Executive Summary / Key Takeaways

• Exceptional Q2 2025 Performance: Third Coast Bancshares delivered record Q2 2025 net income of $15.6 million, a 25% increase quarter-over-quarter, with an annualized Return on Average Assets (ROAA) of 1.38%, positioning it among top-performing regional banks.
• Strategic Securitization as a Competitive Edge: The successful execution of two commercial real estate loan securitizations totaling $250 million in Q2 2025 has become a key competitive differentiator, enabling capital management, risk mitigation, and the accommodation of larger client needs.
• Operational Efficiency Driving Profitability: The "1% improvement campaign" and a completed core banking system conversion have significantly enhanced operational efficiency, reducing the efficiency ratio to 55.45% in Q2 2025 and setting the stage for further cost savings and improved service.
• Robust Loan Growth and Stable Net Interest Margin: The company projects sustained loan growth of $50 million to $100 million per quarter, targeting an 8% annualized rate for 2025. Net Interest Margin (NIM) is forecast between 3.90% and 3.95% for Q3 and Q4 2025, supported by disciplined pricing and asset/liability management.
• Strong Credit Quality and Capital Position: TCBX maintains a conservative credit culture with improving asset quality metrics, including declining nonaccrual loans. Its strong capital ratios and a recently authorized share repurchase program underscore a commitment to shareholder value.

The Texas Triangle's Ascendant Banker

Third Coast Bancshares, Inc. (TCBX) operates as a dynamic regional bank holding company, deeply embedded in the vibrant economic landscape of Texas. Headquartered in Humble, Texas, the company, through its subsidiary Third Coast Bank and Third Coast Commercial Capital, Inc. (TCCC), delivers comprehensive commercial and consumer banking solutions. TCBX's strategic focus is squarely on serving small to medium-sized businesses (SMBs) and professionals across the high-growth Greater Houston, Dallas-Fort Worth, and Austin-San Antonio metropolitan areas, complemented by a presence in Detroit, Texas.

The company's journey, initiated with its founding in 2008 and the holding company's formation in 2013, has been marked by a deliberate strategy of organic growth, talent acquisition, and continuous operational refinement. This history includes proactive measures like tightening credit standards in 2019 and navigating significant macroeconomic headwinds, including a global pandemic and industry-wide liquidity challenges. Through these periods, TCBX has consistently demonstrated resilience and a commitment to its core mission, culminating in 14 consecutive quarters of positive net interest income growth by late 2024.

The broader banking industry is currently characterized by ongoing consolidation, evolving interest rate environments, and rapid technological advancements, including the increasing role of Artificial Intelligence in banking. Within this dynamic backdrop, TCBX positions itself as a relationship-driven institution, leveraging its local expertise and a "talent magnet" culture to attract and retain high-performing bankers. This approach allows TCBX to compete effectively against larger, more established regional players.

Competitive Edge and Technological Innovation

In the competitive Texas banking market, TCBX faces rivals such as Prosperity Bancshares (PB), Independent Bank Group (IBTX), Texas Capital Bancshares (TCBI), and Cullen/Frost Bankers (CFR). While these competitors often boast greater scale and broader geographic reach, TCBX differentiates itself through a highly personalized, relationship-based service model and strategic operational agility. For instance, TCBX's disciplined loan pricing, targeting spreads like SOFR plus 300 basis points, allows it to maintain profitability even when turning away deals that do not meet its internal hurdle rates. This contrasts with some competitors who may pursue more aggressive growth strategies at potentially lower margins.

TCBX's technological differentiation, while not a proprietary product like a specialized chip, lies in its strategic adoption and optimization of core banking infrastructure and digital service platforms. A significant recent initiative was the completion of its core banking system conversion from Jack Henry (JKHY) to FIS (FIS) in Q2 2025. This transition is a foundational technological upgrade designed to yield substantial, quantifiable benefits. Management anticipates "really substantial savings" in contract costs compared to the old system, directly impacting the efficiency ratio. Furthermore, the new system is expected to provide "enhanced functionality" for treasury products, enabling the bank to "bring on some larger corporate customers" and improve deposit-taking capabilities.

This technological enhancement, coupled with the ongoing "1% improvement campaign," forms a critical operational moat. The campaign, described as a "cultural cornerstone," drives continuous process streamlining, cost reduction, and productivity enhancement across the organization. This focus on operational excellence has already translated into tangible financial improvements, with the efficiency ratio improving to 55.45% in Q2 2025, a significant reduction from 61.39% a year prior. This demonstrates TCBX's ability to drive meaningful transformation and positions it for sustained momentum in cost management and service delivery, allowing it to compete more effectively on service and efficiency against larger, more scaled rivals.

Financial Strength and Performance Trajectory

TCBX's financial performance in Q2 2025 underscores the effectiveness of its strategic initiatives. The company reported net income of $15.6 million, a robust 25% increase from Q1 2025, resulting in an impressive annualized Return on Average Assets (ROAA) of 1.38%. This marks a significant improvement from 1.17% in Q1 2025 and 0.97% in Q2 2024. Net interest income (NII) surged to $49.374 million in Q2 2025, up 15.4% quarter-over-quarter, and has grown at a compound annual rate of 21.7% since its IPO in 2021, outpacing noninterest expense growth of 10.7% over the same period.

