when considering options to extend the lease and excluded short-term leases (defined as lease terms of 12 months or less). The Company elected to separate non-lease components from lease components in its application of ASU 2016-02. At adoption, the Company recorded right-of-use assets totaling $11.0 million, which represented the Company's right to use, or control the use of, specified assets for their lease terms, and the Company recorded lease liabilities totaling $10.9 million, which represented the Company's liability to make lease payments under these leases. The ASU 2016-02 standard applied to all leases existing at the date of initial adoption. The Company's financial statements and related footnotes were not updated for ASU 2016-02 for dates and periods before the date of adoption. See Note 9 – Leases.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022. The Company is in the process of evaluating the potential effects of adopting ASU 2016-13 on the Company’s consolidated results of operations, financial position, or cash flows.

Investment Securities Available for Sale

Investment securities have been classified in the consolidated balance sheets according to management’s intent. The carrying amount of securities and their approximate fair values as of March 31, 2022 and December 31, 2021 are as follows:


	March 31, 2022
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale:
State and municipal securities	$	425	$	—	$	1	$	424
Mortgage-backed securities		753		12		4		761
U.S. Treasury bonds		101,080		2		—		101,082
Corporate bonds		23,551		477		77		23,951
	$	125,809	$	491	$	82	$	126,218


	December 31, 2021
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities Available-for-sale:
State and municipal securities	$	1,087	$	7	$	—	$	1,094
Mortgage-backed securities		791		20		—		811
Corporate bonds		23,556		972		1		24,527
	$	25,434	$	999	$	1	$	26,432

Mortgage-backed securities are typically issued with stated principal amounts and are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as prepayment risk, are passed on to the certificate holder. Accordingly, the term of mortgage-backed securities approximates the term of the underlying mortgages and can vary significantly due to prepayments.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

The amortized cost and estimated fair value of securities available for sale at March 31,2022, by contractual maturity, are shown below.


	March 31, 2022
	Securities Available for Sale
(Dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due from one year to five years		101,505		101,506
Due from five to ten years		23,551		23,951
		125,056		125,457
Mortgage-backed securities		753		761
	$	125,809	$	126,218

The following table summarizes securities with unrealized losses at March 31, 2022 and December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position:


	March 31, 2022
(Dollars in thousands)	Less Than 12 Months in a Loss Position		Greater Than 12 Months in a Loss Position		Total Unrealized Loss		Estimated Fair Value
Securities available-for-sale:
State and municipal securities	$	1	$	—	$	1	$	424
Mortgage-backed securities		4		—		4		161
Corporate bonds		77		—		77		5,439
	$	82	$	—	$	82	$	6,024

	December 31, 2021
(Dollars in thousands)	Less Than 12 Months in a Loss Position		Greater Than 12 Months in a Loss Position		Total Unrealized Loss		Estimated Fair Value
Securities available-for-sale:
Corporate bonds	$	—	$	1	$	1	$	3,999
	$	—	$	1	$	1	$	3,999

There were five investments in an unrealized loss position at March 31, 2022, and two investments in an unrealized loss position at December 31, 2021. The Company does not consider any securities to be other-than-temporarily impaired. In estimating other-than-temporary impairment losses, the Company considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near term prospects of the issuer, (iii) that the Company does not intend to sell these securities, and (iv) it is more likely than not that the Company will not be required to sell before a period of time sufficient to allow for any anticipated recovery in fair value. The Company has reviewed the ratings of the issuers and has not identified any issues related to the ultimate repayment of principal because of credit concerns on these securities.

There were no securities pledged as collateral as of March 31, 2022 and December 31, 2021.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Loans and Allowance for Loan Losses

Loans in the accompanying consolidated balance sheets consisted of the following:


	March 31,			December 31,
(Dollars in thousands)	2022			2021
Real estate loans:
Non-farm non-residential owner occupied	$	477,573		$	383,941
Non-farm non-residential non-owner occupied		463,618			445,308
Residential		225,649			213,264
Construction, development & other		414,653			320,335
Farmland		13,467			9,934
Commercial & industrial		756,005			611,348
Consumer		3,304			4,001
Other		93,676			80,593
		2,447,945			2,068,724
Allowance for loan losses		(23,312	)		(19,295	)
Loans, net	$	2,424,633		$	2,049,429

Total loans are presented net of unaccreted discounts and deferred fees totaling $7.1 million and $6.5 million at March 31, 2022 and December 31, 2021, respectively.

The Company had $26.7 million and $81.6 million in outstanding loan balances related to the guaranteed SBA Paycheck Protection Program (“PPP”) as of March 31, 2022 and December 31, 2021, respectively. These loans are included within the commercial and industrial loan balances throughout the footnotes.

Non-accrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. As mentioned in Note 1, the accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. Non-accrual loans and accruing loans past due more than 90 days segregated by class of loans were as follows:


	March 31,				December 31,
	2022				2021
(Dollars in thousands)	Non-accrual		Accruing loans past due more than 90 days		Non-accrual		Accruing loans past due more than 90 days
Real estate loans:
Non-farm non-residential owner occupied	$	986	$	—	$	1,008	$	-
Non-farm non-residential non-owner occupied		334		—		346		—
Residential		121		—		127		—
Construction, development & other		238		—		244		—
Farmland		—		—		—		—
Commercial & industrial		8,210		40		8,297		278
Consumer		—		—		—		—
Other		—		—		—		—
Purchased credit impaired		7		—		8		—
	$	9,896	$	40	$	10,030	$	278

As of March 31, 2022 and 2021, the amount of income that would have been accrued for loans on non-accrual was approximately $482,000 and $517,000, respectively.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

An age analysis of past due loans, segregated by class of loans, were as follows:


	March 31, 2022
(Dollars in thousands)	30-59 days		60-89 days		Over 90 days		Total past due		Total current		Total loans
Real estate loans:
Non-farm non-residential owner occupied	$	451	$	379	$	986	$	1,816	$	475,757	$	477,573
Non-farm non-residential non-owner occupied		1,933		150		334		2,417		460,470		462,887
Residential		1,438		—		121		1,559		224,090		225,649
Construction, development & other		401		—		238		639		409,919		410,558
Farmland		—		—		—		—		13,467		13,467
Commercial & industrial		542		496		8,250		9,288		746,655		755,943
Consumer		44		—		—		44		3,260		3,304
Other		151		—		—		151		93,525		93,676
Purchased credit impaired		—		—		7		7		4,881		4,888
	$	4,960	$	1,025	$	9,936	$	15,921	$	2,432,024	$	2,447,945


	December 31, 2021
(Dollars in thousands)	30-59 days		60-89 days		Over 90 days		Total past due		Total current		Total loans
Real estate loans:
Non-farm non-residential owner occupied	$	291	$	—	$	1,008	$	1,299	$	382,642	$	383,941
Non-farm non-residential non-owner occupied		161		—		346		507		444,079		444,586
Residential		230		—		127		357		212,822		213,179
Construction, development & other		—		395		244		639		315,584		316,223
Farmland		—		—		—		—		9,934		9,934
Commercial & industrial		960		457		8,575		9,992		601,291		611,283
Consumer		9		—		—		9		3,992		4,001
Other		18	1			—		19		80,574		80,593
Purchased credit impaired		—		—		8		8		4,976		4,984
	$	1,669	$	853	$	10,308	$	12,830	$	2,055,894	$	2,068,724

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Impaired Loans

The following tables present impaired loans by class of loans:


	March 31, 2022
(Dollars in thousands)	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance		Average recorded investment during period
Real estate loans:
Non-farm non-residential owner occupied	$	986	$	986	$	—	$	986	$	—	$	997
Non-farm non-residential non-owner occupied		5,603		5,595		—		5,595		—		5,613
Residential		124		121		—		121		—		124
Construction, development & other		235		238		—		238		—		241
Farmland		—		—		—		—		—		—
Commercial & industrial		9,000		7,522		1,483		9,005		297		9,045
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Purchased credit impaired		62		—		61		61		15		63
	$	16,010	$	14,462	$	1,544	$	16,006	$	312	$	16,083


	December 31, 2021
(Dollars in thousands)	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance		Average recorded investment during year
Real estate loans:
Non-farm non-residential owner occupied	$	1,008	$	1,008	$	—	$	1,008	$	—	$	1,051
Non-farm non-residential non-owner occupied		5,641		5,630		—		5,630		—		5,680
Residential		130		127		—		127		—		138
Construction, development & other		241		244		—		244		—		255
Farmland		—		—		—		—		—		—
Commercial & industrial		8,297		7,331		967		8,298		290		9,117
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Purchased credit impaired		65		—		65		65		17		71
	$	15,382	$	14,340	$	1,032	$	15,372	$	307	$	16,312

Interest payments received on impaired loans are recorded as interest income unless collections of the remaining recorded investment are doubtful, at which time payments received are recorded as reductions of principal. Interest income collected on impaired loans was approximately $120,000 and $39,000 for the three months ended March 31, 2022 and 2021, respectively.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Troubled Debt Restructuring

During the three months ended March 31, 2022, the terms of one loan were modified as a troubled debt restructuring (“TDR”). The terms of three loans were modified as TDRs prior to December 31, 2021. The following table presents modifications of loans the Company considers to be TDR loans:


	March 31, 2022
	Loan modifications
(Dollars in thousands)	Number of loans		Pre- restructuring recorded investment		Post- restructuring recorded investment		Adjusted interest rate		Payment deferral		Combined rate and payment deferral
Real estate loans:
Non-farm non-residential owner occupied		3	$	865	$	865	$	—	$	865	$	—
Non-farm non-residential non-owner occupied		—		—		—		—		—		—
Residential		—		—		—		—		—		—
Construction, development & other		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Commercial & industrial		1		790		790		—		790		—
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
		4	$	1,655	$	1,655	$	—	$	1,655	$	—

	December 31, 2021
	Loan modifications
(Dollars in thousands)	Number of loans		Pre- restructuring recorded investment		Post- restructuring recorded investment		Adjusted interest rate		Payment deferral		Combined rate and payment deferral
Real estate loans:
Non-farm non-residential owner occupied		3	$	927	$	927	$	—	$	927	$	—
Non-farm non-residential non-owner occupied		—		—		—		—		—		—
Residential		—		—		—		—		—		—
Construction, development & other		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Commercial & industrial		2		758		758		—		758		—
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
		5	$	1,685	$	1,685	$	—	$	1,685	$	—

No loans modified under a TDR during the previous twelve-month period were in default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. At March 31, 2022 and December 31, 2021, the Company had no commitments to lend additional funds to borrowers with loans whose terms had been modified under TDRs.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

COVID-19 Loan Deferments

Certain borrowers were unable to meet their contractual payment obligations because of the adverse effects of COVID-19. During March of 2020 and to help mitigate these effects, the Company began offering deferral modifications of principal and/or interest payments for varying periods, but typically no more than 90 days. After 90 days, customers could apply for an additional deferral, and a small portion of our customers requested such an additional deferral. At March 31, 2022 and December 31, 2021, the Company had approximately 400 and 500 loans totaling $211.7 million and $223.6 million, respectively, in outstanding loan balances subject to deferral and modification agreements due to COVID-19 whereby principal and/or interest payments were deferred to the end of each loan term. Subsequent to the approved deferral period, customers resumed their regular payments. The Coronavirus Aid, Relief, and Economic Security Act provides banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs if the borrowers were not more than 30 days past due at December 31, 2019. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as TDRs, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status. At March 31, 2022 and December 31, 2021, $4.3 million and $4.4 million, respectively, in accrued interest receivables related to these loans remained outstanding and will be collected at the end of each loan term.

