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Item 7. 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 Annual Report on Form 10-K (this “Form 10-K”). Unless we state otherwise or the context otherwise requires, references in this Form 10-K 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-K 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-K 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” and the risk factors and other cautionary statements described under the heading “Risk Factors” included in Item 1A of this Form 10-K. 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 headquartered in Humble, Texas and operated 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 sixteen branches, with eight branches in the Greater Houston market, three branches in the Dallas-Fort Worth market, four branches in the Austin-San Antonio market, and one branch in Detroit, Texas. As of December 31, 2022, we had, on a consolidated basis, total assets of $3.77 billion, total loans of $3.11 billion, total deposits of $3.24 billion and total shareholders’ equity of $381.8 million.

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

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

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

Completion of $69.4 Million Preferred Stock Private Placement

On September 30, 2022, the Company completed a private placement of (i) 69,400 shares of a new series of preferred stock designated Series A Convertible Non-Cumulative Preferred Stock, par value $1.00 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) warrants to purchase an aggregate of 175,000 shares of the Company’s common stock (or, at the election of the warrant holder in accordance with the terms of the warrant agreement, Series B Convertible Perpetual Preferred Stock, par value $1.00 per share, or non-voting common stock, par value $1.00 per share, of the Company if an amendment to the Company's first amended and restated certificate of formation to create such non-voting common stock is approved by the Company's shareholders at its 2023 Annual Meeting of Shareholders) at an exercise price equal to $22.50 per share, for aggregate gross proceeds of $69.4 million before deducting placement fees and offering expenses. Aggregate net proceeds were $66.2 million after deducting placement fees and offering expenses of $3.2 million.

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The securities sold in the private placement were sold only to accredited investors and were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption provided under Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder as securities offered and sold only to accredited investors (as defined in Rule 501(a) of Regulation D under the Securities Act) in a transaction not involving any public offering.

On October 17, 2022, the Company paid a quarterly cash dividend of $3.1875 per share on the Series A Preferred Stock to holders of record at the close of business on September 30, 2022. On January 17, 2023, the Company paid a quarterly cash dividend of $17.25 per share on the Series A Preferred Stock to holders of record at the close of business on December 31, 2022.

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, 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.

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 Secured Overnight Financing Rate (“SOFR”) 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 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. The exchange offer under the Registration Rights Agreement was completed on July 19, 2022.

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 $2.1 million 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 December 31, 2022, the Company had $82.3 million in outstanding principal and $2.0 million in unamortized debt issuance costs.

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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 restricted stock to our directors and executive officers.

Completion of $70.5 Million Common Stock Private Placement

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

COVID-19 Update

The Company has been, and may continue to be, impacted by the COVID-19 pandemic. Uncertainty remains about 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 were 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.

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 December 31, 2022, outstanding PPP loans have decreased to $537,000, net of deferred loan fees of $24,000, and 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 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 December 31, 2022, outstanding MSLP loans, excluding the 95% portion sold to the Federal Reserve and net of deferred loan fees of $432,000, 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 Year Ended December 31, For the Year Ended December 31,

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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.

Year ended December 31, 2022 vs. Year ended December 31, 2021

Net interest income increased $25.9 million, or 28.6%, during the year ended December 31, 2022, compared to the year ended December 31, 2021 primarily due to interest income from loan growth offset by a decrease in income from PPP loans and an increase in interest expense from interest-bearing deposit growth and increased rates paid on deposits. Average loans was $2.69 billion for the year ended December 31, 2022 compared to $1.65 billion for the year ended December 31, 2021 with the increase primarily due to loan growth in commercial and industrial loans, construction and development real estate loans, and commercial real estate loans. The Company recognized $2.0 million in PPP loan origination fees for the year ended December 31, 2022 through accretion and forgiveness of the related PPP loans compared to $19.2 million for the year ended December 31, 2021. Interest expense related to interest bearing deposit accounts was $30.7 million and $8.5 million for the years ended December 31, 2022 and 2021, respectively. Interest expense related to notes payable and FHLB advances was $6.8 million for the year ended December 31, 2022 compared to $1.5 million for the year ended December 31, 2021. The average cost of interest-bearing deposits was 1.29% for the year ended December 31, 2022 and 0.60% for the year ended December 31, 2021. For the year ended December 31, 2022, net interest margin and net interest spread were 3.82% and 3.57%, respectively, compared to 4.65% and 4.50%, respectively, for the year ended December 31, 2021.