Loan growth remains a key driver, with total loans reaching $4.08 billion as of June 30, 2025, reflecting a $91.7 million increase in Q2 alone. The loan portfolio is well-diversified, with Commercial & Industrial (C&I) loans comprising 42% and construction, development, and other loans at 19.2%. C&I loans have been particularly robust, leading pipeline growth. The company's loan yield for Q2 2025 was 7.95%. A significant tailwind to future margins is the $18 million in capitalized loan fees at quarter-end, an all-time high, expected to amortize over the next three years at approximately $1 million per month.

Deposit dynamics show total deposits at $4.28 billion as of June 30, 2025, a slight decrease of 0.7% from December 31, 2024. While noninterest-bearing deposits saw a 26.8% decline from year-end 2024 to $441.0 million, interest-bearing deposits increased by 3.6% to $3.84 billion. The average rate paid on interest-bearing deposits decreased to 4.01% for the six months ended June 30, 2025, down from 4.71% in the prior year period. This reduction in funding costs has been instrumental in supporting the Net Interest Margin.

A notable operational and capital management achievement in Q2 2025 was the completion of two securitization transactions totaling $250 million of revolving commercial real estate loans. These transactions generated approximately $2 million in fee income (contributing about 5 basis points to NIM) and resulted in TCBX purchasing $206 million in Class A-1 asset-backed notes, classified as held-to-maturity securities. This strategy effectively reduces risk-weighted assets, lowers construction concentrations, and mitigates credit risk, while also serving as a competitive advantage to accommodate larger client needs.

Outlook, Guidance, and Risk Assessment

Management is highly optimistic about the remainder of 2025, providing clear guidance and strategic rationale. The Net Interest Margin (NIM) is forecast to be between 3.90% and 3.95% for Q3 and Q4 2025, assuming no new securitizations. This outlook is supported by recurring loan fees, the amortizing capitalized fees, and a balanced asset-liability structure. Management anticipates two Federal Reserve rate cuts before year-end, noting that TCBX is "somewhat indifferent" to the direction of rate changes, as its asset-sensitive profile allows it to benefit from either upward or downward movements.

Loan growth is projected to continue at $50 million to $100 million per quarter, targeting an 8% annualized growth rate for 2025, consistent with 2024's performance. This confidence is driven by robust pipelines and the company's ability to attract customers from larger banks. Return on Average Assets (ROAA) is expected to settle in the 1.25% to 1.30% range for the rest of the year. Noninterest expenses are forecast to be around $28 million per quarter, with an estimated 4% increase for the full year, reflecting selective hiring to support growth while benefiting from core conversion savings.

Credit quality remains a paramount focus, with Chief Credit Officer Audrey Duncan noting "asset quality demonstrated resilience... staying close to historical benchmarks." Nonaccrual loans improved in Q2 2025, though a $1.7 million write-off from a factoring client impacted net charge-offs. The company's conservative underwriting and robust monitoring processes are expected to maintain strong credit metrics, with charge-offs remaining well below industry averages.

Liquidity is robust, supported by substantial borrowing capacity, including $491.8 million under FHLB advances and $1.8 billion from the Federal Reserve's Discount Window. Total shareholders' equity grew by 7.7% to $496.1 million in Q2 2025, and the bank remains "well capitalized" by regulatory standards. The Board's authorization of a $30 million share repurchase program signals a commitment to enhancing shareholder value, particularly if the stock price is deemed attractive relative to its tangible book value.

Key risks include interest rate volatility, which TCBX actively manages through its Asset Liability and Investment Committee, and competitive pressures in its Texas markets. While the M&A environment is currently challenging, TCBX believes it can achieve its growth goals organically. The company's geographic concentration in Texas also exposes it to regional economic fluctuations, though the Texas economy is generally viewed as robust.

Conclusion

Third Coast Bancshares is executing a compelling growth story, leveraging its deep Texas market presence, disciplined operational strategies, and innovative capital management. The exceptional Q2 2025 results, marked by strong profitability and efficiency gains, are not isolated events but rather the culmination of a multi-year strategic "flywheel" effect. The successful securitization strategy and the core banking system conversion are not merely operational adjustments; they are foundational technological and strategic differentiators that enhance TCBX's competitive positioning, enabling it to serve larger clients and manage risk more effectively.

With a clear roadmap for sustained loan growth, a stable net interest margin, and a steadfast commitment to superior credit quality and operational excellence, TCBX is poised for continued success. The company's ability to consistently outperform expectations, even amidst a dynamic industry landscape, underscores the strength of its management team and its strategic vision. For investors, TCBX represents an opportunity to participate in the growth of a high-performing regional bank that is strategically capitalizing on the robust Texas economy, driven by a blend of relationship-centric banking and forward-thinking operational and technological advancements.