Credit Quality Indicators

Credit Quality Indicators. From a credit risk standpoint, the Company classifies its loans in one of six categories: (i) pass, (ii) special mention, (iii) substandard, (iv) purchased credit impaired, (v) doubtful, or (vi) loss.

The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

(i) The Company has several pass credit grades that are assigned to loans based on varying levels of credits, ranging from credits that are secured by cash or marketable securities, to watch credits that have all the characteristics of an acceptable credit risk but warrant more than the normal level of supervision.

(ii) Special mention loans are loans that still show sufficient cash flow to service their debt but show a declining financial trend with potential cash flow shortages if trends continue. This category should be treated as a temporary grade. If cash flow deteriorates further to become negative, then a substandard grade should be given. If cash flow trends begin to improve then an upgrade back to pass would be justified. Nonfinancial reasons for rating a credit special mention include management problems, pending litigation, an ineffective loan agreement or other material structure weakness.

(iii) A substandard loan has material weakness in the primary repayment source such as insufficient cash flow from operations to service the debt. However, other weaknesses such as limited paying capacity of the obligor or the collateral pledged could justify a substandard grade. Substandard loans must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.

(iv) Credits purchased from third parties are recorded at their estimated fair value at the acquisition date and are classified as PCI loans if the loans reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments (see Note 1 – Nature of Operations and Summary of Significant Accounting Policies - Certain Acquired Loans).

(v) A loan classified as doubtful has all the weaknesses of a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, non-accrual status is required on doubtful loans.

(vi) Loans classified as loss are considered uncollectible and of such little value that their continuance as banking assets are not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. With loans classified as loss, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified as loss, there is little prospect of collecting either its principal or interest. When access to collateral, rather than the value of the collateral, is a problem, a less severe classification may be appropriate. However, the Company does not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are to be recorded in the period an obligation becomes uncollectible.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

The following tables summarize the Company’s internal ratings of its loans:


	March 31, 2022
(Dollars in thousands)	Pass		Special Mention		Substandard		Purchased Credit Impaired		Doubtful		Total
Real estate loans:
Non-farm non-residential owner occupied	$	466,035	$	4,695	$	6,843	$	—	$	—	$	477,573
Non-farm non-residential non-owner occupied		454,476		—		8,411		731		—		463,618
Residential		224,593		—		1,056		—		—		225,649
Construction, development & other		410,319		—		238		4,096		—		414,653
Farmland		13,467		—		—		—		—		13,467
Commercial & industrial		751,356		—		4,588		61		—		756,005
Consumer		3,283		21		—		—		—		3,304
Other		93,676				—		—		—		93,676
	$	2,417,205	$	4,716	$	21,136	$	4,888	$	—	$	2,447,945


	December 31, 2021
(Dollars in thousands)	Pass		Special Mention		Substandard		Purchased Credit Impaired		Doubtful		Total
Real estate loans:
Non-farm non-residential owner occupied	$	370,062	$	6,953	$	6,926	$	—	$	—	$	383,941
Non-farm non-residential non-owner occupied		428,972		8,338		7,276		722		—		445,308
Residential		212,109		—		1,069		86		—		213,264
Construction, development & other		315,979		—		244		4,112		—		320,335
Farmland		9,934		—		—		—		—		9,934
Commercial & industrial		605,322		1,146		4,816		64		—		611,348
Consumer		3,979		22		—		—		—		4,001
Other		80,593		—		—		—		—		80,593
	$	2,026,950	$	16,459	$	20,331	$	4,984	$	—	$	2,068,724

Allowance for Loan Losses

The majority of the loan portfolio is comprised of loans to businesses and individuals in the Greater Houston, Dallas-Fort Worth, and Austin-San Antonio markets. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration has been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at March 31, 2022 and December 31, 2021.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

The following tables detail the activity in the allowance for loan losses by portfolio segment:


	For the Three Months Ended March 31, 2022
(Dollars in thousands)	Beginning balance		Provision for loan losses			Charge-offs		Recoveries		Ending balance
Real estate loans:
Non-farm non-residential owner occupied	$	3,456	$	631		$	—	$	—	$	4,087
Non-farm non-residential non-owner occupied		5,935		(322	)		—		—		5,613
Residential		957		(191	)		—		—		766
Construction, development & other		2,064		260			—		—		2,324
Farmland		45		(1	)		—		—		44
Commercial & industrial		6,500		3,669			—		4		10,173
Consumer		6		(14	)		—		13		5
Other		332		(32	)		—		—		300
	$	19,295	$	4,000		$	—	$	17	$	23,312


	For the Three Months Ended March 31, 2021
(Dollars in thousands)	Beginning balance		Provision for loan losses			Charge-offs			Recoveries		Ending balance
Real estate loans:
Non-farm non-residential owner occupied	$	2,608	$	1,544		$	—		$	—	$	4,152
Non-farm non-residential non-owner occupied		3,107		1,025			—			—		4,132
Residential		1,218		(280	)		—			—		938
Construction, development & other		932		(230	)		—			—		702
Farmland		32		—			—			—		32
Commercial & industrial		3,858		(538	)		—			3		3,323
Consumer		35		(23	)		—			—		12
Other		189		2			(13	)		2		180
	$	11,979	$	1,500		$	(13	)	$	5	$	13,471

The following tables summarize the allocation of the allowance for loan losses, by portfolio segment, for loans evaluated for impairment individually and collectively:


	March 31, 2022
	Period end amounts of ALLL allocated to loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	—	$	4,087	$	—	$	4,087
Non-farm non-residential non-owner occupied		—		5,613		—		5,613
Residential		—		766		—		766
Construction, development & other		—		2,324		—		2,324
Farmland		—		44		—		44
Commercial & industrial		297		9,861		15		10,173
Consumer		—		5		—		5
Other		—		300		—		300
	$	297	$	23,000	$	15	$	23,312

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021


	December 31, 2021
	Period end amounts of ALLL allocated to loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	—	$	3,456	$	—	$	3,456
Non-farm non-residential non-owner occupied		—		5,935		—		5,935
Residential		—		957		—		957
Construction, development & other		—		2,064		—		2,064
Farmland		—		45		—		45
Commercial & industrial		290		6,193		17		6,500
Consumer		—		6		—		6
Other		—		332		—		332
	$	290	$	18,988	$	17	$	19,295

The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows:


	March 31, 2022
	Loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	986	$	476,587	$	—	$	477,573
Non-farm non-residential non-owner occupied		5,595		458,023		—		463,618
Residential		121		225,528		—		225,649
Construction, development & other		238		414,415		—		414,653
Farmland		—		13,467		—		13,467
Commercial & industrial		9,005		746,939		61		756,005
Consumer		—		3,304		—		3,304
Other		—		93,676		—		93,676
	$	15,945	$	2,431,939	$	61	$	2,447,945


	December 31, 2021
	Loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	1,008	$	382,933		—	$	383,941
Non-farm non-residential non-owner occupied		5,630		439,678		—		445,308
Residential		127		213,137		—		213,264
Construction, development & other		244		320,091		—		320,335
Farmland		—		9,934		—		9,934
Commercial & industrial		8,298		602,985		65		611,348
Consumer		—		4,001		—		4,001
Other		—		80,593		—		80,593
	$	15,307	$	2,053,352	$	65	$	2,068,724

Certain Acquired Loans

During 2013, the Company purchased certain loans from a third party with gross contractual balances of $8.2 million for a purchase price of $6.3 million, resulting in a discount of $1.9 million. Upon acquisition, the acquired loans were initially segregated and classified in one of two categories: 1) PCI loans and 2) acquired performing loans. At acquisition date, estimated fair values of PCI loans and acquired performing loans were $3.2 million and $3.1 million, respectively. The gross contractual amounts receivable for PCI loans and acquired performing loans were $4.5 million and $3.7 million, respectively, as of the acquisition date.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

On January 1, 2020, the Company acquired loans with fair values of $259.6 million as part of the acquisition of Heritage Bancorp, Inc. and its subsidiary, Heritage Bank. Of the total $263.3 million of loans acquired, $250.7 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 and 310-20. The remaining $12.6 million were determined to exhibit deteriorated credit quality since origination under ASC 310-30.

In connection with the acquisition of loans from Heritage Bancorp, Inc. and its subsidiary, Heritage Bank, on January 1, 2020, the PCI loan portfolio was accounted for at fair value as follows:


Contractual required payments	$	26,627
Non-accretable difference (expected loss)		15,027
Cash flows expected to be collected at acquisition		11,600
Accretable yield		1,850
Basis in acquired Heritage PCI loans	$	9,750

The following table presents the gross contractual amounts receivable balances, by portfolio segment, and the carrying amount of PCI loans:


	March 31,		December 31,
(Dollars in thousands)	2022		2021
Real estate loans:
Non-farm non-residential owner occupied	$	—	$	—
Non-farm non-residential non-owner occupied		794		820
Residential		88		181
Construction, development & other		5,141		5,169
Farmland		—		—
Commercial & industrial		63		66
Consumer		—		—
Other		—		—
Total outstanding balances	$	6,086	$	6,236
Carrying amount	$	4,888	$	4,984

The accretable discount is accreted into income using the interest method over the life of the loans. At March 31, 2022 and December 31, 2021, unaccreted discounts on PCI loans totaled $881,000 and $926,000, respectively, and were included in net loans in the accompanying consolidated balance sheets.

At March 31, 2022 and December 31, 2021, the allowance for loan losses related to the PCI loans disclosed above was $16,000 and $17,000, respectively.

Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired loans.

Accretable yield, or income expected to be collected on PCI loans was as follows:


	March 31,			December 31,
(Dollars in thousands)	2022			2021
Balance at beginning of year	$	926		$	2,261
Accretion of income		(45	)		(1,335	)
Balance at end of period	$	881		$	926

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Premises and Equipment

Premises and equipment in the accompanying consolidated balance sheets consisted of the following:


	Estimated	March 31,			December 31,
(Dollars in thousands)	Useful Life	2022			2021
Building and building improvements	30 years or 3 - 10 years	$	12,172		$	12,156
Land			3,894			3,894
Equipment	3 - 5 years		4,638			4,308
Leasehold improvements	3 - 10 years		2,935			2,888
Furniture and fixtures	3 - 5 years		2,803			2,541
Construction in process			2,843			1,174
			29,285			26,961
Accumulated depreciation			(8,439	)		(7,916	)
		$	20,846		$	19,045

Depreciation expense for the three months ended March 31, 2022 and 2021 amounted to $522,000 and $401,000, respectively. Depreciation expense is included in occupancy and equipment expense in the accompanying consolidated statements of income.

Deposits

Deposits in the accompanying consolidated balance sheets consisted of the following:


	March 31,		December 31,
(Dollars in thousands)	2022		2021
Transaction accounts:
Noninterest bearing demand accounts	$	931,622	$	531,401
Interest bearing demand accounts		1,350,837		1,298,546
Savings		34,825		33,539
Total transaction accounts		2,317,284		1,863,486
Time deposits		269,885		277,713
Total deposits	$	2,587,169	$	2,141,199

The aggregate amount of time deposits in denominations of $250,000 or more totaled $118.6 million and $113.2 million as of March 31, 2022 and December 31, 2021, respectively.