Year ended December 31, 2021 vs. Year ended December 31, 2020

Net interest income increased $22.7 million, or 33.4%, during the year ended December 31, 2021, compared to the year ended December 31, 2020 primarily due to an increase in average loans and lower average rates paid on interest-bearing deposits as well as increase in income from PPP loans. Average loans was $1.43 billion for the year ended December 31, 2020 compared to $1.65 billion for the year ended December 31, 2021, with the increase primarily due to loan growth in commercial and industrial loans and commercial real estate loans. The average cost of interest-bearing deposits was 0.60% for the year ended December 31, 2021 and 1.07% for the year ended December 31, 2020. The Company recognized $19.2 million in PPP deferred origination fees for the year ended December 31, 2021 through both accretion and forgiveness of the related PPP loans compared to $10.2 million for the year ended December 31, 2020. For the year ended December 31, 2021, net interest margin and net interest spread were 4.65% and 4.50%, respectively, compared to 4.24% and 3.98%, respectively, for the year ended December 31, 2020.

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

For the Year Ended December 31,

Assets

Interest-earnings assets:

Liabilities and Shareholders’ Equity

Interest-bearing liabilities:

(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 $14.7 million, $32.8 million, and $18.5 million for the years ended December 31, 2022, 2021, and 2020, respectively.

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

(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)

Interest-earning assets:

Interest-bearing liabilities:

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Provision for Loan Losses

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

The provision for loan losses for the year ended December 31, 2022 was $12.2 million compared to $9.9 million for the year ended December 31, 2021. The increase in the provision related primarily to provisioning for new loans booked. As of December 31, 2022, the allowance for loan losses totaled $30.4 million, or 0.98% of total loans, compared to $19.3 million, or 0.93% of total loans, as of December 31, 2021.

The provision for loan losses for the year ended December 31, 2021 was $9.9 million compared to $7.6 million for the year ended December 31, 2020. The majority of the provision for 2021 related to provisions on newly originated non-PPP loans. As of December 31, 2021, the allowance for loan losses totaled $19.3 million, or 0.93% of total loans, compared to $12.0 million, or 0.77% of total loans, as of December 31, 2020.

Noninterest Income

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains from the sale of SBA loans, and earnings from bank-owned life insurance (“BOLI”) and derivative fees.

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

For the Year Ended December 31, For the Year Ended December 31,

Noninterest Income:

Year ended December 31, 2022 vs. Year ended December 31, 2021

The increase in noninterest income of $2.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to an increase in BOLI income of $745,000 related to additional BOLI purchased in the second quarter of 2022, an increase of $439,000 in derivative related fee income, and an increase of $364,000 from gains on the sales of guaranteed portion of SBA loans.

Year ended December 31, 2021 vs. Year ended December 31, 2020

The increase in noninterest income of $2.2 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to $820,000 in derivative related fee income, $658,000 increase in service charges and fees, an increase of $320,000 from gains on sales of guaranteed portion of SBA loans, and an increase in earnings on BOLI of $213,000 related to additional $10.0 million of BOLI purchased in the fourth quarter of 2020. The increase in service charges and fees was primarily due to a $512,000 increase in ATM income and a $171,000 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 FDIC assessments, advertising and marketing expenses, and loan operations and repossessed asset related expenses.

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

For the Year Ended December 31, For the Year Ended December 31,

Noninterest Expense:

Other:

Year ended December 31, 2022 vs. Year ended December 31, 2021

The increase in noninterest expense of $17.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to increases in salaries and employee benefits expense, net occupancy and equipment expenses, legal and professional expenses, regulatory assessments, and other 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 $56.5 million for the year ended December 31, 2022, an increase of $7.9 million, or 16.2%, compared to $48.6 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 December 31, 2022 and 2021, the number of employees was 368 and 334, respectively.

Net occupancy and equipment expenses were $8.5 million and $5.4 million for the years ended December 31, 2022 and 2021, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation and software amortization totaling $3.7 million and $2.5 million for the years ended December 31, 2022 and 2021, respectively. In addition, the increase was also due to costs associated with opening four branches during 2022 and additional leased administrative office space to accommodate the increase in employees.

Legal and professional fees were $7.0 million and $5.3 million for the years ended December 31, 2022 and 2021, respectively. The increase was primarily due to higher audit, consulting, and legal costs as a result of doing business as a public company, growth and regulatory requirements. We incurred additional professional expenses related to required regulatory filings and additional legal fees related to potential new products and services.

Regulatory assessment fees increased from $1.1 million for the year ended December 31, 2021 to $3.5 million for the year ended December 31, 2022. The increase was primarily due to our growth in total assets from $2.50 billion at December 31, 2021 to $3.77 billion at December 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.

Other expenses were $5.6 million and $3.4 million for the years ended December 31, 2022 and 2021, respectively. Other expenses includes telephone and communication expenses, software purchases and maintenance costs, and other miscellaneous expenses. The increase was primarily due to a $900,000 one-time legal settlement, a $292,000 increase in insurance expense, a $208,000 increase in check fraud losses, a $178,000 increase in directors and officers insurance and filing and investor relation expenses resulting from doing business as a public company, and $134,000 in additional software purchased during 2022.

Year ended December 31, 2021 vs. Year ended December 31, 2020

The increase in noninterest expense of $23.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to increases in salaries and employee benefits expense, net occupancy and equipment expenses, and legal and professional expenses.

