Third Coast Bancshares, Inc. (TCBX) Q3 2026 earnings review
Third Coast free deposits grow, but its lending spread narrows
Third Coast Bancshares, a commercial bank operating across Texas, gathered more free checking deposits this quarter while its lending spread narrowed. Profit per share excluding merger costs rose 8% from last quarter to $1.06, as higher service fees and lower credit loss provisions offset a 1% dip in net interest income. Chief executive Bart Caraway also announced a $240 million all-stock deal to buy Great Plains Bancshares, adding a second bank merger just months after closing the Keystone acquisition.
| Net revenue (interest plus fees) | $65.9M +20.9% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $1.06 +8.2% from last quarter |
| Net interest margin | 3.70% 3.83% last quarter |
| Free checking deposits | $721.2M +12.2% from last quarter |
⚖️ Verdict: 🔴 Bearish
The story got worse because the bank's net interest margin fell 0.13 percentage points to 3.70%, missing management's call for a flat or higher spread. Loan yields dropped and the bank paid higher rates on interest-bearing checking and time deposits, which erased the savings from $78 million of new free checking accounts. On the positive side, lending teams generated $145 million in gross loans by our math before packaging $88 million of property loans off the balance sheet.
The question now is whether the margin squeeze comes from temporary deposit competition or a lasting loss of loan pricing power. If one-time rate specials caused the dip, the growing base of free checking accounts will lift the margin; if loan yields keep falling, net interest income will stall. Management's fourth-quarter margin outlook on Thursday's conference call will settle it.
🐂 Bull Case
Free Checking Accounts Keep Growing
Third Coast wants to gather more noninterest-bearing demand deposits, which are checking accounts that pay zero interest, to hold down its funding bills. Chief executive Bart Caraway pointed to "continued progress in our funding base" during the third quarter as commercial customers added balances.
Customers added $78.4 million to these free accounts this quarter, lifting the total by 12.2% from June to $721.2 million. That raised their share of total deposits to 12.2%, up from 11.0% last quarter and 10.3% a year ago. Total deposits grew 16.2% from a year ago by our math when stripping out the $844.2 million acquired at the close of the Keystone merger.
This shift matters because every dollar in a free checking account replaces deposits the Texas lender would otherwise pay about 3.5% a year to hold. However, the bank also raised rates on its interest-bearing checking accounts and added $126.1 million in higher-priced time deposits, which offset the savings this quarter.
What to watch: the share of noninterest-bearing deposits in the fourth-quarter report. A drop below 11% would show that volatile commercial accounts left the bank and forced it to rely more on expensive time deposits.
Loan Packaging Masked $145 Million of Lending
The company uses loan securitizations, where it bundles commercial real estate loans and sells them to investors, as a regular tool to manage property concentration. On the balance sheet, gross loans held for investment rose by only $57.1 million, or 1.1% from last quarter, missing the $75 million to $125 million target range.
That headline number hides the actual lending pace because Third Coast packaged and moved $87.5 million of commercial real estate loans off its loan book during the quarter. Adding those transferred loans back shows the lending teams generated $144.6 million in gross loans by our math, while underlying loans excluding the Keystone deal grew 12.4% from a year ago. Service charges and fees also jumped 35.3% from last quarter to $4.3 million, even as total employee headcount dipped by five to 499.
What to watch: the commercial real estate concentration details and new banker hiring updates on the conference call. Those disclosures will confirm whether the bank kept hiring commercial lenders while trimming back-office staff.
🐻 Bear Case
Net Interest Margin Fell Despite Loan Packaging
Net interest margin (NIM) measures the gap between what a bank earns on its loans and what it pays on its deposits. Last quarter, management said it expected the third-quarter margin to stay flat or rise slightly from 3.83%, with loan securitization fees providing an extra boost.
Instead, the margin shrank by 0.13 percentage points to 3.70%, even though the bank completed an $87.5 million commercial real estate securitization during the quarter. That drop pulled net interest income down 1.2% from last quarter to $59.5 million, missing the $60 million to $62 million implied by the prior outlook by our math.
- Yield on loans: 6.95%, down 0.11 percentage points from last quarter and 0.84 points from a year ago
- Cost of interest-bearing deposits: 3.49%, up 0.08 percentage points from last quarter
- Time deposits: up $126.1 million, or 14.6%, while interest-bearing checking fell $141.1 million
This squeeze matters because funding costs rose "primarily due to the increase in rates paid on interest-bearing demand deposits" just as loan yields fell. When deposit competition forces the bank to pay more while older, higher-rate loans roll off, loan growth fails to lift net interest income.
What to watch: the fourth-quarter net interest margin target on Thursday's call. Another drop toward 3.60% would show that deposit pricing pressure is outrunning the benefit of free checking accounts.
