Third Coast Bancshares: Leveraging Low Deposit Costs to Boost Net Interest Margins and Earnings Growth

In the ever-evolving landscape of community banking, strategic asset-liability management (ALM) has emerged as a critical differentiator. Third Coast Bancshares (TCBX) has positioned itself at the forefront of this trend, demonstrating how disciplined cost control and proactive balance sheet optimization can drive sustainable earnings growth. With a net interest margin (NIM) of 4.22% in Q2 2025—a 40-basis point increase year-over-year—the company is proving that even in a high-rate environment, a well-executed ALM strategy can unlock long-term shareholder value.

The Power of Deposit Cost Optimization

TCBX's recent performance underscores the importance of managing deposit costs. In Q2 2025, the company reduced the cost of interest-bearing deposits to 4.00%, a 76-basis point decline from the same period in 2024. This achievement was driven by a 63-basis point drop in the average cost of deposits to 3.59%, primarily due to lower rates on interest-bearing demand accounts. By curbing funding costs while maintaining a robust loan portfolio yielding 7.95%—a 188-basis point increase from Q2 2024—TCBX has widened its NIM and generated $49.4 million in net interest income, up 27.1% year-over-year.

This dual focus on deposit cost reduction and loan yield expansion reflects a disciplined approach to ALM. Unlike peers who may prioritize aggressive loan pricing or deposit acquisition, TCBX has struck a balance, ensuring that its funding base remains both low-cost and stable. Its loan-to-deposit ratio of 95% further reinforces this strategy, indicating a strong liquidity buffer without overleveraging.

Strategic Securitization: A Game-Changer for Capital Efficiency

One of TCBX's most innovative ALM tactics has been its use of securitizations. In Q2 2025, the company executed two securitization deals, generating $2 million in fee income while reducing risk-weighted assets and construction loan concentrations. These transactions not only improved capital efficiency but also created securities with an average yield of 5.63%, further bolstering the investment portfolio.

The benefits of securitization extend beyond immediate earnings. By freeing up capital and liquidity, TCBX can deploy resources toward higher-growth opportunities or shareholder returns. Management has hinted at exploring additional securitizations in 2026, suggesting a long-term commitment to leveraging non-traditional tools for balance sheet optimization. This flexibility is a rarity among community banks and positions TCBX to outperform peers in capital-constrained environments.

Preparing for Rate Cuts: Proactive Interest Rate Risk Management

With the Federal Reserve projected to cut rates twice in 2025, TCBX's ALM strategy is uniquely poised to capitalize on shifting rate dynamics. The company has already hedged its exposure through swaps and a diversified investment portfolio, while its dynamic loan pricing model allows it to adjust yields in real-time. Management projects a NIM range of 3.90%–3.95% for Q3-Q4 2025, even without new securitizations—a testament to the resilience of its ALM framework.

Importantly, TCBX's conservative credit culture and disciplined underwriting practices have preserved asset quality. Non-accrual loans have improved significantly, and the company's efficiency ratio dropped to 55.45% in Q2 2025, a 5.94-point decline from the prior year. These metrics suggest that the company is not sacrificing credit quality for short-term gains, a critical factor in sustaining long-term value.

Long-Term Shareholder Value: A Multi-Faceted Approach

TCBX's ALM strategies are not just about near-term profitability—they are designed to create durable shareholder value. By maintaining a low-cost deposit base, optimizing capital through securitization, and hedging interest rate risk, the company is building a model that can thrive in both rising and falling rate environments. Additionally, its buyback program and prioritization of loan growth over asset purchases reflect a shareholder-friendly capital allocation philosophy.

For investors, the implications are clear: TCBX is a high-conviction play in the community banking sector. Its ability to grow earnings at a 27% annualized rate while maintaining a 4.22% NIM—well above the industry average—positions it as a compelling long-term holding. As the Fed's rate cuts begin to materialize, TCBX's proactive ALM framework could further amplify its margins, rewarding investors with both income and capital appreciation.

Conclusion: A Model for Sustainable Growth

Third Coast Bancshares exemplifies how strategic ALM can transform a regional bank into a high-performing entity. By leveraging low deposit costs, innovative capital tools, and forward-looking rate management, TCBX is not just surviving in a challenging macroeconomic climate—it's thriving. For investors seeking exposure to a bank with a clear path to long-term value creation, TCBX's combination of disciplined execution and strategic agility makes it a standout opportunity.

Investment Takeaway: TCBX's robust ALM strategy, coupled with its proactive stance on capital efficiency and credit quality, positions it as a top-tier player in the community banking sector. With a projected NIM range of 3.90%–3.95% and a strong balance sheet, the stock offers a compelling mix of growth and stability for long-term investors.