Salaries and employee benefits were $48.6 million for the year ended December 31, 2021, an increase of $19.4 million, or 66.2%, compared to $29.3 million for the same period in 2020. The increase was due to our investment in additional personnel, which

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we expect will foster future growth and allow us to accommodate that growth, and increased commissions related to our loan and deposit growth. As of December 31, 2021 and 2020, the number of employees was 334 and 213, respectively.

Net occupancy expenses were $5.4 million and $4.1 million for the years ended December 31, 2021 and 2020, respectively. This category includes building, leasehold, furniture, fixtures and equipment depreciation and software amortization totaling $2.5 million and $1.9 million for the years ended December 31, 2021 and 2020, respectively. In addition, during 2021, additional office space was leased to accommodate the increase in employees which resulted in an increase in lease expense from $1.2 million in 2020 to $1.6 million in 2021. Expenses related to building maintenance, landscaping services and janitorial services also increased partly due to the five branches acquired in the Heritage acquisition.

Legal and professional fees were $5.3 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively. The increase was primarily due to the $1.1 million increase in professional fees as a result of costs associated with the PPP loan program and recruitment costs related to hiring additional personnel in 2021. Expenses related to audit, consulting, and legal increased as a result of growth and regulatory requirements.

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:

Year Ended December 31,

Year ended December 31, 2022 vs. Year ended December 31, 2021

For the years ended December 31, 2022 and 2021, income tax expense totaled $4.5 million and $3.1 million, respectively, and our effective tax rate was 19.5% and 21.1% for the years ended December 31, 2022 and 2021, respectively. The decrease in the effective tax rate for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to an increase in tax-exempt income from non-taxable assets including loans, BOLI and investments partially offset by an increase in non-deductible incentive stock option compensation.

Year ended December 31, 2021 vs. Year ended December 31, 2020

For the years ended December 31, 2021 and 2020, income tax expense totaled $3.1 million and $3.5 million, respectively, and our effective tax rate was 21.1% and 22.4% for the years ended December 31, 2021 and 2021, respectively. The decrease in the effective tax rate for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due primarily to an increase in non-taxable income related to BOLI.

Financial Condition

Total assets were $3.77 billion as of December 31, 2022 compared to $2.50 billion as of December 31, 2021. The increase of $1.28 billion, or 51.0%, was primarily due to organic loan growth andthe purchase of investment securities and BOLI. The increases were funded by the growth in demand deposits, the issuance of $82.3 million in subordinated notes in March 2022, and the issuance of 69,400 shares of Series A Preferred Stock with net proceeds of $66.2 million in September 2022. In addition, at December 31, 2022, operating lease right-of-use assets and operating lease liabilities were recorded totaling $17.9 million and $18.2 million, respectively, with the adoption of ASU 2016-02 in 2022, and derivative assets and liabilities each totaled $9.2 million as a result of 2022 derivative transactions.

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 December 31, 2022, total loans were $3.11 billion, an increase of $1.04 billion, or 50.2%, compared to $2.07 billion as of December 31, 2021. The increase in loans was primarily related to construction and development real estate loans, commercial real estate loans, and commercial and industrial loans. Total loans as a percentage of deposits were 96.0% and 96.6% as of December 31,

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2022 and 2021, respectively. Total loans as a percentage of assets were 82.4% and 82.8% as of December 31, 2022 and 2021, respectively.

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

As of December 31,

Real estate:

Commercial real estate:

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 $109.9 million, or 28.6%, to $493.8 million as of December 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 $60.7 million, or 13.6%, to $506.0 million as of December 31, 2022 from $445.3 million as of December 31, 2021.

The increases in commercial real estate loans were due to the addition of several lenders in 2022 and increased productivity of existing lenders in response to market demand.

Residential Real Estate Loans. Residential real estate loans consists of 1-4 family residential loans and multi-family residential loans. Our 1-4 family residential loan portfolio is predominately comprised of loans secured by 1-4 family homes, which are investor owned. While we do have some owner-occupied 1-4 family residential loans, we have not historically pursued this product line; however, we do offer limited mortgage products through our mortgage department. Our multi-family residential loan portfolio is comprised of loans secured by properties deemed multi-family, which includes apartment buildings. Our current multifamily loans are to operators who we believe are seasoned and successful and possess quality alternative repayment sources. Residential real estate loans increased $95.5 million, or 44.8%, to $308.8 million as of December 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. Historically, the properties securing the portfolio were primarily in the Greater Houston and Dallas markets and were generally diverse in terms of type. During 2021, we expanded our construction and development portfolio through the formation of our builder finance group, which provides traditional homebuilder lines secured by lots and single-family homes, and land acquisition and development loans. This group also finances bond anticipation notes and lines of credit to large national institutional tier-one funds that invest equity in various real estate assets. Construction, development and other loans increased $247.5 million, or 77.3%, to $567.9 million as of December 31, 2022 from $320.3 million as of December 31, 2021 due primarily to the additional productivity from the builder finance group.