Scheduled maturities of time deposits at March 31, 2022 are as follows:


2022 (nine months remaining)	$	212,906
2023		50,703
2024		2,811
2025		1,476
2026		1,675
2027 and thereafter		314
	$	269,885

At March 31, 2022 and December 31, 2021, the aggregate amount of demand deposit overdrafts that were reclassified as loans was $40,000 and $28,000, respectively.

Deposits received from related parties at March 31, 2022 and December 31, 2021, totaled approximately $16.7 million and $19.0 million, respectively.

Income Taxes

During the three months ended March 31, 2022 and 2021, the Company recorded income tax provision expense of $608,000 and $1,354,000, reflecting an effective tax rate of 22.6% and 21.0%, respectively.

GAAP prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. GAAP also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

FHLB Advances and Other Borrowings

Senior Debt

On December 24, 2019, the Company modified the terms of a $5,000,000 promissory note maturing on August 30, 2020, whereby the revolving line of credit facility was increased to $10,000,000, 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%. Upon maturity, the note was renewed and extended to August 31, 2021, in the amount of $10,000,000. 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. The note was secured by 100% of the outstanding stock of the Bank and was senior in rights to the $13,000,000 in subordinated debt described below. As of December 31, 2020, the outstanding principal balance was $10,000,000. On March 10, 2021, the note was combined with the outstanding balance of the $15,000,000 note described below and consolidated into a new revolving line of credit facility totaling $30,875,000 (see March 10, 2021 note below).

On December 24, 2019, the Company modified the terms of a $15,000,000 promissory note maturing on March 10, 2021, whereby the fixed interest rate of 6.00% was reduced 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. The note was secured by 100% of the outstanding stock of the Bank and was senior in rights to the $13,000,000 in subordinated debt described below. As of December 31, 2020, the outstanding principal balance was $10,875,000. On March 10, 2021, the remaining balance of the note was combined with the remaining balance of the revolving note described above and consolidated into a new revolving line of credit facility totaling $30,875,000 (see March 10, 2021 note below).

On March 10, 2021, the remaining balance of the two aforementioned notes totaling $20,875,000 was consolidated into a new revolving line of credit loan with new funds of $10,000,000 for a total facility of $30,875,000. 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 of September 10, 2022. All principal and unpaid interest is due at maturity. The note is secured by 100% of the outstanding stock of the Bank and was senior in rights to the $13,000,000 in subordinated debt described below until the subordinated debt was paid in full during August 2021. As of March 31, 2022, the outstanding balance was $1.0 million.

Subordinated Debt - Related Party

During August 2021, the Company paid off a $2,000,000 promissory note scheduled to mature on September 27, 2022 and an $11,000,000 promissory note scheduled to mature on July 29, 2022. Each note bore interest at a fixed rate of 6.00%. Quarterly interest payments for the $2,000,000 note were due on the 27th day of March, June, September and December. Quarterly interest payments for the $11,000,000 note were due on the 29th day of March, June, September and December. The notes were subordinate and junior in rights to the senior indebtedness described above.

Subordinated Notes Offering

On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements (the “Note Purchase Agreements”) with certain qualified institutional buyers and institutional accredited investors (the “Purchasers”) pursuant to which the Company issued and sold $82,250,000 in aggregate principal amount of its 5.500% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “Notes”) in a private placement transaction in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and Regulation D thereunder. The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. The Note Purchase Agreements contain certain customary representations, warranties and covenants made by the Company, on the one hand, and the Purchasers, severally and not jointly, on the other hand. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes, and the Company intends to use the net proceeds from the offering for general corporate purposes.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

or the date of early redemption, the Company will pay interest on the Notes semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2022, at a fixed interest rate of 5.500% per annum. From and including April 1, 2027, to, but excluding, the maturity date or the date of early redemption (the “Floating Rate Period”), the Company will pay interest on the Notes at a floating interest rate. The floating interest rate will be reset quarterly, and the interest rate for any Floating Rate Period shall be equal to the then-current Three-Month Term SOFR (as defined in the Indenture) plus 315 basis points for each quarterly interest period during the Floating Rate Period. Interest payable on the Notes during the Floating Rate Period will be paid quarterly in arrears
on January 1, April 1, July 1 and October 1, of each year, commencing on July 1, 2027. Notwithstanding the foregoing, in the event that Three-Month Term SOFR (or such other applicable benchmark rate) is less than zero, then Three-Month Term SOFR (or such other applicable benchmark rate) rate shall be deemed to be zero.

On March 31, 2022, in connection with the issuance and sale of the Notes, the Company entered into Registration Rights Agreements (the “Registration Rights Agreements”) with the Purchasers. Under the terms of the Registration Rights Agreements, the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act and have substantially the same terms as the Notes. Under certain circumstances, if the Company fails to meet its obligations under the Registration Rights Agreements, it would be required to pay additional interest to the holders of the Notes.

The Company may, at its option, redeem the Notes (i) in whole or in part beginning with the interest payment date on April 1, 2027, and on any interest payment date thereafter, or (ii) in whole, but not in part, upon the occurrence of a “Tier 2 Capital Event,” a “Tax Event,” or “Investment Company Event” (each as defined in the Indenture). The redemption price for any redemption is 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the extent then required under applicable laws or regulations, including capital adequacy rules or regulations.

There is no right of acceleration of maturity of the Notes in the case of default in the payment of principal of, or interest on, the Notes or in the performance of any other obligation of the Company under the Notes or the Indenture. The Indenture provides that holders of the Notes may accelerate payment of indebtedness only upon the Company’s bankruptcy, insolvency, reorganization, receivership or other similar proceedings.

The Notes are general unsecured, subordinated obligations of the Company and rank junior to all of its existing and future Senior Indebtedness (as defined in the Indenture), including all of its general creditors. The Notes will be equal in right of payment with any of the Company’s existing and future subordinated indebtedness, and will be senior to the Company’s obligations relating to any junior subordinated debt securities. In addition, the Notes are effectively subordinated to all secured indebtedness of the Company, including without limitation, the Bank’s liabilities to depositors in connection with deposits in the Bank, to the extent of the value of the collateral securing such indebtedness.

In connection with the above offering, the Company incurred approximately $1,743,000 in debt issuance costs which will be amortized to interest expense on a straight-line basis over the ten-year life of the note. As of March 31, 2022, the Company had $80,507,000 in outstanding principal, net of $1,743,000 in unamortized debt issuance costs.

FHLB Borrowings

At March 31, 2022, FHLB advances represented $12,000,000 in FHLB Owns the Option (“FOTO”) borrowings with a floating rate of 1.100% maturing on June 19, 2029; $18,000,000 in FOTO borrowings with a floating rate of 1.020% maturing on August 2, 2029; and $20,000,000 in FOTO borrowings with a floating rate of 0.570% maturing on February 26, 2035. The FOTO borrowings have quarterly call options that began on September 19, 2019, November 4, 2019, and February 25, 2022, respectively. The call feature allows the FHLB to terminate the entire outstanding balance at each option date and, in the event the option is exercised, replacement funding will be made available at then prevailing interest rates. FHLB advances are collateralized by FHLB stock, real estate loans and investment securities. The approximate amount of loans and investment securities that collateralize borrowings at March 31, 2022 and December 31, 2021 was $760.8 million and $601.0 million, respectively. At March 31, 2022, letters of credit with FHLB for $97.5 million were outstanding with expirations ranging from April 2022 through March 2023.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Contractual maturities of FHLB advances and other borrowings at March 31, 2022 were as follows:


(Dollars in thousands)	FHLB Advances		Other Borrowings
2022 (nine months remaining)	$	—	$	1,000
2023		—		—
2024		—		—
2025		—		—
2026		—		—
2027 and thereafter		50,000		80,507
	$	50,000	$	81,507

At March 31, 2022 and December 31, 2021, the Company had federal funds lines of credit with commercial banks that provide for availability to borrow up to an aggregate of $50.5 million and $50.5 million in federal funds, respectively. The Company had no advances outstanding under these lines at March 31, 2022 and December 31, 2021.

Stock Options and Warrants

2013 Stock Option Plan

In 2008 upon shareholder approval, the Bank adopted the 2008 Stock Option Plan. In 2013 upon formation of Third Coast Bancshares, Inc., the Company adopted the 2013 Stock Option Plan (the “2013 Plan”). All outstanding options from the 2008 Stock Option Plan were grandfathered into the 2013 Plan. The 2013 Plan permits the grant of stock options for up to 500,000 shares of common stock from time to time during the term of the plan, subject to adjustment upon changes in capitalization. Under the 2013 Plan, the Bank may grant either incentive stock options or nonqualified stock options to eligible directors, executive officers, key employees and non-employee shareholders of the Bank. At March 31, 2022, there were no shares remaining available for grant for future awards as all outstanding options under the 2013 Plan were grandfathered into the 2019 Omnibus Incentive Plan (see 2019 Omnibus Incentive Plan). Awards outstanding under the 2013 Plan remain in full force and effect, according to their respective terms.

2019 Omnibus Incentive Plan

On May 29, 2019, the Company’s shareholders approved the Third Coast Bancshares, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”), which was previously approved by the Company’s board of directors. Under the 2019 Plan, the Company may issue stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses, other stock-based awards, cash awards, and dividend equivalents. On May 20, 2021, the Company’s shareholders approved an amendment to the 2019 Plan such that the maximum number of shares reserved for issuance under the 2019 Plan was increased by an additional 500,000 shares. The maximum aggregate number of shares of common stock that may be issued under the 2019 Plan is equal to the sum of (i) 800,000 shares of common stock, (ii) the total number of shares remaining available for new awards under the 2013 Plan as of May 29, 2019, which was 152,750 shares of common stock, and (iii) any shares subject to outstanding stock options issued under the 2013 Plan to the extent that (A) any such award is forfeited or otherwise terminates or is cancelled without the delivery of shares of common stock, or (B) shares of common stock are withheld from any such award to satisfy any tax or withholding obligation, in which case the shares of common stock covered by such forfeited, terminated or cancelled award or which are equal to the number of shares of common stock withheld, will become available for issuance under the 2019 Plan. At March 31, 2022, there were 187,891 shares remaining available for grant for future awards under the 2019 Plan.

2017 Non-Employee Director Stock Option Plan

In December 2017, the Bank adopted the 2017 Non-Employee Director Stock Option Plan (the “Director Plan”). The Director Plan originally authorized the grant of stock options for up to 100,000 shares of common stock to non-employee directors of the Company pursuant to the terms of the Director Plan. During July 2018, the Company's board of directors approved the grant of stock options for 50,000 additional shares of common stock under the Director Plan, such that the Director Plan permitted the grant of stock options for up to 150,000 shares of common stock. On January 1, 2021, the Director Plan was amended and subsequently approved by the Company’s board of directors such that the aggregate number of shares of common stock to be issued pursuant to options shall not exceed 187,000 shares. Options are generally granted with an exercise price equal to the market price of the Company’s stock at the date of the grant. Option awards generally vest based on five years of continuous service and have 10-year contractual terms for non-controlling participants as defined by the Director Plan. Other grant terms can vary for controlling participants as defined by the Director Plan. At March 31, 2022, there were 8,000 shares remaining available for grant for future awards under the Director Plan.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

2020 Heritage Stock Option Plan

On January 1, 2020, the Company acquired a stock option plan which originated under Heritage Bancorp, Inc. as part of a merger of the two companies. The options granted to employees must be exercised within 10 years from the date of grant and vesting schedules are determined on an individual basis. At merger date, 109,908 outstanding options became fully vested and were converted to options to purchase 97,821 shares of the Company’s common stock at an exchange ratio of 0.89, which was equal to the acquisition exchange rate for common shares. At March 31, 2022, there were no shares remaining available for grant for future awards.

