Critical Southeast Expansion And Tech Investments Set To Boost Bank's Market Share And Profitability

Key Takeaways

• Expansion in new Southeast markets and strategic focus on improving loan quality through conservative credit practices are expected to positively influence revenue and margins.
  
• Investment in data analytics and a cautious approach to commercial real estate (CRE) portfolio diversification are aimed at enhancing operational efficiency and risk management.
  
• Governance and oversight issues, along with a focus on conservative credit philosophy, might impact trust, profitability, and future revenue expansion.

Catalysts

Operates as a bank holding company for Origin Bank that provides banking and financial services to small and medium-sized businesses, municipalities, and retail clients in Texas, Louisiana, and Mississippi.

• Expansion in new Southeast market including regulatory approval for Mobile and Fort Walton Beach locations, is expected to contribute to the bank's future growth by capturing market share in promising regions, ultimately influencing revenue and net interest margin positively.
  
• Focus on client selection and purging of unaligned credit relationships aligns with conservative credit philosophy, potentially enhancing loan quality and deposit relationships, which may lead to better net interest margins and reduced loan loss provisions.
  
• Investment in data analytics and strategic technology to drive more proactive decisions around product returns, compliance, and fraud detection is likely to enhance operational efficiency, improve margin efficiency, and boost profitability.
  
• Management's emphasis on maintaining a diversified and conservative CRE portfolio, as demonstrated by strategic shifts within the portfolio and monitoring overall exposure, is designed to manage risk effectively while seeking growth opportunities, which could positively impact loan portfolio quality and earnings.
  
• Ongoing efforts to stabilize deposit mix and manage deposit costs, especially in an environment of expected easing by the Fed, could lead to improvements in net interest margin and overall financial performance through careful balance sheet management.

Assumptions

• Analysts are assuming Origin Bancorp's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.5% today to 21.9% in 3 years time.
• Analysts expect earnings to reach $92.8 million (and earnings per share of $2.97) by about October 2027, up from $81.4 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 14.9x on those 2027 earnings, up from 12.4x today. This future PE is greater than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The questioned activities of a recently terminated banker in the East Texas market violated bank policy by inappropriately facilitating advances among accounts, revealing potential governance and oversight weaknesses, possibly affecting trust and reputation, impacting customer relationships and earnings.
  
• A notable $0.25 hit to EPS in the second quarter related to the questionable activities indicates immediate financial impact and operational risk, potentially affecting short-term profitability and investor confidence.
  
• Ongoing legal and external accounting expenses related to resolving the questioned activities hint at elevated noninterest expenses in the near term, potentially impacting net margins.
  
• The strategic focus on client selection and exiting certain lending relationships for better alignment with the bank's conservative credit philosophy and deposit growth could lead to slower loan growth, affecting future revenue expansion.
  
• The bank's net interest margin experienced a slight decline, and while there are plans for margin expansion, unforeseen pressures on deposit costs or less favorable asset repricing could challenge margin improvement efforts, impacting net interest income.

Valuation

• The analysts have a consensus price target of $37.8 for Origin Bancorp 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 2027, revenues will be $423.5 million, earnings will come to $92.8 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 5.8%.
• Given the current share price of $32.46, the analyst's price target of $37.8 is 14.1% 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.