Commercial and Industrial Loans. Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and effectively. These loans are primarily made based on the borrower's ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees. Our commercial and industrial loan portfolio consists of loans principally to retail trade, service, and manufacturing firms located in our market areas.

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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 December 31, 2022 and 2021, outstanding factored receivables were $28.0 million and $41.9 million, respectively. The decrease was primarily attributable to the reduction in participations purchased.

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 December 31, 2022 and 2021, outstanding indirect auto loans included in the commercial and industrial category were $6.6 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 December 31, 2022 and 2021, outstanding PPP loans, net of deferred loan fees, were $537,000 and $81.6 million, respectively.

Commercial and industrial loans increased $447.6 million, or 73.2%, to $1.06 billion as of December 31, 2022 from $611.3 million as of December 31, 2021. The increase was primarily a result of the addition of several lenders in 2022 and increased productivity of existing lenders in response to market demand.

Other Loan Categories. Other categories of loans included in our loan portfolio include farmland loans, lease financing, Bond Anticipation Notes (BANs), consumer loans, and agricultural loans made to farmers and ranchers relating to their operations. 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 table:

Real estate:

Commercial real estate:

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.

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The following table presents information regarding nonperforming assets at the dates indicated:

As of December 31,

Ratio of nonperforming loans to total loans 0.39 % 0.75 % 0.80 % 0.57 % 0.79 %

Ratio of nonperforming loans to total assets 0.32 % 0.62 % 0.66 % 0.50 % 0.65 %

Ratio of nonperforming assets to total assets 0.32 % 0.69 % 0.84 % 0.69 % 0.89 %

(1)

Restructured loans-nonaccrual are included in nonaccrual loans.

We had $12.3 million in nonperforming assets as of December 31, 2022 compared to $17.3 million as of December 31, 2021, and we had $12.3 million in nonperforming loans as of December 31, 2022 compared to $15.6 million as of December 31, 2021. The decrease in nonperforming assets in 2022 was primarily attributable to the decrease in accruing restructured loans and the sale of other real estate owned.

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

As of December 31,

Nonaccrual loans by category:

Real estate:

Commercial real estate

Non-farm non-residential owner occupied $ 1,699 $ 1,008 $ 1,944 $ 57 $ —

Construction, development and other 40 244 264 — 53

Municipal and other — — — 34 —

Purchased credit impaired 5 8 424 — —

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 December 31, 2022, we had approximately 261 loans totaling $150.7 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 December 31, 2022, $3.3 million in accrued interest receivables related to these loans remained outstanding and are due at the end of each loan term.

Risk Gradings

As part of the on-going monitoring of the credit quality of the Company's loan portfolio and methodology for calculating the allowance for loan losses, management assigns and tracks risk gradings as indicated below that are used as credit quality indicators.

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The following table summarizes the internal ratings of our loans as of the dates indicated:

Real estate:

Commercial real estate:

Real estate:

Commercial real estate:

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 II—Item 8. Financial Statements and Supplementary Data—Note 3.”

As of December 31, 2022, the allowance for loan losses totaled $30.4 million, or 0.98% 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 of $11.1 million, or 57.3%, was primarily due to loan loss provisions related to loan growth.

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The following tables present as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

For Year Ended December 31,

Charge-offs:

Commercial real estate:

Non-farm non-residential non-owner occupied — — (2,336 ) — —

Consumer (18 ) — (7 ) (2 ) (14 )

Municipal and other — (20 ) — — —

Recoveries:

Commercial real estate:

Non-farm non-residential owner occupied — — — 50 —

Municipal and other 2 3 — — —

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

As of December 31,

Real estate:

Commercial real estate:

Securities

Our investment portfolio consists of state and municipal securities, mortgage-backed securities, agency collateralized mortgage obligations, 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 in shareholders’ equity.

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

As of December 31,

Investment securities available for sale:

As of December 31, 2022, the carrying amount of the security portfolio was $176.1 million compared to $26.4 million as of December 31, 2021, an increase of $149.6 million, or 85.0%. Investment securities represented 4.7% and 1.1% of total assets as of December 31, 2022 and 2021, respectively.

The mortgage-backed securities held include agency collateralized mortgage obligations, 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 December 31, 2022 and 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 ranges from 2023 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 December 31, 2022, by contractual maturity, are shown below:

(Dollars in thousands) Amortized Cost Estimated Fair Value

Due from one year to five years 3,778 3,838

Mortgage-backed securities and other agency obligations 23,522 22,881

The weighted average life of our investment portfolio was 3.11 years with an estimated modified duration of 2.52 years as of December 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 December 31, 2022 were $3.24 billion, an increase of $1.09 billion, or 51.1%, compared to $2.14 billion as of December 31, 2021. The increase was primarily due to growth in our national wholesale deposits through our core, fiduciary and institutional deposit programs, continued growth in our primary market areas, and the increase in commercial lending relationships for which we also seek deposit balances offset by a decrease in time deposits.