Stock Options

During the three months ended March 31, 2022, the Company granted stock options to certain directors, executive officers and other key employees of the Company. These stock options vest ratably over five years and have a 10-year contractual term. Options granted during the three months ended March 31, 2022 and for the year ended December 31, 2021 were granted with an exercise price ranging from $16.30 to $25.76.

The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for the options granted in the three months ended March 31, 2022: risk-free interest rate ranging from 1.45% to 1.76%, dividend yield of 0.00%; estimated volatility of 10.00%, and expected lives of options of 7.5 years. The following assumptions were used for options granted in the three months ended March 31, 2021: risk-free interest rate ranging from 0.70% to 1.42%, dividend yield of 0.00%; estimated volatility of 10.00%, and expected lives of options of 7.5 years. Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer group averages.

For the three months ended March 31, 2022 and 2021, the Company recognized stock-based compensation expense of $118,000 and $69,000, respectively, associated with stock options. As of March 31, 2022, there was approximately $2.1 million of unrecognized compensation costs related to non-vested stock options that is expected to be recognized over the remaining vesting periods. Forfeitures are recognized as they occur.

A summary of stock option activity for the three months ended March 31, 2022 and year ended December 31, 2021 is presented below:


	March 31,					December 31,
	2022					2021
(Dollars in thousands, except share and per share data)	Shares Underlying Options			Weighted Average Exercise Price		Shares Underlying Options			Weighted Average Exercise Price
Outstanding at beginning of period		1,220,428		$	17.83		660,251		$	14.37
Granted during the period		22,500			22.38		788,250			20.22
Forfeited during the period		(37,500	)		24.00		(144,903	)		17.55
Exercised during the period		(3,500	)		15.65		(83,170	)		13.48
Outstanding at the end of period		1,201,928		$	17.73		1,220,428		$	17.83
Options exercisable at end of period		452,738		$	14.12		361,758		$	13.59
Weighted-average grant date fair value of options granted during the period				$	6.75				$	3.15

A summary of weighted average remaining life is presented below:


(Dollars in thousands, except share and per share data)	March 31, 2022						December 31, 2021
Exercise Price	Options Outstanding		Weighted Average Remaining Life (years)		Options Exercisable		Options Outstanding		Weighted Average Remaining Life (years)		Options Exercisable
$10.00 - $12.99		164,223		2.82		161,723		162,223		5.15		162,223
$13.00 - $16.99		493,955		7.23		291,015		496,955		7.48		199,535
$17.00 - $26.99		543,750		9.26		—		561,250		9.52		—
		1,201,928		7.55		452,738		1,220,428		8.11		361,758

Shares issued in connection with stock compensation awards are issued from available authorized shares.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $6.6 million and $4.1 million, respectively, at March 31, 2022. The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $5.8 million and $3.0 million, respectively, at December 31, 2021.

The intrinsic value of stock options exercised during the three months ended March 31, 2022 and 2021 was $24,000 and $80,000, respectively.

A summary of the activity in the Company’s nonvested shares is as follows:


	March 31,					December 31,
	2022					2021
(Dollars in thousands, except share and per share data)	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1,		858,670		$	3.15		262,670		$	3.04
Granted during the period		22,500			6.75		788,250			3.15
Vested during the period		(93,880	)		2.81		(72,500	)		3.17
Forfeited during the period		(38,100	)		3.76		(119,750	)		2.88
Nonvested at end of period		749,190		$	3.27		858,670		$	3.15

Warrants

As consideration for the financial risks undertaken by certain organizers of the Company, the Company has outstanding stock warrants that are initially exercisable to purchase one share of common stock for each warrant held.

A summary of the Company’s stock warrant activity is presented below:


	March 31,				December 31,
	2022				2021
(Dollars in thousands, except share and per share data)	Shares Underlying Warrants		Weighted- Average Exercise Price		Shares Underlying Warrants			Weighted- Average Exercise Price
Outstanding at beginning of period		4,285	$	11.00		6,000		$	11.00
Granted		—		—		—			—
Exercised		—		—		(1,715	)		11.00
Expired or forfeited		—		—		—			—
Outstanding at end of period		4,285	$	11.00		4,285		$	11.00
Exercisable at end of period		4,285	$	11.00		4,285		$	11.00

The weighted average remaining contractual life of stock warrants outstanding at March 31, 2022 was 1.25 years. The warrants are exercisable over a ten-year period that expires on July 1, 2023.

Restricted Stock Awards

The Company granted restricted stock awards (“RSAs”) to certain executive officers and employees of the Company during the three months ended March 31, 2022 and to certain directors and executive officers of the Company during the year ended December 31, 2021. Restricted stock is common stock with certain restrictions that relate to trading and the possibility of forfeiture. Holders of restricted stock have full voting rights. Generally, the awards vest ratably over a two-to-four year period, but vesting periods may vary. The RSAs have a 10-year contractual term.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

A summary of the activity for nonvested RSAs for the three months ended March 31, 2022 and the year ended December 31, 2021 is presented below:


	March 31,				December 31,
	2022				2021
(Dollars in thousands, except share and per share data)	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested at beginning of period		49,750	$	24.00		—	$	—
Granted during the period		28,132		24.70		49,750		24.00
Vested during the period		—		—		—		—
Forfeited during the period		—		—		—		—
Nonvested at the end of period		77,882	$	24.25		49,750	$	24.00

Compensation expense for restricted stock awards is determined based on the number of restricted shares granted and the market price of our common stock at issue date. The Company recognized stock-based compensation expense associated with RSAs of approximately $161,000 and zero during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was $1.6 million of total unrecognized compensation expense cost related to nonvested RSAs. The cost is expected to be recognized over a remaining weighted average period of 9.65 years.

Leases

Operating Leases

The Company leases certain office space and stand-alone buildings which are recognized as operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. Lease liabilities represent the Company's liability to make lease payments under these leases, on a discounted basis. For leases with renewal options available, the Company evaluates each lease to determine if exercise of the renewal option is reasonably certain. As of March 31, 2022, the Company's operating lease ROU asset and operating lease liability totaled $10.7 million and $10.6 million, respectively.

In order to calculate its ROU assets and lease liabilities, ASC Topic 842 requires the Company to use the rate of interest implicit in the lease when readily determinable. If the rate implicit in the lease is not readily determinable, the Company is required to use its incremental borrowing rate, which is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. The Company was unable to determine the implicit interest rate in any of the leases and therefore used its incremental borrowing rate.

As of March 31, 2022, the weighted-average discount rate for the Company's operating leases was 4.00%. The Company's lease terms range from six months to one hundred twenty months. The weighted-average remaining term of the leases was 9.2 years.

Lease costs for the period shown below were as follows:


	March 31,
(Dollars in thousands)	2022
Operating lease cost	$	600
Short-term lease cost		191
Total lease cost	$	791

Total operating lease expense for the three months ended March 31, 2022 and 2021 was $791,000 and $300,000, respectively.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

A schedule of the Company's lease liabilities by contractual maturity for operating leases with initial or remaining terms in excess of one year for each year through 2027 and thereafter is presented below:


	March 31,
(Dollars in thousands)	2022
2022 (nine months remaining)	$	1,197
2023		1,926
2024		2,144
2025		2,133
2026		2,179
2027 and thereafter		11,840
Total undiscounted lease liability		21,419
Less:
Discount on cash flows		(2,121	)
Lease signed, but not yet commenced		(8,669	)
Total operating lease liability	$	10,629

10.

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company generally uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The following financial instruments were outstanding whose contract amounts represent credit risk:


	March 31,		December 31,
(Dollars in thousands)	2022		2021
Commitments to extend credit	$	891,853	$	606,160
Standby letters of credit		9,522		14,144
Total	$	901,375	$	620,304

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Management evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank's policy for obtaining collateral and the nature of such collateral is essentially the same as that involved in making commitments to extend credit.

Although the maximum exposure to loss is the amount of such commitments, management currently anticipates no material losses from such activities.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

11.

Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

GAAP requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

•

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 2 investments consist primarily of obligations of U.S. government sponsored enterprises and agencies, obligations of state and municipal subdivisions, corporate bonds and mortgage backed securities.

•

Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Financial assets and financial liabilities measured at fair value on a recurring and nonrecurring basis include the following:

Investment Securities Available-for-sale. Investment securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the bond’s terms and conditions, among other things.

Loans Held for Sale. Loans held for sale are reported at aggregate cost which has been deemed to be the equivalent of fair value using Level 3 inputs.

Impaired Loans. Impaired loans are reported at the estimated fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based on observable market data or independent appraisals using Level 3 inputs.

Derivative Instruments. The estimated fair value of interest rate derivative positions are obtained from a pricing service that provides the swaps’ unwind value using Level 2 inputs.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

There were no transfers between levels during the three month period ended March 31, 2022 or during the year ended December 31, 2021.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value as of March 31, 2022 and December 31, 2021:


	Fair Value Measurements Using
(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
At March 31, 2022:
Securities available for sale:
State and municipal securities	$	—	$	424	$	—	$	424
Mortgage-backed securities		—		761		—		761
U.S. Treasury bonds		—		101,082		—		101,082
Corporate bonds		—		23,951		—		23,951
Total investment securities available for sale	$	—	$	126,218	$	—	$	126,218
Asset derivatives:
Interest rate swaps	$	—	$	3,872	$	—	$	3,872
Risk participation agreements		—		1		—		1
Total asset derivatives	$	—	$	3,873	$	—	$	3,873
Liability derivatives:
Interest rate swaps	$	—	$	3,872	$	—	$	3,872
Risk participation agreements		—		37		—		37
Total liability derivatives	$	—	$	3,909	$	—	$	3,909


	Fair Value Measurements Using
(Dollars in thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
At December 31, 2021:
Securities available for sale:
State and municipal securities	$	—	$	1,094	$	—	$	1,094
Mortgage-backed securities		—		811		—		811
Corporate bonds		—		24,527		—		24,527
Total investment securities available for sale	$	—	$	26,432	$	—	$	26,432
Loans held for sale:	$	—	$	—	$	2,844,441	$	2,844,441
Asset derivatives:
Interest rate swaps	$	—	$	389	$	—	$	389
Total asset derivatives	$	—	$	389	$	—	$	389
Liability derivatives:
Interest rate swaps	$	—	$	389	$	—	$	389
Total liability derivatives	$	—	$	389	$	—	$	389

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following at March 31, 2022 and December 31, 2021:

Impaired loans. At March 31, 2022, impaired loans with carrying values of $16.0 million were reduced by specific valuation allowances totaling $312,000 resulting in a net fair value of $15.7 million based on Level 3 inputs. At December 31, 2021, impaired loans with carrying values of $15.4 million were reduced by specific valuation allowances totaling $307,000 resulting in a net fair value of $15.1 million based on Level 3 inputs.

Non-financial assets measured at fair value on a non-recurring basis during the three months ended March 31, 2022 and year ended December 31, 2021, include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

remeasured at fair value through a write-down included in current earnings. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

The following table presents foreclosed assets that were remeasured and recorded at fair value:


	March 31,		December 31,
(Dollars in thousands)	2022		2021
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	1,666	$	1,676
Write downs included in other non-interest expense		—		—
Fair value of foreclosed assets remeasured subsequent to initial recognition	$	1,666	$	1,676

For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments as defined. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market rates for similar assets and liabilities. Financial instrument assets with variable rates and financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value.

