425: Third Coast Bancshares to Acquire Keystone Bancshares

Third Coast Bancshares, Inc. announced an agreement to acquire Keystone Bancshares, Inc. in an all-stock and partial cash transaction, expanding its presence in Texas.

Summary

• Third Coast Bancshares, Inc. (TCBX) will acquire Keystone Bancshares, Inc. (Keystone) through a series of integrated mergers, including the merger of Keystone Bank into Third Coast Bank.
• Keystone shareholders will receive 0.45925 shares of TCBX Common Stock for each Keystone share, subject to certain adjustments.
• A cash election option is available, allowing shareholders to receive cash equal to the Exchange Ratio multiplied by TCBX's 20-day volume-weighted average price, with the aggregate cash consideration capped at $20,000,000.
• The Exchange Ratio is subject to reduction if Keystone's Adjusted Equity (capital, surplus, and retained earnings less intangible assets, adjusted for merger costs) falls below a minimum of $94,576,000.
• Keystone stock options will convert into TCBX options, adjusted by the Exchange Ratio, while restricted stock units and restricted stock awards will fully vest and convert into TCBX stock consideration.
• The boards of directors of TCBX and Third Coast Bank will each expand by two members, with Jeffrey A. Wilkinson (Keystone's Chairman and CEO) and one other mutually agreed Keystone director joining.
• The transaction is intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code.

Sentiment

Score: 7

Explanation: The sentiment is positive due to a strategic merger announcement, which typically aims for growth and synergy. The transaction is structured with clear terms, including board representation for the acquired entity, and is intended to be tax-free. However, the presence of a cash election cap, potential exchange ratio reduction, and standard merger risks temper the score from being extremely high.

Positives

• The transaction represents a strategic business combination determined to be in the best interests of both companies and their shareholders.
• The integrated mergers are intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code, potentially offering tax efficiencies.
• Keystone's board received a fairness opinion from Stephens Inc. regarding the merger consideration, indicating a financially sound deal for its shareholders.
• TCBX's board received a fairness opinion from Raymond James & Associates, Inc. regarding the merger consideration, supporting the financial rationale for TCBX.
• Voting agreements from shareholders owning approximately 12% of Keystone Stock, along with Director Support Agreements from Keystone directors, indicate strong internal support for the merger.

Negatives

• The aggregate cash election consideration is capped at $20,000,000, meaning Keystone shareholders electing cash may be subject to proration and receive a portion of their consideration in TCBX stock.
• The Exchange Ratio is subject to reduction if Keystone's Adjusted Equity falls below $94,576,000, which could decrease the value received by Keystone shareholders.
• Keystone is responsible for various merger-related costs, including employment agreement terminations, transaction fees, and contract termination penalties, which will reduce its Adjusted Equity.
• A termination fee of $4,820,128 is payable by Keystone under certain circumstances, such as alternative acquisition proposals or changes in board recommendation, posing a financial risk.
• The issuance of additional TCBX common stock in connection with the merger could result in dilution for existing TCBX shareholders.

Risks

• The occurrence of any event, change, or circumstance that could give rise to the right of one or both parties to terminate the merger agreement.
• The outcome of any legal proceedings that may be instituted against Third Coast or Keystone.
• The possibility that the transaction does not close when expected or at all because required regulatory, shareholder, or other approvals and conditions are not received or satisfied on a timely basis or at all.
• The risk that regulatory approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction.
• The benefits from the transaction may not be fully realized or may take longer to realize than expected due to changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations, and competition.
• Disruption to the parties' businesses as a result of the announcement and pendency of the transaction.
• The risk that the integration of each party's operations will be materially delayed or will be more costly or difficult than expected, or that the parties are otherwise unable to successfully integrate their businesses.
• The possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events.
• Reputational risk and potential adverse reactions of Third Coast's or Keystone's customers, suppliers, employees, or other business partners.
• The dilution caused by Third Coast's issuance of additional shares of its common stock in connection with the transaction.
• A material adverse change in the financial condition of Third Coast or Keystone.
• General competitive, economic, political, and market conditions.
• Major catastrophes such as earthquakes, floods, or other natural or human disasters, including infectious disease outbreaks.
• The diversion of management's attention and time from ongoing business operations and opportunities on merger-related matters.
• Other factors that may affect future results, including changes in asset quality and credit risk, inability to sustain revenue and earnings growth, changes in interest rates and capital markets, inflation, customer practices, technological changes, capital management activities, and legislative and regulatory actions.
• The risk that the Integrated Mergers may not qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code for U.S. federal income tax purposes.
• Holders of more than 5% of the outstanding shares of Keystone Stock demanding payment of the fair value of their shares as dissenting shareholders could impact the transaction.

