Third Coast Bancshares' $17.0625 Preferred Dividend: A High-Yield Gamble in Texas Banking

The declaration of a $17.0625 quarterly dividend per share on Third Coast Bancshares' (NASDAQ: TCBX) 6.75% Series A Convertible Non-Cumulative Preferred Stock marks one of the highest yields in the regional banking sector. While this dividend represents a compelling income opportunity, its sustainability hinges on the bank's financial stability, growth trajectory in Texas markets, and the risks inherent in its capital structure.

The Dividend: A Math Lesson in Risk and Reward

The $17.0625 quarterly dividend translates to a 6.75% annual yield, calculated as $17.0625 × 4. This yield is derived from a par value of approximately $1,010 per share, assuming the dividend aligns with the stated coupon rate (see calculation: $17.0625 × 4 / 0.0675 = $1,010). While this dividend offers income investors a standout return, the non-cumulative nature of the preferred stock is a critical caveat. Unlike cumulative preferred stock, missed dividends on TCBX's Series A are irrecoverable, leaving shareholders exposed to the bank's discretionary payout policy.

Financial Stability: A Mixed Picture

Third Coast's financial health is a double-edged sword. Its book value per share of $32.96 (as of Q3 2024) reflects a strong equity position, bolstered by its focus on commercial lending in high-growth Texas markets like Houston and Dallas. However, its negative enterprise value of -$50.7 million in Q3 2024 raises eyebrows. This metric suggests liabilities exceed assets, a red flag that could indicate elevated debt levels or off-balance-sheet risks. Investors should scrutinize management's ability to deleverage while maintaining profitability.

The bank's net income of $12.775 million in Q3 2024 comfortably covered the $1.198 million in preferred dividends, resulting in a diluted EPS of $0.67. Yet, this narrow margin highlights vulnerability to macroeconomic headwinds, such as rising interest rates or loan defaults.

Growth in Texas: A Double-Edged Sword

Third Coast's 19 branches in Texas' key markets position it to capitalize on the state's economic dynamism. The bank's loan portfolio growth, driven by commercial real estate and business lending, has been a consistent revenue driver. However, Texas' booming economy also attracts competition from larger regional banks, and Third Coast's relatively small scale ($2.5 billion in assets as of 2024) could limit its ability to compete in pricing and services.

Convertible Preferred Stock: Upside or Downside?

The Series A's convertibility feature offers potential upside for preferred shareholders if TCBX's common stock rises. However, the lack of disclosed conversion terms—such as the ratio or price—introduces uncertainty. Should holders convert their shares, it could dilute common equity, pressuring the stock price and undermining the bank's capital efficiency.

Risks to Consider

• Non-Cumulative Dividends: Management can suspend payments without penalty, making this a high-risk bet for income seekers.
• Debt Overhang: The negative enterprise value implies debt could squeeze equity holders in a downturn.
• Interest Rate Sensitivity: Rising rates could compress net interest margins, squeezing profitability.

Investment Takeaways

• For Income Investors: The 6.75% yield is enticing, but only suitable for those willing to accept the non-cumulative risk. Monitor quarterly earnings reports for dividend sustainability.
• For Growth Investors: The common stock may appeal if Texas markets continue to thrive, but the convertible preferred's dilution risk complicates the picture.
• For Cautionary Investors: Wait for clarity on the bank's debt reduction plans and enterprise value recovery before committing capital.

Final Verdict

Third Coast Bancshares' preferred stock offers a high-yield gamble in a sector where stability is prized. While its Texas growth story and solid book value provide a foundation, the non-cumulative dividend, negative enterprise value, and convertibility risks demand a cautious approach. Investors should pair this holding with a broader portfolio of more stable financial instruments—or treat it as a speculative bet on Texas' economic resilience.