The carrying value and the estimated fair value of the Company’s contractual off-balance sheet unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are as follows:


	March 31, 2022				December 31, 2021
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets
Level 2 inputs
Cash and cash equivalents	$	371,320	$	371,320	$	327,025	$	327,025
Interest bearing time deposits in other banks		132		132		131		131
Investment securities available for sale		126,218		126,218		26,432		26,432
Non-marketable securities		11,327		11,327		7,527		7,527
Accrued interest receivable		12,648		12,648		10,228		10,228
Bank-owned life insurance		26,671		26,671		26,528		26,528
Derivative instruments assets		3,873		3,873		389		389
	$	552,189	$	552,189	$	398,260	$	398,260
Level 3 inputs
Loans, including held for sale, net	$	2,424,633	$	2,391,904	$	2,049,429	$	2,023,761
Financial liabilities
Level 2 inputs
Deposits	$	2,587,169	$	2,587,827	$	2,141,199	$	2,141,999
Accrued interest payable		387		387		437		437
FHLB advances		50,000		50,000		50,000		50,000
Notes payable		81,507		81,507		1,000		1,000
Derivative instrument liabilities		3,909		3,909		389		389
	$	2,722,972	$	2,723,630	$	2,193,025	$	2,193,825

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

12.

Significant Group Concentrations of Credit Risk

All of the Company’s business activity is with customers primarily located within Texas. Such customers are normally also depositors of the Company.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit related financial instruments such as commitments to extend credit and credit card arrangements represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.

At March 31, 2022 and December 31, 2021, the Company had federal funds sold aggregating $1,538,000 and $292,000, respectively, which represents concentrations of credit risk. The Company had uninsured deposits of $244.3 million and $189.7 million as of March 31, 2022 and December 31, 2021, respectively.

13.

Employee Benefit Plans

Defined Contribution Plan

In 2009, the Company adopted the Third Coast Bank, SSB 401(k) Plan (the “Plan”) covering substantially all employees. Employees may elect to defer a percentage of their compensation subject to certain limits based on federal tax laws. The Company may make a discretionary match of employees’ contributions based on a percentage of salary contributed by participants.

Effective January 1, 2018, the discretionary contributions made by the Company were invested in the common stock of the Company in accordance with the Third Coast Bank, SSB Employee Stock Ownership Plan (“ESOP”). The ESOP became effective on January 1, 2018 for the exclusive benefit of the participants and their beneficiaries. Benefits under the ESOP generally are distributed in the form of cash. In addition, until the Company’s common stock was actively traded on an established securities market, the participant could demand (in accordance with the terms of the ESOP and applicable laws) that the Company repurchase shares of common stock distributed to the participant at the estimated fair value. This put option terminated upon the consummation of the Company's IPO and listing of its common stock on the NASDAQ Global Select Market in November 2021.

Prior to the IPO, the fair value of shares of common stock, held by the ESOP, was deducted from permanent shareholders’ equity in the consolidated balance sheets, and was reflected in a line item below liabilities and above shareholders’ equity. This presentation was necessary in order to recognize the put option within the ESOP, consistent with SEC guidelines, because the Company was not publicly traded. The Company used an external third party to determine the maximum possible cash obligation related to those securities. The valuation was the same that was used for the stock option plan. Increases or decreases in the value of the cash obligation were included in a separate line item in the statements of changes in shareholders’ equity. An increase of approximately $317,000 in the fair value of the cash obligation was recorded for the year ended December 31, 2021. At December 31, 2021, the $2.3 million estimated fair value of the cash obligation for stock allocated under the ESOP plan was eliminated upon completion of the IPO.

As of March 31, 2022, the number of shares held by the ESOP was 124,132 and there were no shares unallocated to plan participants. At March 31, 2022, shares committed to be released to the plan were 11,361 shares for a fair value of $266,000. All shares held by the ESOP were treated as outstanding at March 31, 2022.

For the three months ended March 31, 2022 and 2021, Company contributions to the ESOP were approximately $330,000 and $178,000, respectively. Administrative expense related to the ESOP and the Plan for the same three month period totaled approximately $10,000 and zero, respectively. The costs were included in salaries and employee benefits in the accompanying consolidated statements of income.

14.

Related Party Transactions

During the normal course of business, the Company may enter into transactions with significant stockholders, directors and principal officers and their affiliates (collectively referred to herein as “related parties”). It is the Company’s policy that all such transactions are on substantially the same terms as those prevailing at the time for comparable transactions with third parties. At March 31, 2022 and December 31, 2021, the aggregate amounts of loans to related parties were approximately $596,000 and $569,000, respectively. During the three months ended March 31, 2022, loan originations to related parties totaled $50,000 and repayments from related party loans totaled $23,000. Related party unfunded commitments at March 31, 2022 were $150,000. There were no related party unfunded commitments at December 31, 2021.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

15.

Shareholders’ Equity and Regulatory Matters

Private Placement Memorandum

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; (ii) $11.0 million under a subordinated debt due July 29, 2022; and (iii) $2.0 million under a subordinated debt due September 27, 2022.

Initial Public Offering

On November 9, 2021, the Company's common stock began trading on the NASDAQ Global Select Market under the symbol “TCBX”. The Company issued and sold an aggregate of 4,025,000 shares of its common stock, including 525,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, in its initial public offering (“IPO”) at a public offering price of $25.00 per share for aggregate gross proceeds of $100.6 million before deducting underwriting discounts and offering expenses. Aggregate net proceeds from our IPO were $92.0 million after deducting underwriting discounts and offering expenses of $8.6 million. The initial closing of the IPO 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 the IPO, the Company issued an aggregate of 49,750 shares of restrictive stock to its directors, advisory directors, and executive officers. The Company intends to use the net proceeds from the IPO to support its organic growth and for general corporate purposes, including maintenance of its required regulatory capital and potential future acquisition opportunities.

Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I capital, and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2022 and December 31, 2021 the Bank meets all capital adequacy requirements to which it is subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Bank’s capital ratios exceed the regulatory definition of well capitalized as of March 31, 2022 and December 31, 2021. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since March 31, 2022, that management believes have changed the Bank’s category.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

A comparison of the Bank’s actual capital amounts and ratios to required capital amounts and ratios are presented in the following table (dollars in thousands):


	Actual					For Capital Adequacy Purposes Basel III Fully Phased-In (2)						To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
As of March 31, 2022:
Total capital (to risk weighted assets)	$	379,530		13.2	%	≥	$	302,763	≥	10.5	%	≥	$	288,336	≥	10.0	%
Tier I capital (to risk weighted assets)	$	356,218		12.4	%	≥	$	245,086	≥	8.5	%	≥	$	230,669	≥	8.0	%
Tier I capital (to average assets) (1)	$	356,218		13.7	%	≥	$	104,281	≥	4.0	%	≥	$	130,351	≥	5.0	%
Common equity tier 1 (to risk weighted assets)	$	356,218		12.4	%	≥	$	201,835	≥	7.0	%	≥	$	187,418	≥	6.5	%
As of December 31, 2021:
Total capital (to risk weighted assets)	$	288,022		13.5	%	≥	$	223,444	≥	10.5	%	≥	$	212,804	≥	10.0	%
Tier I capital (to risk weighted assets)	$	268,727		12.6	%	≥	$	180,883	≥	8.5	%	≥	$	170,243	≥	8.0	%
Tier I capital (to average assets) (1)	$	268,727		12.3	%	≥	$	87,602	≥	4.0	%	≥	$	109,503	≥	5.0	%
Common equity tier 1 (to risk weighted assets)	$	268,727		12.6	%	≥	$	148,962	≥	7.0	%	≥	$	138,322	≥	6.5	%

(1) The Tier 1 capital ratio (to average assets) is not impacted by the Basel III Capital Rules; however, the Federal Reserve and the FDIC may require the Bank to maintain a Tier 1 capital ratio (to average assets) above the minimum required.

(2) Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CIT1 capital buffer under the Basel III Capital Rules.

16.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table presents a reconciliation of net income available to common shareholders and the number of shares used in the calculation of basic and diluted earnings per common share shown on the consolidated statements of income.


	For the Three Months Ended March 31,
(Dollars in thousands, except share and per share data)	2022		2021
Net income available to common shareholders	$	2,087	$	5,096
Weighted-average shares outstanding for basic earnings per common share		13,385,324		6,280,854
Dilutive effect of stock compensation		369,702		83,817
Weighted-average shares outstanding for diluted earnings per common share		13,755,026		6,364,671

17.

Derivative Financial Instruments

As part of its hedging strategy, the Company entered into a $100 million pay-fixed interest rate swap facility with another financial institution. The instrument is designated as a cash flow hedge, and changes in fair values are recognized in other comprehensive income (loss). On February 18, 2021, the facility was discontinued and a termination fee of $945,000 was received by the Company. The fee is being accreted from other comprehensive income (loss), net of deferred taxes, into interest expense through September 4, 2025, which is the maturity date of the contract. For the three months ended March 31, 2022, approximately $51,000 was recognized as a reduction of interest expense.

The Company also offers certain interest rate swap products directly to its qualified commercial banking customers. These financial instruments are not designated as hedging instruments. The interest rate swap derivative positions relate to transactions in which the Company enters into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. An interest rate swap transaction allows customers to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest on a notional amount at a variable interest rate and receive

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.

Because the Bank acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and would not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At March 31, 2022, no such deterioration was determined by management.

All derivatives are carried at fair value in either other assets or other liabilities in the accompanying consolidated balance sheets.

As of March 31, 2022 and December 31, 2021, cash of $730,000 was pledged as collateral for derivative financial instruments.

The following tables provide the outstanding notional balances and fair values of outstanding derivative positions at March 31, 2022 and December 31, 2021.


(Dollars in thousands)	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value		Pay Rate (1)	Receive Rate (1)	Remaining Term (2)
March 31, 2022
Pay-fixed interest rate swap (*)	$	—	$	—	$	—	0.20%	USD Fed Funds-H.15		3.4
Risk participation agreements purchased		11,739		1	—		—	—		3.0
Risk participation agreements sold		30,000		—		37	—	—		5.0
Commercial loan interest rate swaps:
Loan customer counterparty		141,540		—		3,872	—	4.48%		5.4
Financial institution counterparty		141,540		3,872		—	4.48%	—		5.4
	$	324,819	$	3,873	$	3,909


(Dollars in thousands)	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value		Pay Rate (1)	Receive Rate (1)	Remaining Term (2)
December 31, 2021
Pay-fixed interest rate swap (*)	$	—	$	—	$	—	0.20%	USD Fed Funds-H.15	3.7
Commercial loan interest rate swaps:
Loan customer counterparty		77,587		—		389		4.21%	7.6
Financial institution counterparty		77,587		389		—	4.21%		7.6
	$	155,174	$	389	$	389

(*) Facility terminated on February 18, 2021 (see disclosure narrative on cash flow hedge above).

(1) Weighted average rate.

(2) Weighted average life (in years).

18.

Goodwill and Core Deposit Intangible, Net

In 2020, the Company recorded goodwill and core deposit intangible of $18,033,880 and $1,615,002, respectively, relating to the Heritage Bancorp, Inc. acquisition.

Amortization expense of the core deposit intangible (“CDI”) was $40,000 for each of the three months ended March 31, 2022 and 2021. The remaining weighted average life is 7.75 years at March 31, 2022.