Noninterest-bearing deposits as of December 31, 2022 were $486.1 million, a decrease of $45.3 million, or 8.5%, compared to $531.4 million as of December 31, 2021. Total interest-bearing account balances as of December 31, 2022 were $2.75 billion, an increase of $1.14 billion, or 70.8%, from $1.61 billion as of December 31, 2021.

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

As of December 31,

(Dollars in thousands) Amount Percent Amount Percent Amount Percent

The following table sets forth the Company’s estimated uninsured time deposits by time remaining until maturity as of the dates indicated:

As of December 31,

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

Year Ended December 31,

The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2022 and 2021 was 11.7% and 21.3%, respectively.

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.

As of December 31,

FHLB borrowings $ - $ 50,000

Note Payable - Subordinated Debt 80,348 —

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 December 31, 2022 and 2021, total borrowing capacity available under this arrangement was $719.1 million and $450.4 million, respectively.

The Company had no FHLB advances outstanding at December 31, 2022 and $50.0 million were outstanding at December 31, 2021. Our cost of FHLB advances was 2.70% for the year ended December 31, 2022 and 0.79% for the year ended December 31, 2021. In addition, letters of credit with the FHLB in the amount of $290.3 million and $100.5 million were outstanding at December 31, 2022 and 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, the Company combined a $10.0 million promissory note scheduled to mature on August 31, 2021, with the remaining balance of a $10.9 million note scheduled to mature on March 10, 2021. The remaining balance of the two aforementioned notes totaling $20.9 million was consolidated into a new revolving line of credit loan with new funds of $10.0 million for a total facility of $30.9 million. The note bore interest at The Wall Street Journal US Prime Rate, as such

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changes from time to time, with a floor rate of 4.00% per annum. Interest was payable quarterly on the 10th day of March, June, September and December through maturity date of September 10, 2022. All principal and unpaid interest was due at maturity. Upon maturity, the outstanding balance of the note was renewed for $30.9 million, and the total revolving line of credit facility was increased to $50.0 million with payment terms similar to the payment terms of the previous agreement. The note bears interest at The Wall Street Journal US Prime Rate, as such changes from time to time, plus 0.50%, with a floor rate of 5.00% per annum. Interest is payable quarterly on the 10th day of March, June, September and December through maturity date of September 10, 2024. All principal and unpaid interest is due at maturity. The note is secured by 100% of the outstanding stock of the Bank and is senior in rights to the subordinated debt and subordinated notes described below. As of December 31, 2022, the outstanding balance of the note was $30.9 million.

Note Payable - Subordinated Debt. During August 2021, the Company paid off a $2.0 million promissory note scheduled to mature on September 27, 2022 and an $11.0 million 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 $2.0 million note were due on the 27th day of March, June, September and December. Quarterly interest payments for the $11.0 million 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.

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. As of December 31, 2022, the outstanding balance was $80.3 million, net of $2.0 million in unamortized debt issuance costs.

Our cost of notes payable was 5.96% and 4.89% for the years ended December 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 report.

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 years ended December 31, 2022 and 2021, liquidity needs were primarily met by core deposits, loan maturities, amortizing loan portfolios, brokered deposits, borrowings, and proceeds from issuance of stock.

As of December 31, 2022 and 2021, we maintained federal funds lines of credit with commercial banks that provide for the availability to borrow up to an aggregate of $36.5 million and $50.5 million, respectively, in federal funds. The Company had no advances outstanding under these lines of credit at December 31, 2022 and 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 $3.20 billion for the year ended December 31, 2022 and $2.06 billion for the year ended December 31, 2021.

For the Year Ended December 31,

Sources of Funds:

Deposits:

FHLB advances 2.5 % 2.7 % 3.0 %

Notes payable 2.4 % 1.1 % 2.4 %

Other liabilities 0.9 % 0.4 % 0.4 %

Shareholders’ equity, including ESOP-owned shares 10.1 % 8.3 % 6.7 %

Uses of Funds:

Securities (available for sale and held to maturity) 3.9 % 1.4 % 1.0 %

Federal funds sold and other interest-earning assets 7.0 % 13.0 % 9.1 %

Other noninterest-earning assets 5.7 % 6.5 % 4.8 %

Average noninterest-bearing deposits to average deposits 11.7 % 21.3 % 21.3 %

Average total loans to average deposits 100.1 % 91.2 % 98.1 %

Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.

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As of December 31, 2022, we had $1.15 billion in outstanding commitments to extend credit and $21.7 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 December 31, 2022 and 2021, we had no exposure to future cash requirements associated with known uncertainties or capital expenditure of a material nature. As of December 31, 2022, we had cash and cash equivalents of $332.0 million, compared to $327.0 million as of December 31, 2021. The increase was primarily due to an increase in deposits of $1.09 billion, proceeds from issuance of subordinated debt and preferred stock offerings of $80.3 million and $66.2 million, respectively, and net income of $18.7 million, offset by a net decrease in FHLB advances and line of credit senior debt of $20.1 million, net purchase of investment securities of $157.1 million, purchase of BOLI of $32.9 million, and loan growth of $1.04 billion.

