Texas Banking Expansion Will Capture Sun Belt Opportunities

Key Takeaways

• Strong loan growth, enhanced digital infrastructure, and successful securitizations position the company for sustained revenue and margin expansion.
  
• Prudent lending, resilient fee income, and strategic acquisitions offer stability, flexibility, and potential for long-term profitability in a consolidating market.
  
• Heavy geographic concentration, limited scale, and rising regulatory and digital pressures raise concerns about earnings stability, margin compression, and long-term competitiveness against larger banks and fintechs.

Catalysts

Operates as the bank holding company for Third Coast Bank that provides various commercial banking solutions to small and medium-sized businesses and professionals in the United States.

• Strong ongoing loan growth and robust pipelines, driven by business expansion and migration of customers from larger banks, positions the company to capitalize on rising economic and population growth in Texas and the Sun Belt, supporting sustained revenue growth.
  
• Strategic investments in digital banking platforms, technology infrastructure, and completed core banking conversion are improving operating efficiencies, enabling further reductions in the efficiency ratio and driving higher net margins over time.
  
• The company's demonstrated ability to execute and replicate successful securitization transactions reduces risk-weighted assets, expands capital flexibility, and accommodates larger, more sophisticated clients, paving the way for future earning asset growth and enhanced earnings capacity.
  
• A disciplined focus on high-quality commercial and industrial lending-with sticky client relationships and prudent underwriting-creates a stable, diversified stream of fee income, providing resilience for earnings even in mixed economic cycles.
  
• Continued industry consolidation in the Texas banking sector offers potential accretive acquisition opportunities, which, combined with strong organic growth, can drive greater scale, operating leverage, and long-term profitability.

Third Coast Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Third Coast Bancshares's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.6% today to 28.8% in 3 years time.
• Analysts expect earnings to reach $72.1 million (and earnings per share of $3.37) by about August 2028, up from $52.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, up from 9.6x today. This future PE is lower than the current PE for the US Banks industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Third Coast Bancshares Future Earnings Per Share Growth

Risks

• The company's core operations remain heavily concentrated in Texas, exposing it to outsized risks from local economic downturns or sector-specific shocks-especially in energy and real estate-which could result in higher non-performing loans and provisions, impacting future earnings quality and growth prospects.
  
• Despite recent efficiency gains, Third Coast Bancshares is a relatively small regional player with less scale and resource flexibility compared to larger national banks; this may hinder its ability to invest sufficiently in digital banking infrastructure and keep pace with evolving fintech competitors, leading to higher long-term operational costs and lower net margins.
  
• Continued reliance on loan growth and securitization transactions to drive earnings may mask underlying volatility in organic loan demand or future credit quality, while the nonrecurring nature of some fee income, as highlighted by management, could result in less predictable revenue and net interest margin trends going forward.
  
• Rising regulatory compliance costs and more stringent requirements for community and regional banks could squeeze profit margins and necessitate ongoing investments in risk/compliance infrastructure, thereby reducing net income and return on equity over time.
  
• Accelerating adoption of digital-first banking and increasing competition from both larger banks and fintechs may erode the value proposition of branch-based, relationship-driven banking, potentially reducing customer retention, core deposit growth, and long-term revenue sustainability.

Valuation

• The analysts have a consensus price target of $42.667 for Third Coast Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $250.7 million, earnings will come to $72.1 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of $35.95, the analyst price target of $42.67 is 15.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.