Cost Ratio Missed Target Even Without Merger Bills
The efficiency ratio measures operating expenses as a share of net revenue, so a lower number means a more profitable bank. Management has targeted a normal run rate of 56% to 57% and promised that revenue growth would outpace expense growth as the Keystone integration wraps up.
In the third quarter, the reported efficiency ratio worsened by 6.59 percentage points to 63.10%. Noninterest expenses rose $3.1 million from last quarter to $41.6 million, driven by $3.2 million of acquisition bills that pushed legal and professional fees up 4.05 percentage points of revenue to 7.4%. Compared to a year ago, employee salaries and benefits also climbed 2.03 percentage points of revenue to 37.9%.
Stripping out the $3.2 million of merger bills leaves $38.4 million in underlying operating expenses by our math, matching the flat cost plan. Even so, the underlying efficiency ratio sits at 58.2% by our math, worse than the 56% to 57% target because net interest income shrank.
What to watch: whether management confirms the $100,000 monthly Keystone computer system savings started in August and the $150,000 monthly savings remain on track for February 2027. Missing that cost-saving schedule would keep the efficiency ratio above 58%.
Troubled Assets Stay Near $56 Million
Caraway highlighted "stable credit performance" as the bank recorded $27,000 in net loan recoveries and cut its quarterly credit loss provision to $540,000 from $2.1 million in the second quarter. However, total troubled assets remain elevated after jumping in the first half of the year.
Nonperforming loans — loans that are in default or close to it — rose by $1.9 million from June to $29.0 million, or 0.53% of total loans, mainly due to $2.3 million "in SBA loans placed on nonaccrual". Foreclosed real estate (other real estate owned, or OREO) barely budged at $27.0 million, leaving total nonperforming assets at $56.0 million, or 0.82% of total assets by our math.
Meanwhile, the holding company drew another $2.0 million on its senior debt line, lifting the balance to $62.4 million and leaving little room on its $70 million credit limit. The bank has also still not bought back any stock under its $30 million repurchase plan, as treasury stock stayed unchanged at $1.1 million.
What to watch: the sale progress on the $17.1 million foreclosed medical office building and the parent company's borrowing plans in the quarterly filing. Carrying $27 million of foreclosed property earns no interest and drags on the margin.
👓 Other Themes
Great Plains Acquisition Adds Another Integration
On October 7, Third Coast agreed to buy Great Plains Bancshares, the parent of Great Plains National Bank, in an all-stock deal valued at about $239.6 million. Caraway said the merger builds a franchise "capable of producing durable earnings and long-term stakeholder value" and expects it to close in the first quarter of 2027. The bank already recorded $3.2 million of acquisition expenses in the third quarter.
💲 Other KPIs
Tangible book value per share — net worth per share excluding goodwill and other intangible assets — rose 0.7% from last quarter and 7.8% from a year ago. Retained earnings added $17.8 million this quarter, but a $14.8 million swing into unrealized bond and derivative losses held back the per-share gain.
The average diluted share count rose 0.5% from last quarter and 16.6% from a year ago because the bank issued stock to buy Keystone Bancshares in February. That higher share count caused GAAP profit per diluted share to fall 9.7% from a year ago to $0.93, even though total net income rose 5.2%.
Borrowings on the holding company's senior credit line rose by $2.0 million from June and jumped 89.7% from $32.9 million a year ago. Total interest expense on borrowings and advances edged up 6.1% from last quarter to $2.5 million as the parent company carried a larger debt balance.
🔮 Guidance
Unchanged. Third Coast does not issue numeric targets in its earnings releases, and Caraway reiterated the bank's focus on relationship-driven growth while adding the planned first-quarter 2027 closing of the Great Plains merger. On last quarter's call, management set qualitative targets for a flat-to-higher net interest margin and a 56% to 57% efficiency ratio, both of which the third quarter missed.
❓ Key Questions
Why did the net interest margin drop after a securitization?
Management expected the margin to hold at 3.83% or rise with loan packaging fees, yet it fell to 3.70% even with an $87.5 million deal. Investors need to know how much fee income that deal generated and why deposit rates rose.
What are the financial terms of the Great Plains deal?
The release announces a $239.6 million all-stock purchase of Great Plains Bancshares but gives no asset size, loan book, expected cost savings, or tangible book value dilution. Those numbers determine whether the deal helps per-share earnings.
What drove the jump in service fees and other income?
Service charges and fees jumped 35% from last quarter to $4.3 million, and other noninterest income nearly tripled to $1.2 million. Management has not said how much came from the new factoring revenue-share agreement versus one-off loan packaging fees.
When will the bank sell its $27 million foreclosed property?
Foreclosed real estate stayed at $27.0 million after a $17.1 million medical office building entered the account last quarter, while nonperforming SBA loans rose by $2.3 million. Carrying foreclosed property earns nothing and weighs on returns.