Capital Resources

Total shareholders’ equity increased to $381.8 million as of December 31, 2022, compared to $299.0 million as of December 31, 2021, an increase of $82.8 million, or 27.7%. This increase was primarily the result of the completion of our private placement of 69,400 shares of Series A Preferred Stock for aggregate net proceeds of $66.2 million after deducting placement fees and offering expenses of $3.2 million. In addition, the increase in shareholders' equity was also due to $18.7 million in net income for year ended December 31, 2022 and $2.8 million in proceeds from the exercise of stock options, issuances of common stock to the Third Coast Bank, SSB Employee Stock Ownership Plan (“ESOP”), and share-based compensation, offset by $1.4 million in dividends on Series A Preferred Stock and other comprehensive loss of $3.5 million.

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 December 31, 2022 and 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 December 31,

Third Coast Bank, SSB

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 ALCO, 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

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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 December 31,

Base — — — — — —

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-K. 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

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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 II—Item 8. Financial Statements and Supplementary Data—Note 1.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how the Company manages market risk.

Item 8. Financial Statements and Supplementary Data.

The Company's financial statements and accompanying notes are included in Part IV—Item 15. Exhibit and Financial Statement Schedules.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Company’s Chairman, President and Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule l3a-l5(e) and 15d-15(e) promulgated under the Exchange Act) as of December 31, 2022. Based on this evaluation, the Company’s Chairman, President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2022.

Changes in Internal Control Over Financial Reporting

There was no change 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) identified during the quarter ended December 31, 2022 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Report on Management's Assessment of Internal Control Over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control system is a process designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with

64

GAAP. All internal control systems, no matter how well designed, have inherent limitations and can only provide reasonable assurance with respect to financial reporting.

As of December 31, 2022, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission in 2013. This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the FDICIA. Management’s assessment determined that the Company maintained effective internal controls over financial reporting as of December 31, 2022.

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the SEC for an emerging growth company.

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this Item is incorporated herein by reference to our Definitive Proxy Statement for the 2023 Annual Meeting of Shareholders to be filed with the SEC within 120 days after our fiscal year end (the “Proxy Statement”).

In accordance with Item 406 of Regulation S-K, we have adopted a code of business conduct and ethics that applies to Company executives, directors and employees. The code of business conduct and ethics is posted on our website at www.tcbssb.com under “Investors.” Within the time period required by the SEC, we will post on our website any amendment to the code of ethics and any waiver applicable to our principal executive officer, principal financial officer, and principal accounting officer or controller.

Item 11. Executive Compensation.

The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after our fiscal year end.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after our fiscal year end.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after our fiscal year end.

Item 14. Principal Accountant Fees and Services.

The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after our fiscal year end.

66

PART IV

Item 15. Exhibit and Financial Statement Schedules.

All supplemental schedules to the consolidated financial statements have been omitted as inapplicable or because the required information is included in the Company’s consolidated financial statements or the notes thereto included in this Annual Report on Form 10-K.

Exhibit Index

ExhibitNumber Description

4.2* Description of Registrant's Securities.

67

21.1* Subsidiaries of Third Coast Bancshares, Inc.

23.1* Consent of Whitley Penn LLP.

24.1* Powers of attorney (included on signature page).

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.

68

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104 Cover Page Interactive Data File (embedded within the Inline XBRL document).

* 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.

† Indicates a management contract or compensatory plan.

# 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.

Item 16. Form 10-K Summary

None.

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2023 By: /s/ Bart O. Caraway

Bart O. Caraway

Chairman, President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below appoints Bart O. Caraway and R. John McWhorter, and each of them, any of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or would do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Name Title Date

Bart O. Caraway (Principal Executive Officer)

/s/ R. John McWhorter Chief Financial Officer March 15, 2023

R. John McWhorter (Principal Financial and Accounting Officer)

/s/ Carolyn Bailey Director March 15, 2023

Carolyn Bailey

/s/ Martin Basaldua Director March 15, 2023

Martin Basaldua

/s/ Dennis Bonnen Director March 15, 2023

Dennis Bonnen

/s/ W. Donald Brunson Director March 15, 2023

W. Donald Brunson

/s/ Norma J. Galloway Director March 15, 2023

Norma J. Galloway

/s/ Troy A. Glander Director March 15, 2023

Troy A. Glander

/s/ Shelton J. McDonald Director March 15, 2023

Shelton J. McDonald

/s/ Tony Scavuzzo Director March 15, 2023

Tony Scavuzzo

/s/ Joseph L.Stunja Director March 15, 2023

Joseph L. Stunja

/s/ Reagan Swinbank Director March 15, 2023

Reagan Swinbank

70

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 726) F-2

Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 F-3

Notes to Consolidated Financial Statements F-9

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Third Coast Bancshares, Inc.