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2022 and December 31, 2021

Scheduled amortization of CDI at March 31, 2022 are as follows:


(Dollars in thousands)	CDI Amortization
2022 (nine months remaining)	$	121
2023		162
2024		162
2025		162
2026		162
2027 and thereafter		483
	$	1,252

19. Contingencies

Litigation

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

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 Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022. 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 our Annual Report on Form 10-K filed with the SEC on March 17, 2022 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 thirteen branches, with seven branches in the Greater Houston market, three branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas. As of March 31, 2022, we had, on a consolidated basis, total assets of $3.04 billion, total loans of $2.45 billion, total deposits of $2.59 billion and total shareholders’ equity of $301.2 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.

Completion of $70.5 Million Private Placement

Initial Public Offering

On November 9, 2021, the Company's common stock began trading on the NASDAQ Global Select Market under the symbol “TCBX”. 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 offering expenses. Aggregate net proceeds from our initial public offering were $92.0 million after deducting underwriting discounts and offering expenses. 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 49,750 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.

Subordinated Notes Offering

On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements (the “Note Purchase Agreements”) with certain qualified institutional buyers and institutional accredited investors (the “Purchasers”) pursuant to which the Company issued and sold $82.3 million in aggregate principal amount of its 5.500% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “Notes”) in a private placement transaction in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and Regulation D thereunder. The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. The Note Purchase Agreements contain certain customary representations, warranties and covenants made by the Company, on the one hand, and the Purchasers, severally and not jointly, on the other hand. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes, and the Company intends to use the net proceeds from the offering for general corporate purposes.

The Notes were issued under an Indenture, dated as of March 31, 2022 (the “Indenture”), by and between the Company and UMB Bank, N.A., as trustee. The Notes will mature on April 1, 2032. From and including March 31, 2022, to, but excluding, April 1, 2027 or the date of early redemption, the Company will pay interest on the Notes semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2022, at a fixed interest rate of 5.500% per annum. From and including April 1, 2027, to, but excluding, the maturity date or the date of early redemption (the “Floating Rate Period”), the Company will pay interest on the Notes at a floating interest rate. The floating interest rate will be reset quarterly, and the interest rate for any Floating Rate Period shall be equal to the then-current Three-Month Term SOFR (as defined in the Indenture) plus 315 basis points for each quarterly interest period during the Floating Rate Period. Interest payable on the Notes during the Floating Rate Period will be paid quarterly in arrears
on January 1, April 1, July 1 and October 1, of each year, commencing on July 1, 2027. Notwithstanding the foregoing, in the event that Three-Month Term SOFR (or such other applicable benchmark rate) is less than zero, then Three-Month Term SOFR (or such other applicable benchmark rate) rate shall be deemed to be zero.

The Company may, at its option, redeem the Notes (i) in whole or in part beginning with the interest payment date on April 1, 2027, and on any interest payment date thereafter, or (ii) in whole, but not in part, upon the occurrence of a “Tier 2 Capital Event,” a “Tax Event,” or “Investment Company Event” (each as defined in the Indenture). The redemption price for any redemption is 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital adequacy rules or regulations.

The Notes are general unsecured, subordinated obligations of the Company and rank junior to all of its existing and future Senior Indebtedness (as defined in the Indenture), including all of its general creditors. The Notes will be equal in right of payment with any of the Company’s existing and future subordinated indebtedness, and will be senior to the Company’s obligations relating to any junior subordinated debt securities. In addition, the Notes are effectively subordinated to all secured indebtedness of the Company, including without limitation, the Bank's liabilities to depositors in connection with deposits in the Bank, to the extent of the value of the collateral securing such indebtedness.

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 March 31, 2022, outstanding PPP loans, net of deferred loan fees of $713,000, were $26.7 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 March 31, 2022, outstanding MSLP loans, excluding the 95% portion sold to the Federal Reserve and net of deferred loan fees of $541,000, were $3.2 million which are included in commercial and industrial loans.

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 March 31,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Interest income	$	27,184	$	25,625	$	1,559		6.1	%
Interest expense		1,974		2,907		(933	)	(32.1	)%
Net interest income		25,210		22,718		2,492		11.0	%
Provision for loan losses		4,000		1,500		2,500		166.7	%
Noninterest income		1,666		750		916		122.1	%
Noninterest expense		20,181		15,518		4,663		30.0	%
Income before income taxes		2,695		6,450		(3,755	)	(58.2	)%
Income tax expense		608		1,354		(746	)	(55.1	)%
Net income	$	2,087	$	5,096	$	(3,009	)	(59.0	)%

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.

Three months ended March 31, 2022 vs. Three months ended March 31, 2021

Net interest income increased $2.5 million, or 11.0%, during the three months ended March 31, 2022, compared to the three months ended March 31, 2021 primarily due to an increase in average loans and lower average rates paid on interest-bearing deposits offset by a decrease in income from PPP loans. Average loans was $1.6 billion for the three months ended March 31, 2021 compared to $2.2 billion for the three months ended March 31, 2022 with the increase primarily due to loan growth in construction and development loans and commercial real estate loans. The average cost of interest-bearing deposits was 0.46% for the three months ended March 31, 2022 and 0.71% for the three months ended March 31, 2021. The Company recognized $1.3 million in PPP loan origination fees for the three months ended March 31, 2022 through both accretion and forgiveness of the related PPP loans compared to $7.6 million for the three months ended March 31, 2021. For the three months ended March 31, 2022, net interest margin and net interest spread were 4.09% and 3.95%, respectively, compared to 4.97% and 4.78%, respectively, for the three months ended March 31, 2021.

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 Three Months Ended March 31,
	2022								2021
(Dollars in thousands)	Average Outstanding Balance			Interest Earned/ Paid(3)		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Paid(3)		Average Yield/ Rate
Assets
Interest-earnings assets:
Investment securities	$	28,170		$	276		3.97	%	$	25,181		$	252		4.06	%
Loans, gross		2,208,462			26,682		4.90	%		1,604,107			25,198		6.37	%
Federal funds sold and other interest earning assets		260,275			226		0.35	%		225,850			175		0.31	%
Total interest-earning assets		2,496,907			27,184		4.42	%		1,855,138			25,625		5.60	%
Less allowance for loan losses		(20,395	)							(12,626	)
Total interest-earning assets, net of allowance		2,476,512								1,842,512
Noninterest-earning assets		150,871								101,177
Total assets	$	2,627,383							$	1,943,689
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,640,273		$	1,844		0.46	%	$	1,356,885		$	2,377		0.71	%
Notes payable		1,891			23		4.93	%		33,783			423		5.08	%
FHLB advances		50,000			107		0.87	%		53,911			107		0.80	%
Total interest-bearing liabilities		1,692,164			1,974		0.47	%		1,444,579			2,907		0.82	%
Noninterest-bearing deposits		620,900								368,413
Other liabilities		12,782								7,726
Total liabilities		2,325,846								1,820,718
Shareholders’ equity, including ESOP- owned shares		301,537								122,971
Total liabilities and shareholders' equity	$	2,627,383							$	1,943,689
Net interest income				$	25,210							$	22,718
Net interest spread(1)							3.95	%							4.78	%
Net interest margin(2)							4.09	%							4.97	%

(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 $3.2 million and $8.5 million for the three months ended March 31, 2022 and 2021, 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 March 31, 2022 compared to 2021
	Increase (Decrease) Due to Changes In						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
Interest-earning assets:
Investment securities	$	30		$	(6	)	$	24
Loans, gross		9,490			(8,006	)		1,484
Federal funds sold and other interest-earning assets		24			27			51
Total increase in interest income	$	9,544		$	(7,985	)	$	1,559
Interest-bearing liabilities:
Interest-bearing deposits	$	495		$	(1,028	)	$	(533	)
Notes payable		(399	)		(1	)		(400	)
FHLB advances		(8	)		8			—
Total increase (decrease) in interest expense	$	88		$	(1,021	)	$	(933	)
Increase (decrease) in net interest income	$	9,456		$	(6,964	)	$	2,492

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 three months ended March 31, 2022 was $4.0 million compared to $1.5 million for the three months ended March 31, 2021. The increase in the provision relates primarily to provisioning for new loans booked in the first quarter 2022.

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 March 31,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Noninterest Income:
Service charges and fees	$	619	$	472	$	147	31.1	%
Earnings on bank-owned life insurance		143		128		15	11.7	%
Other		904		150		754	502.7	%
Total noninterest income	$	1,666	$	750	$	916	122.1	%

Three months ended March 31, 2022 vs. Three months ended March 31, 2021

The increase in noninterest income of $916,000 for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to the increase in service charges and fees and a $670,000 increase in derivative related fee income. The increase in service charges and fees was primarily due to a $40,000 increase in commercial account analysis fees, a $49,000 increase in ATM income and a $39,000 increase in mortgage secondary market fee income.

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, including Federal Deposit Insurance Corporation (“FDIC”) assessments, marketing expenses, and loan operations and repossessed asset related expenses.

The following table presents, for the periods indicated, the major categories of noninterest expense:


	For the Three Months Ended March 31,
(Dollars in thousands)	2022		2021		Increase (Decrease)
Noninterest Expense:
Salaries and employee benefits	$	13,324	$	9,963	$	3,361		33.7	%
Net occupancy and equipment expenses		1,873		1,196		677		56.6	%
Other:
Legal and professional fees		1,746		1,115		631		56.6	%
Data processing and network expenses		922		610		312		51.1	%
Regulatory assessments		645		49		596		1216.3	%
Advertising and marketing expenses		427		404		23		5.7	%
Loan operations and other real estate owned expenses		278		1,023		(745	)	(72.8	)%
Loss on sale of other real estate owned		—		375		(375	)	(100.0	)%
Other expenses		966		783		183		23.4	%
Total noninterest expense	$	20,181	$	15,518	$	4,663		30.0	%

Three months ended March 31, 2022 vs. Three months ended March 31, 2021

The increase in noninterest expense of $4.7 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to increases in salaries and employee benefits expense, net occupancy and equipment expenses, and legal and professional expenses and regulatory assessments offset by the decrease in loan operations and other real estate owned expenses.

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 $13.3 million for the three months ended March 31, 2022, an increase of $3.4 million, or 33.7%, compared to $10.0 million for the same period in 2021. The increase was due to our investment in additional personnel, which we expect will foster future growth and allow us to accommodate that growth. As of March 31, 2022 and 2021, the number of employees was 339 and 236, respectively.

Net occupancy and equipment expenses were $1.9 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation and software amortization totaling $782,000 and $567,000 for the three months ended March 31, 2022 and 2021, respectively. In addition, the increase was also due to costs associated with the opening of our thirteenth branch during the first quarter of 2022 and additional administrative office space leased during the second half of 2021 to accommodate the increase in employees.

Legal and professional fees were $1.7 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively. The increase was primarily due to higher audit, consulting, and legal costs as a result of growth and regulatory requirements. We incurred additional professional expenses related to required regulatory filings resulting from our IPO in the fourth quarter of 2021 and additional legal fees related to potential new products and services.

Regulatory assessment fees increased from $49,000 for the three months ended March 31, 2021 to $645,000 for the three months ended March 31, 2022. The increase is primarily due to our growth in total assets from $2.03 billion at March 31, 2021 to $3.04 billion at March 31, 2022 and an increase in our quarterly assessment rate. In addition, a catch up assessment was recorded in the first quarter of 2022 for changes to the 2021 assessments.