Future Outlook

The integrated mergers are expected to expand Third Coast Bancshares' operations and market presence in Texas. The transaction is structured to qualify as a tax-free reorganization, aiming for efficient integration and long-term strategic benefits. Management anticipates a successful integration, though acknowledges potential risks related to economic conditions, regulatory changes, and operational challenges.

Management Comments

• The Board of Directors of TCBX and the Board of Directors of Keystone have determined that it is advisable and in the best interests of their respective companies and their shareholders to consummate the strategic business combination transaction.
• TCBX believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different.

Industry Context

This acquisition reflects a continuing trend of consolidation within the regional banking sector, particularly in growth markets like Texas. Larger institutions like Third Coast Bancshares are seeking to expand their geographic footprint and customer base through strategic mergers, leveraging economies of scale and enhancing competitive positioning against both larger national banks and smaller community banks. The focus on a tax-free reorganization structure indicates a desire to optimize financial outcomes for shareholders in a competitive M&A environment.

Management Changes

Corporate Governance

Stakeholder Impact

• **Shareholders (Keystone)**: Will receive TCBX common stock or a limited cash election, subject to proration. Will vote on the merger.
• **Shareholders (TCBX)**: Will vote on the issuance of new shares, potentially experiencing dilution.
• **Employees (Keystone)**: Some may be terminated, others continued with TCBX, with severance details on a confidential schedule. Continuing employees will participate in TCBX benefit plans with service credit.
• **Directors (Keystone)**: Jeffrey A. Wilkinson and one other to join TCBX and TCB boards. All directors to provide releases.
• **Customers (Keystone Bank)**: Keystone Bank will merge into Third Coast Bank, potentially leading to changes in services, branding, and branch operations.
• **Creditors (Keystone)**: The Keystone Loan Agreement will be paid off and related liens released.

Next Steps

• Keystone will hold a shareholder meeting to approve the Agreement and Merger.
• TCBX will hold a shareholder meeting to approve the TCBX Share Issuance.
• A Registration Statement on Form S-4, including a joint proxy statement/prospectus, will be filed with the SEC and must become effective.
• Required regulatory and third-party consents and approvals must be obtained.
• The new TCBX Common Stock to be issued must be approved for listing on the New York Stock Exchange.
• Keystone will terminate certain employee benefit plans and contracts prior to closing, as requested by TCBX.
• The Keystone Loan Agreement will be paid off, and related liens discharged and terminated at the Effective Time.
• Jeffrey A. Wilkinson and another mutually agreed Keystone director will be appointed to the TCBX and TCB boards.
• The Merger, Second Step Merger, and Bank Merger will be completed.

Key Dates

Recommendation

The merger presents a strategic growth opportunity for Third Coast Bancshares, expanding its market presence and potentially creating synergies. However, the immediate impact on share price for TCBX is uncertain due to potential dilution from share issuance and the complexities of integration. For Keystone shareholders, the fixed exchange ratio offers a clear value proposition, but the cash election cap and potential for exchange ratio reduction introduce some uncertainty. Given the forward-looking nature of the announcement and the inherent risks of integration, a 'hold' recommendation is prudent until more clarity emerges on the financial benefits and successful execution of the merger.

Keywords

Merger, Acquisition, Banking, Financial Services, SEC Filing, TCBX, Keystone, Stock Exchange, Corporate Governance, Risk Management, Shareholder Approval, Regulatory Approval, Tax Reorganization, Texas