Opinion on the Financial Statements

We have audited the consolidated balance sheets of Third Coast Bancshares, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes to the consolidated financial statements. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the

Company as of December 31, 2022 and 2021, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but

not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the

consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Whitley Penn LLP

We have served as the Company’s auditor since 2009.

Dallas, Texas

March 15, 2023

F-2

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31,

(Dollars in thousands, except share and per share data) 2022 2021

ASSETS

Cash and cash equivalents:

Interest bearing time deposits in other banks — 131

Other real estate owned — 1,676

Non-marketable equity securities, at cost 15,405 7,527

Right-of-use asset - operating leases 17,872 —

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:

Fair value hedge liabilities 9,221 389

Lease liability - operating leases 18,209 —

Note payable - Subordinated Debt, net 80,348 —

Shareholders' equity:

Accumulated other comprehensive income (2,103 ) 1,393

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

F-3

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

For the Years Ended December 31,

(Dollars in thousands, except share and per share data) 2022 2021 2020

Interest income:

Investment securities available-for-sale 3,925 1,043 297

Interest expense:

Noninterest income:

Earnings on bank-owned life insurance 1,312 567 354

Noninterest expense:

Loan operations and other real estate owned expense 988 1,963 1,369

Loss on sale of other real estate owned 350 344 —

Preferred stock dividends declared (1,418 ) — —

Earnings per common share:

Diluted earnings per share $ 1.25 $ 1.40 $ 1.91

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

F-4

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

For the Years Ended December 31,

Other comprehensive income (loss):

Unrealized gain (loss) on securities:

Unrealized holding (loss) gain arising during the period (7,049 ) 861 137

Income tax benefit (expense) 1,480 (181 ) (29 )

Other comprehensive (loss) income on securities (5,569 ) 680 108

Unrealized gain on derivatives:

Unrealized holding (loss) gain arising during the period — (216 ) 216

Gain on termination of derivative instruments 3,025 945 —

Other comprehensive income on derivatives 2,073 434 171

Total other comprehensive (loss) income (3,496 ) 1,114 279

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

F-5

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders' Equity

Accumulated Less:

Additional Other ESOP-

Preferred Stock Common Paid in Retained Comprehensive Treasury Owned

Share-based compensation — — — 275 — — — — 275

Stock options exercised — — 32 353 — — — — 385

Issuance of common stock to ESOP — — 32 504 — — — (537 ) (1 )

Net change in fair value of ESOP shares — — — — — — — 18 18

Net redemption of treasury stock — — — — — — (37 ) — (37 )

Other comprehensive income, net of tax — — — — — 279 — — 279

(Dollars in thousands)

Share-based compensation — — — 659 — — — — 659

Warrants exercised — — 2 17 — — — — 19

Stock options exercised — — 83 912 — — — — 995

Common stock issued from initial public offering — — 4,025 88,018 — — — — 92,043

Issuance of common stock to ESOP — — 34 613 — — — (647 ) —

Terminated ESOP put option — — — — — — — 2,266 2,266

Restricted stock grants — — 50 (50 ) — — — — —

Net change in fair value of ESOP shares — — — — — — — (317 ) (317 )

Net redemption of treasury stock — — — — — — (121 ) — (121 )

Other comprehensive income, net of tax — — — — — 1,114 — — 1,114

(Dollars in thousands)

Share-based compensation — — — 1,275 — — — — 1,275

Stock options exercised — — 47 625 — — — — 672

Preferred stock issued - private placement 69 — — 66,156 — — — — 66,225

Issuance of common stock to ESOP — — 36 820 — — — — 856

Restricted stock grants — — 45 (45 ) — — — — —

Other comprehensive loss, net of tax — — — — — (3,496 ) — — (3,496 )

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

F-6

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Years Ended December 31,

Cash flows from operating activities:

Changes in deferred tax asset, net (1,250 ) (380 ) (1,708 )

Gain on sale of SBA loans (950 ) (586 ) (266 )

Writedown of other real estate owned — — 10

Loss on sale of other real estate owned 350 344 —

Loss on disposal of fixed assets — — 7

Amortization of premium on securities, net 392 34 60

Accretion of gain on terminated cash flow hedges (401 ) (180 ) —

Accretion of SBA Paycheck Protection Program fees (2,039 ) (19,249 ) (10,223 )

Amortization of subordinated debt origination costs 154 — —

Depreciation, amortization and accretion (479 ) (270 ) 78

Earnings on bank-owned life insurance (1,312 ) (567 ) (354 )

Originations of loans held for sale — — (5,003 )

Proceeds from sale of loans held for sale — 2,346 3,840

Net change in operating leases 337 — —

Net change in fair value hedge assets and liabilities 8 — —

Changes in operating assets and liabilities:

