Efficiency Initiatives Will Strengthen Operations And Capitalize On Texas's Robust Market

Key Takeaways

• Strategic operational improvements with a focus on efficiency and cost reduction are expected to enhance net margins.
  
• Strong loan growth and improved credit quality support stable asset quality, positioning the bank for revenue expansion.
  
• Reliance on cyclical sectors and loan growth could strain credit quality, while high funding costs and securities volatility may pressure financial stability and margins.

Catalysts

Operates as a bank holding company for Third Coast Bank, SSB that provides various commercial banking solutions to small and medium-sized businesses, and professionals.

• The bank's 1% efficiency improvement initiative has led to better operational performance, with significant progress in reducing costs and increasing productivity. This is expected to further improve the efficiency ratio, potentially enhancing net margins.
  
• A strong performance in loan growth, particularly in the commercial sector, suggests continued revenue growth. The target is $50 million to $100 million in quarterly loan growth, which should positively impact future earnings.
  
• Improved credit quality and the maintenance of low charge-offs are expected to sustain strong asset quality, supporting stable or improved net margins.
  
• The robust economic environment in Texas offers growth prospects. The bank's strategic presence and deep market knowledge position it well to capitalize on emerging trends, potentially driving future revenue growth.
  
• Initiatives in treasury management and deposit growth, especially the focus on noninterest-bearing demand deposits, are expected to enhance the bank's net interest margin, impacting earnings positively.

Third Coast Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Third Coast Bancshares's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.5% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $56.3 million (and earnings per share of $3.15) by about December 2027, up from $38.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2027 earnings, up from 12.7x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 9.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Third Coast Bancshares Future Earnings Per Share Growth

Risks

• The company's reliance on high-yielding municipal loans was reduced, as evidenced by a decline of $39 million. Reductions in this area could impact future net interest income and overall loan yield.
  
• The sale of low-yielding mortgage-backed securities at a loss of $480,000 indicates potential volatility in investment income from securities, which could affect earnings.
  
• The bank's heavy concentration in cyclical sectors like construction and development (21% of total loans) could pose risks to revenue and credit quality if the economic environment weakens.
  
• Despite improvements, the company still has a relatively high cost of funds compared to peers, which could pressure net interest margins if not effectively managed as rates change.
  
• The company’s ongoing significant loan growth, mainly through commercial lending, could strain credit quality or require more capital and liquidity, potentially affecting net margins and financial stability.

Valuation

• The analysts have a consensus price target of $36.75 for Third Coast Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $210.0 million, earnings will come to $56.3 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of $36.16, the analyst's price target of $36.75 is 1.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.