Loan operations and other real estate owned expenses were $278,000 and $1.0 million for the three months ended March 31, 2022 and 2021, respectively. The decrease is primarily due to agency fees paid on PPP loans in the three months ended March 31, 2021 of $572,000 and a decrease in other real estate owned expenses from $164,000 for the three months ended March 31, 2021 to $13,000 for the three months ended March 31, 2022.

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 March 31,
(Dollars in thousands)	2022			2021
Income tax expense	$	608		$	1,354
Effective tax rate		22.6	%		21.0	%

Financial Condition

Total assets were $3.04 billion as of March 31, 2022 compared to $2.50 billion as of December 31, 2021. The increase of $541.0 million, or 21.6% was primarily due to organic loan growth during the first quarter of 2022 and the purchase of $100 million in treasury securities in March 2022. The increases in loans and investments were funded by the growth in demand deposits during the quarter and the issuance of $82.3 million in subordinated notes in March 2022.

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 of March 31, 2022, total loans were $2.45 billion, an increase of $379.2 million, or 18.3%, compared to $2.07 billion as of December 31, 2021. The increase in loans was due to growth of non-PPP related loans totaling $434.1 million, primarily construction and development loans, commercial real estate loans, and commercial and industrial loans, offset by a decrease in PPP loans of $54.9

million due to forgiveness payments received from the SBA. Total loans as a percentage of deposits were 94.6% and 96.6% as of March 31, 2022 and December 31, 2021, respectively. Total loans as a percentage of assets were 80.5% and 82.8% as of March 31, 2022 and December 31, 2021, respectively.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:


	March 31, 2022					December 31, 2021
(Dollars in thousands)	Amount		Percent			Amount		Percent
Real estate:
Commercial real estate:
Non-farm non-residential owner occupied	$	477,573		19.5	%	$	383,941		18.6	%
Non-farm non-residential non-owner occupied		463,618		19.0	%		445,308		21.5	%
Residential		225,649		9.2	%		213,264		10.3	%
Construction, development and other		414,653		16.9	%		320,335		15.5	%
Farmland		13,467		0.6	%		9,934		0.5	%
Commercial and industrial		756,005		30.9	%		611,348		29.5	%
Consumer		3,304		0.1	%		4,001		0.2	%
Other		93,676		3.8	%		80,593		3.9	%
Total loans	$	2,447,945		100.0	%	$	2,068,724		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.

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 $93.6 million, or 24.4%, to $477.6 million as of March 31, 2022 from $383.9 million as of December 31, 2021.

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 $18.3 million, or 4.1%, to $463.6 million as of March 31, 2022 from $445.3 million as of December 31, 2021.

The increases in commercial real estate loans were due to continued organic growth.

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 $12.4 million, or 5.8%, to $225.6 million as of March 31, 2022 from $213.3 million as of December 31, 2021 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. The properties securing the portfolio are primarily in the Greater Houston and Dallas markets and are 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 $94.3 million, or 29.4%, to $414.7 million as of March 31, 2022 from $320.3 million as of December 31, 2021 due primarily to the additional productivity from 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 throughout the 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. At March 31, 2022 and December 31, 2021, outstanding factored receivables were $44.1 million and $41.9 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. At March 31, 2022 and December 31, 2021, outstanding indirect auto loans included in the commercial and industrial category were $7.0 million and $7.3 million, respectively.

In April 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. At March 31, 2022 and December 31, 2021, outstanding PPP loans, net of deferred loan fees, were $26.7 million and $81.6 million, respectively.

Commercial and industrial loans increased $144.7 million, or 23.7%, to $756.0 million as of March 31, 2022 from $611.3 million as of December 31, 2021. The increase was primarily a result of continued organic growth in non-PPP loans offset by the net decrease in PPP loans of $54.9 million due to payoffs and forgiveness by the SBA.

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 March 31, 2022
(Dollars in thousands)	One Year or Less		One Through Five Years		Five Years Through Fifteen Years		After Fifteen Years		Total
Real estate:
Commercial real estate:
Non-farm non-residential owner occupied	$	22,320	$	125,510	$	230,699	$	99,044	$	477,573
Non-farm non-residential non-owner occupied		41,477		213,842		175,329		32,970		463,618
Residential		10,796		93,141		61,972		59,740		225,649
Construction, development and other		90,875		287,323		26,301		10,154		414,653
Farmland		2,233		4,002		5,904		1,328		13,467
Commercial and industrial		317,492		335,906		96,838		5,769		756,005
Consumer		79		2,464		761		—		3,304
Other		43,139		49,380		1,157		—		93,676
Total loans	$	528,411	$	1,111,568	$	598,961	$	209,005	$	2,447,945
Amounts with fixed rates	$	240,997	$	483,430	$	80,118	$	46,754	$	851,299
Amounts with floating rates	$	287,414	$	628,138	$	518,843	$	162,251	$	1,596,646

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:


(Dollars in thousands)	As of March 31, 2022			As of December 31, 2021
Nonaccrual loans(1)	$	9,896		$	10,030
Loans > 90 days and still accruing		40			278
Restructured loan—accruing		790			5,295
Total nonperforming loans	$	10,726		$	15,603
Other real estate owned and repossessed assets		1,666			1,676
Total nonperforming assets	$	12,392		$	17,279
Ratio of nonaccrual loans to total loans		0.40	%		0.48	%
Ratio of nonperforming loans to total loans		0.44	%		0.75	%
Ratio of nonperforming loans to total assets		0.35	%		0.62	%
Ratio of nonperforming assets to total assets		0.41	%		0.69	%
Ratio of nonperforming loans to total loans plus OREO		0.44	%		0.75	%
Ratio of allowance for loan losses to nonaccrual loans		235.57	%		192.37	%

(1)

Restructured loans-nonaccrual are included in nonaccrual loans.

We had $12.4 million in nonperforming assets as of March 31, 2022 compared to $17.3 million as of December 31, 2021, and we had $10.7 million in nonperforming loans as of March 31, 2022 compared to $15.6 million as of December 31, 2021. The improvement was primarily the result of a decline in restructured loans. We believe that the value recorded for each of the properties held in other real estate owned is adequately supported by recent appraisals.

The following table summarizes our nonaccrual loans by category as of the dates indicated:


(Dollars in thousands)	As of March 31, 2022		As of December 31, 2021
Nonaccrual loans by category:
Real estate:
Commercial real estate:
Non-farm non-residential owner occupied	$	986	$	1,008
Non-farm non-residential non-owner occupied		334		346
Residential		121		127
Construction, development and other		238		244
Farmland		—		—
Commercial and industrial		8,210		8,297
Consumer		—		—
Other		—		—
Purchased credit impaired		7		8
Total nonaccrual loans	$	9,896	$	10,030

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. At March 31, 2022, we had approximately 400 loans totaling $211.7 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 at December 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. At March 31, 2022, $4.3 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 ongoing 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:


	March 31, 2022
(Dollars in thousands)	Pass		Special Mention		Substandard		Purchased Credit Impaired		Doubtful		Total
Real estate:
Commercial real estate:
Non-farm non-residential owner occupied	$	466,035	$	4,695	$	6,843	$	—	$	—	$	477,573
Non-farm non-residential non-owner occupied		454,476		—		8,411		731		—		463,618
Residential		224,593		—		1,056		—		—		225,649
Construction, development and other		410,319		—		238		4,096		—		414,653
Farmland		13,467		—		—		—		—		13,467
Commercial and industrial		751,356		—		4,588		61		—		756,005
Consumer		3,283		21		—		—		—		3,304
Other		93,676		—		—		—		—		93,676
Gross loans	$	2,417,205	$	4,716	$	21,136	$	4,888	$	—	$	2,447,945


	December 31, 2021
(Dollars in thousands)	Pass		Special Mention		Substandard		Purchased Credit Impaired		Doubtful		Total
Real estate:
Commercial real estate:
Non-farm non-residential owner occupied	$	370,062	$	6,953	$	6,926	$	—	$	—	$	383,941
Non-farm non-residential non-owner occupied		428,972		8,338		7,276		722		—		445,308
Residential		212,109		—		1,069		86		—		213,264
Construction, development and other		315,979		—		244		4,112		—		320,335
Farmland		9,934		—		—		—		—		9,934
Commercial and industrial		605,322		1,146		4,816		64		—		611,348
Consumer		3,979		22		—		—		—		4,001
Other		80,593		—		—		—		—		80,593
Gross loans	$	2,026,950	$	16,459	$	20,331	$	4,984	$	—	$	2,068,724

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 of March 31, 2022, the allowance for loan losses totaled $23.3 million, or 0.95% of total loans. As of December 31, 2021, the allowance for loan losses totaled $19.3 million, or 0.93% of total loans. The increase in our allowance for loan losses is due to the $4.0 million loan loss provision recorded for the three months ended March 31, 2022.

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 March 31,
(Dollars in thousands)	2022			2021
Allowance for loan loss at beginning of period	$	19,295		$	11,979
Provision for loan loss		4,000			1,500
Charge-offs:
Other		—			(13	)
Total charge-offs		—			(13	)
Recoveries:
Commercial and industrial		4			3
Consumer		13			—
Other		—			2
Total recoveries		17			5
Net (charge-offs) recoveries		17			(8	)
Allowance for loan losses at end of period	$	23,312		$	13,471
Ratio of net (charge-offs) recoveries to average loans(1)		0.00	%		(0.00	)%

(1)

Interim periods annualized.

During the three months ended March 31, 2022 and 2021, charge-offs and recoveries were minimal.

The allowance for loan losses by loan category as of the dates indicated was as follows:


	March 31, 2022					December 31, 2021
(Dollars in thousands)	Amount		% Loans in Each Category			Amount		% Loans in Each Category
Real estate:
Commercial real estate:
Non-farm non-residential owner occupied	$	4,087		19.5	%	$	3,456		18.6	%
Non-farm non-residential non-owner occupied		5,613		19.0	%		5,935		21.5	%
Residential		766		9.2	%		957		10.3	%
Construction, development and other		2,324		16.9	%		2,064		15.5	%
Farmland		44		0.6	%		45		0.5	%
Commercial and industrial		10,173		30.9	%		6,500		29.5	%
Consumer		5		0.1	%		6		0.2	%
Other		300		3.8	%		332		3.9	%
	$	23,312		100.0	%	$	19,295		100.00	%

Securities

Our investment portfolio consists of state and municipal securities, mortgage-backed securities, U. S. treasury bonds 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 (loss) in shareholders’ equity.

The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:


	March 31, 2022
(Dollars in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value
Investment securities available for sale:
State and municipal securities	$	425	$	—	$	1	$	424
Mortgage-backed securities		753		12		4		761
U.S. Treasury bonds		101,080		2		—		101,082
Corporate bonds		23,551		477		77		23,951
	$	125,809	$	491	$	82	$	126,218


	December 31, 2021
(Dollars in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value
Investment securities available for sale:
State and municipal securities	$	1,087	$	7	$	—	$	1,094
Mortgage-backed securities		791		20		—		811
Corporate bonds		23,556		972		1		24,527
	$	25,434	$	999	$	1	$	26,432

As of March 31, 2022, the carrying amount of the security portfolio was $126.2 million compared to $26.4 million as of December 31, 2021, an increase of $99.8 million, or 377.5%. The increase relates to the purchase of a $100,000 treasury security in March 2022. Investment securities represented 4.2% and 1.1% of total assets as of March 31, 2022 and December 31, 2021, respectively.

