Commercial Real Estate Securitization Will Increase Balance Sheet Flexibility

Key Takeaways

• Strategic loan securitization boosts balance sheet flexibility, net interest margin, and supports sustainable loan growth while enhancing earnings and revenue.
  
• Operational efficiencies and cost savings initiatives are expected to improve profitability and net margins by reducing noninterest expenses.
  
• Strained liquidity management, rising expenses, and reliance on Texas markets amid macroeconomic uncertainties may challenge Third Coast Bancshares' growth and profitability.

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.

• The successful execution of a significant commercial real estate loan securitization will increase flexibility in managing the balance sheet and enhance net interest margin, supporting future loan growth while maintaining a prudent risk profile. This positively impacts earnings and revenue.
  
• The bank's efforts to improve operational efficiencies and cost savings through the 1% improvement campaign are expected to enhance profitability by reducing noninterest expenses, which could improve net margins.
  
• Net interest margin improvement by 9 basis points to 3.80% in the first quarter shows the bank's commitment to maximizing returns through strategic decision-making, which could lead to increased earnings.
  
• The bank is evaluating additional securitizations to manage concentrations and support sustainable profitable growth, potentially leading to stronger capital management and improved net interest margin, impacting earnings positively.
  
• Ongoing improvement in credit quality through proactive asset management, reduction in nonperforming loans, and efficient transition of selected assets indicates consistent underwriting discipline, enhancing long-term sustainable growth and potentially strengthening net margins and earnings.

Third Coast Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Third Coast Bancshares's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.8% today to 27.2% in 3 years time.
• Analysts expect earnings to reach $62.8 million (and earnings per share of $3.06) by about May 2028, up from $46.1 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 8.9x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Third Coast Bancshares Future Earnings Per Share Growth

Risks

• The decline in deposits by $62 million during the quarter, along with fluctuations in the loan-to-deposit ratio reaching 93.9%, may strain liquidity management and affect net interest margin if not managed effectively.
  
• Noninterest expenses increased by 3.2% in the first quarter and by 8.5% over the previous year, indicating pressure on net margins and profitability, which may continue with upcoming expenses related to headcount increases, core conversion, and securitization.
  
• The flat net income ($12.4 million) compared to the prior quarter alongside a slight decrease in net interest income suggests stagnation in earnings growth, which could affect investor sentiment and growth in returns on equity.
  
• Continued loan paydowns, particularly in revolving lines, and potential seasonal deposit roll-off expectations may impact sustainable loan growth prospects and revenue generation.
  
• Heavy reliance on Texas markets, coupled with prevailing macroeconomic uncertainties, could pose risks to consistent loan demand and earnings, especially if a recession hits, leading to potential depositor and borrower cautiousness.

Valuation

• The analysts have a consensus price target of $37.667 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 $231.0 million, earnings will come to $62.8 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $29.73, the analyst price target of $37.67 is 21.1% 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.