Accrued interest receivable and other assets (12,707 ) 749 (9,699 )

Accrued interest payable and other liabilities 7,554 337 (336 )

Net cash provided by (used in) operating activities 21,791 4,584 (3,654 )

Cash flows from investing activities:

Net decrease (increase) in interest bearing deposits in other banks 131 (2 ) —

Increase in non-marketable equity securities (7,878 ) (3,120 ) (987 )

Investment securities available-for-sale activity:

Proceeds from termination of derivative instruments 3,025 945 —

Net additions to bank premises and equipment (12,189 ) (5,620 ) (1,354 )

Proceeds from disposal of fixed assets 1,326 — 59

Construction additions on foreclosed assets — — (230 )

Proceeds from sales of foreclosed assets — 1,347 —

Purchase of bank owned life insurance (32,921 ) — (10,000 )

Net cash acquired from acquisition of Heritage Bancorp, Inc. — — 16,112

Cash flows from financing activities:

Net proceeds from subordinated debt issuance 80,194 — —

Net proceeds from issuance of preferred stock - private placement 66,225 — —

Net proceeds from issuance of common stock - private placement — 70,509 —

Net proceeds from issuance of common stock - initial public offering — 92,043 —

Proceeds from stock warrants exercised — 19 —

Proceeds from stock options exercised 672 995 385

Dividends paid on Series A preferred stock (221 ) — —

Net redemption of treasury stock — (121 ) (38 )

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

F-7

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Years Ended December 31,

Supplemental Disclosures of Cash Flow Information:

Supplemental Disclosure of Noncash Investing and Financing Activities:

Loans transferred to other real estate owned, net $ — $ — $ 1,380

Net (increase) decrease in fair value of ESOP-owned shares $ — $ (317 ) $ 18

Common stock issued for acquisition of Heritage Bancorp, Inc. $ — $ — $ 50,861

Terminated ESOP put option $ — $ 2,266 $ —

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

F-8

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to consolidated Financial Statements

December 31, 2022 and 2021

1.

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 fifteen branch offices in the Greater Houston, Dallas-Fort Worth and Austin-San Antonio markets, and one branch in Detroit, Texas. Branch locations include: Humble, Kingwood, Houston-Galleria, Conroe, Pearland, Lake Jackson, Beaumont, Port Arthur, Dallas, Fort Worth, Plano, La Vernia, Nixon, San Antonio, Georgetown, and Detroit. 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, residential-construction, 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with reporting practices prescribed by the financial services industry. The accompanying consolidated financial statements include the accounts of Bancshares, the Bank, and TCCC. All significant intercompany transactions and balances have been eliminated in consolidation. 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.

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

Use of Estimates

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 significantly from those estimates.

Estimates subject to significant changes include the allowance for loan and lease losses, the expected cash flows and collateral values associated with impaired loans, the carrying value of other real estate owned (“OREO”), the fair value of financial instruments, business combination fair value computations, the valuation of goodwill and other intangible assets, stock-based compensation and deferred income tax assets.

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.

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.

F-9

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to consolidated Financial Statements

December 31, 2022 and 2021

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.

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 Greater Houston, Dallas-Fort Worth, and Austin-San Antonio 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.

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.

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.

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”).

F-10

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to consolidated Financial Statements

December 31, 2022 and 2021

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.

Servicing Assets

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.

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 December 31, 2022 and 2021,

F-11

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to consolidated Financial Statements

December 31, 2022 and 2021

the Company was servicing loans previously sold of approximately $8.3 million and $3.8 million, respectively. The related servicing assets receivable were not material to the consolidated financial statements at December 31, 2022 and 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 building 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 (“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.

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

Derivatives are recorded on our Consolidated Balance Sheets as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of the derivatives and whether the derivatives qualify for hedge accounting. At inception of the derivative, we designate the derivative as one of two types based on our intention and belief as to the likely effectiveness as a hedge. These two types are (1) a hedge of the fair value of a recognized asset or liability (“Fair Value Hedge”), and (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“Cash Flow Hedge”).

For a Fair Value Hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in noninterest income in our Consolidated Statements of Income. Fair Value Hedge instruments offered by the Company include

F-12

THIRD COAST BANCSHARES, INC. AND SUBSIDIARY

Notes to consolidated Financial Statements

December 31, 2022 and 2021

pass-through interest rate swap products to qualified commercial banking customers. Under this type of contract, the Company enters into an interest rate swap contract with a customer, while at the same time entering into an offsetting interest rate swap contract with a financial institution counterparty. Changes in the fair value of the underlying derivatives are designed to offset each other so they would not significantly impact the Company's operating results. The Company also enters into Risk Participation Agreements (“RPAs”) with other banks, primarily to share a portion of the risk of borrower default related to the interest rate swap on certain participated loans. The aforementioned instruments are not designated as accounting hedges and do not qualify for hedge accounting.