The mortgage-backed securities held include Fannie Mae, Freddie Mac, and Ginnie 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 of March 31, 2022 and December 31, 2021, 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 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 at March 31, 2022, by contractual maturity, are shown below:


	March 31, 2022
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due from one year to five years		101,505		101,506
Due from five years to ten years		23,551		23,951
		125,056		125,457
Mortgage-backed securities		753		761
	$	125,809	$	126,218

The weighted average life of our investment portfolio was 2.41 years with an estimated modified duration of 2.20 years as of March 31, 2022. The weighted average life of our investment portfolio was 5.88 years with an estimated modified duration of 5.02 years as of December 31, 2021.

Deposits

Total deposits as of March 31, 2022 were $2.59 billion, an increase of $446.0 million, or 20.8%, compared to $2.14 billion as of December 31, 2021. The increase was primarily due to our success in retaining and growing client relationships.

Noninterest-bearing deposits as of March 31, 2022 were $931.6 million, an increase of $400.2 million, or 75.3%, compared to $531.4 million as of December 31, 2021. Total interest-bearing account balances as of March 31, 2022 were $1.66 billion, an increase of $45.7 million, or 2.8%, from $1.61 billion as of December 31, 2021.

The components of deposits as of the dates shown below were as follows:


	As of March 31,					As of December 31,
	2022					2021
(Dollars in thousands)	Amount		Percent			Amount		Percent
Interest-bearing deposits	$	1,350,837		81.6	%	$	1,298,546		69.7	%
Savings		34,825		2.1	%		33,539		1.7	%
Time deposits $100,000 and over		254,581		15.4	%		261,856		27.3	%
Time deposits less than $100,000		15,304		0.9	%		15,857		1.3	%
Total interest-bearing deposits	$	1,655,547		64.0	%	$	1,609,798		75.2	%
Noninterest-bearing demand deposits	$	931,622		36.0	%	$	531,401		24.8	%
Total deposits	$	2,587,169		100.0	%	$	2,141,199		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 March 31,
(Dollars in thousands)	2022
Three months or less	$	20,229
Over three months through six months		52,770
Over six months through twelve months		41,719
Over twelve months		2,109
Total	$	116,827

The following table presents the average balances and average rates paid on deposits for the periods indicated:


	Three Months Ended					Year Ended
	March 31, 2022					December 31, 2021
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing deposits	$	620,900		—		$	383,747		—
Interest-bearing demand deposits	$	1,328,485		0.49	%	$	1,064,737		0.62	%
Savings		33,607		0.28	%		27,776		0.29	%
Time deposits		278,181		0.30	%		329,244		0.57	%
Total interest-bearing deposits	$	1,640,273		0.46	%	$	1,421,757		0.60	%
Total deposits	$	2,261,173		0.33	%	$	1,805,504		0.47	%

The ratio of average noninterest-bearing deposits to average total deposits for the three months ended March 31, 2022 was 27.5% and for the year ended December 31, 2021 was 21.3%.

Borrowings

We have the ability to utilize advances from the FHLB and other borrowings to supplement deposits used to fund our lending and investment activities.


(Dollars in thousands)	As of March 31, 2022		As of December 31, 2021
FHLB advances	$	50,000	$	50,000
Line of Credit		1,000		1,000
Note Payable - Subordinated Debt		80,507		—
Total borrowings	$	131,507	$	51,000

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 of March 31, 2022 and December 31, 2021, total borrowing capacity under this arrangement was $760.8 million and $601.0 million, respectively.

FHLB advances of $50.0 million were outstanding at March 31, 2022 and December 31, 2021. Our cost of FHLB advances was 0.87% for the three months ended March 31, 2022 and 0.79% for the year ended December 31, 2021. In addition, letters of credit with the FHLB in the amount of $97.5 million and $100.5 million were outstanding at March 31, 2022 and December 31, 2021, respectively. The letters of credit are used to collateralize public fund deposit accounts in excess of FDIC insurance limits.

Line of Credit - Senior Debt. On March 10, 2021, notes totaling $20.9 million outstanding at December 31, 2020 were consolidated into a new revolving line of credit loan with a third party lender with new funds of $10.0 million for a total facility of $30.9 million. The line of credit 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 of September 10, 2022. All principal and unpaid interest is due at maturity. As of March 31, 2022 and December 31, 2021, the outstanding principal balance was $1.0 million. The line of credit is secured by 100% of the outstanding stock of the Bank.

Note Payable - Subordinated Debt. On July 29, 2019, a note for $3.0 million scheduled to mature on September 27, 2019 was retired and replaced with a new subordinated promissory note to the same note holder in the amount of $4.0 million. The note bore interest at a fixed rate of 5.00% through maturity of July 29, 2020. Upon maturity, the note was renewed and increased to $11.0 million with a fixed rate of 6.00% and maturity date of July 29, 2022. The note was subordinate and junior in rights to the senior indebtedness. In August 2021, the principal and unpaid interest on the note was paid in full.

On September 27, 2020, a note for $2.0 million scheduled to mature on September 27, 2020 was renewed and extended to September 27, 2022 at a fixed rate of 6.00%. The note was subordinate and junior in rights to the senior indebtedness. In August 2021, the principal and unpaid interest on the note was paid in full.

On March 31, 2022, the Company issued and sold $82.3 million in aggregate principal amount of the Notes. Please see “—Subordinated Notes Offering” above.

Our cost of notes payable was 4.93% and 5.08% for the three months ended March 31, 2022 and 2021, respectively.

For additional information on our advances from the FHLB and other borrowings, see Note 7 – FHLB Advances and Other Borrowings in the accompanying notes to the consolidated financial statements included elsewhere in this Form 10-Q.

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 three months ended March 31, 2022 and the year ended December 31, 2021, liquidity needs were primarily met by core deposits, loan maturities, amortizing loan portfolios, brokered deposits and borrowings.

As of March 31, 2022 and December 31, 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. The Company had no advances outstanding under these lines of credit at March 31, 2022 and December 31, 2021.

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 $2.63 billion for the three months ended March 31, 2022 and $2.06 billion for the year ended December 31, 2021.


	For the Three Months Ended March 31,			For the Year Ended December 31,
	2022			2021
Sources of Funds:
Deposits:
Noninterest-bearing		23.6	%		18.6	%
Interest-bearing		62.4	%		68.9	%
FHLB advances		1.9	%		2.7	%
Notes payable		0.1	%		1.1	%
Other liabilities		0.5	%		0.4	%
Shareholders’ equity		11.5	%		8.3	%
Total		100.0	%		100.0	%
Uses of Funds:
Loans, net		83.3	%		79.1	%
Securities (available for sale and held to maturity)		1.1	%		1.4	%
Federal funds sold and other interest-earning assets		9.9	%		13.0	%
Other noninterest-earning assets		5.7	%		6.5	%
Total		100.0	%		100.0	%
Average noninterest-bearing deposits to average deposits		27.5	%		21.3	%
Average total loans to average deposits		97.7	%		91.2	%

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.

As of March 31, 2022, we had $891.9 million in outstanding commitments to extend credit and $9.5 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2021, we had $606.2 million in outstanding commitments to extend credit and $14.1 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 March 31, 2022 and December 31, 2021, we had no exposure to future cash requirements associated with known uncertainties or capital expenditure of a material nature. As of March 31, 2022, we had cash and cash equivalents of $371.3 million, compared to $327.0 million as of December 31, 2021. The increase was primarily due to an increase in deposits of $446.0 million and offset by loan growth of $379.2 million.

Capital Resources

Total shareholders’ equity increased to $301.2 million as of March 31, 2022, compared to $299.0 million as of December 31, 2021, an increase of $2.2 million, or 0.7%. This increase was primarily the result of $2.1 million in net income for the three months ended March 31, 2022.

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 the Federal Reserve and the FDIC.

As of each of March 31, 2022 and 2021, and December 31, 2021, the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the FDIC’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
	March 31, 2022	December 31, 2021	Minimum Capital Requirement	Minimum Capital Requirement with Capital Buffer	Minimum To Be Well Capitalized
Third Coast Bank, SSB
Tier 1 leverage capital (to average assets)	13.7%	12.3%	4.0%	4.0%	5.0%
Common equity tier 1 capital (to risk weighted assets)	12.4%	12.6%	4.5%	7.0%	6.5%
Tier 1 capital (to risk weighted assets)	12.4%	12.6%	6.0%	8.5%	8.0%
Total capital (to risk weighted assets)	13.2%	13.5%	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.

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 March 31, 2022				As of December 31, 2021
Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Fair Value of Equity		Percent Change in Net Interest Income		Percent Change in Fair Value of Equity
+ 300	14.35%		17.54%		8.22%		16.74%
+ 200	9.13%		11.91%		4.80%		11.29%
+ 100	4.17%		5.96%		1.83%		5.74%
Base		—		—		—		—
–100	0.00%		(3.21)%		2.34%		(2.36)%

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.

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.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for a smaller reporting company.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), were effective as of the end of the period covered by this Form 10-Q.

Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially and adversely affect our reputation, even if resolved in our favor.

Item 1A. Risk Factors.

In evaluating an investment in any of our securities, investors should consider carefully, among other things, information under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Form 10-Q and such other risk factors as we may disclose in other reports and statements filed with the Securities and Exchange Commission (the “SEC”). There have been no material changes in the risk factors disclosed by the Company in its Annual Report on Form 10-K filed with the SEC on March 17, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On November 9, 2021, the Company's common stock began trading on the NASDAQ Global Select market under the symbol “TCBX”. 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 offering expenses. Aggregate net proceeds of our initial public offering were $92.0 million after deducting underwriting discounts and offering expenses. 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. All of the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No.333-260291), which was declared effective by the SEC on November 8, 2021, and was supplemented by a Registration Statement on Form S-1 (File No. 333-260887) filed pursuant to Rule 462(b). We made no payments to our directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates in connection with the issuance and sale of the securities registered. In connection with the closing of our initial public offering, we issued an aggregate of 49,750 shares of restricted stock to our directors and executive officers. Stephens Inc., Piper Sandler & Co., and Deutsche Bank Securities Inc. acted as underwriters. The offering commenced on November 8, 2021, did not terminate until the sale of all of the shares offered, and was closed on November 17, 2021. There has been no material change in the planned use of proceeds from our initial public offering as described in our prospectus for the initial public offering, filed with the SEC on November 9, 2021 pursuant to Rule 424(b) of the Securities Act. We intend to use the net proceeds to support our organic growth and for general corporate purposes, including maintenance of our required regulatory capital and potential future acquisition opportunities.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit Number		Description
3.1		First Amended and Restated Certificate of Formation of Third Coast Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Form S-1 filed with the SEC on October 15, 2021).
3.2		First Amended and Restated Bylaws of Third Coast Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Form S-1 filed with the SEC on October 15, 2021).
4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Form S-1 filed with the SEC on October 15, 2021).
4.2		Indenture, dated as of March 31, 2022, by and between Third Coast Bancshares, Inc. and UMB Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2022).
4.3		Form of 5.500% Fixed-to-Floating Rate Subordinated Note due 2032 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2022).
10.1		Form of Subordinated Note Purchase Agreement, by and among Third Coast Bancshares, Inc. and the several purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2022).#
10.2		Form of Registration Rights Agreement, by and among Third Coast Bancshares, Inc. and the several purchasers thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2022).
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

# Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished.

* Filed herewith.

** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Third Coast Bancshares, Inc.

Date: May 5, 2022	By:	/s/ Bart O. Caraway
		Bart O. Caraway
		Chairman, President and Chief Executive Officer

Date: May 5, 2022	By:	/s/ R. John McWhorter
		R. John McWhorter
		Chief Financial Officer