Planned Technology Upgrades Will Streamline Operations And Reduce Costs

Key Takeaways

• Strategic loan growth combined with enhanced efficiency measures and technology upgrades aim to boost revenue and operational margins.
  
• Expanding non-interest income and deposits through strategic initiatives aims to strengthen the bank's profitability and stability.
  
• Rising competition and economic uncertainties may pressure Third Coast Bancshares, impacting loan pricing, interest income, and net 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.

• Strong loan growth is expected to continue, with projected 2025 loan growth of approximately 8%, supporting future revenue increases.
  
• The bank plans to improve its efficiency ratio further below the 60% target, impacting net margins positively through enhanced cost management and process optimization.
  
• Planned technology upgrades, including a core system change, are anticipated to reduce costs and improve operational efficiency, positively impacting net margins.
  
• Continued improvements in non-interest income, particularly through treasury management fees and loan fees, are expected to contribute to earnings growth.
  
• Strategic initiatives to grow non-interest-bearing demand deposits and banking relationships are anticipated to strengthen the deposit base, supporting overall profitability and stable net interest margin.

Third Coast Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Third Coast Bancshares's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.9% today to 29.0% in 3 years time.
• Analysts expect earnings to reach $64.3 million (and earnings per share of $3.48) by about January 2028, up from $42.9 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 13.4x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 10.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.93%, as per the Simply Wall St company report.

Third Coast Bancshares Future Earnings Per Share Growth

Risks

• The increase in nonperforming loans to total loans ratio from 0.62% to 0.7% in the fourth quarter and the associated charge-offs could impact net margins and overall profitability.
  
• The company's dependency on maintaining loan growth projections amidst rising competition in the loan markets may challenge their ability to sustain current pricing spreads, potentially affecting future revenues and earnings.
  
• A potential decrease in lending opportunities or heightened competition could pressure the bank to lower interest rates on new loans, impacting net interest income and net margins.
  
• Seasonal fluctuations in deposits, particularly the temporary increases in excess liquidity, may elevate the cost of funds unexpectedly and strain net interest margins and profitability.
  
• Any external economic challenges such as unexpected macroeconomic conditions or changes in Federal Reserve policies could affect the company's balance sheet, impacting both revenue growth and cost management strategies.

Valuation

• The analysts have a consensus price target of $40.25 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 $221.7 million, earnings will come to $64.3 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $37.05, the analyst's price target of $40.25 is 8.0% 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.