Expansion Into Texas And Investment In Argent Financial Will Improve Future Operations

Key Takeaways

• Strategic cost reductions and resource reallocation aim to boost margins and revenue, leveraging efficiency and market expansion.
  
• Investment and margin strategies are set to enhance earnings and offset regulatory impacts, targeting top quartile ROA performance.
  
• Strategic asset constraints, loan reduction plans, and closure of banking centers may hinder revenue growth, while credit quality concerns could further impact earnings.

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.

• The strategy Optimize Origin focuses on productivity, delivery, and efficiency, including measures such as branch closures and banker profitability analysis, which are expected to enhance earnings through cost reductions of approximately $4.6 million and $6.7 million, respectively, impacting net margins.
  
• The reallocation of less profitable resources towards higher-producing bankers, alongside geographical expansion in Texas and Southeast, is anticipated to drive high single-digit loan growth in 2025, enhancing future revenue performance.
  
• The ongoing investment in Argent Financial, aiming for over 20% ownership, could lead to a change in accounting methodology that might positively influence earnings, potentially offsetting future regulatory impacts, such as the Durbin Amendment.
  
• Margin expansion is expected through improved liquidity management and strategic debt repurchase, anticipated to elevate the net interest margin to 3.45% by the fourth quarter of 2025, directly benefiting net interest income and overall earnings.
  
• Opportunities identified by a third-party benchmarking study, alongside plans to improve mortgage profitability, are poised to further enhance operational efficiency and revenue generation, supporting a target of achieving top quartile return on assets (ROA) performance among peers.

Origin Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Origin Bancorp's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.0% today to 27.6% in 3 years time.
• Analysts expect earnings to reach $125.3 million (and earnings per share of $3.98) by about April 2028, up from $76.5 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 12.5x on those 2028 earnings, up from 12.4x today. This future PE is greater than the current PE for the US Banks industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 0.64% 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.

Origin Bancorp Future Earnings Per Share Growth

Risks

• The strategic decision to remain under $10 billion in assets has led to constraints on loan growth, potentially impacting revenue and earnings growth in the near term.
  
• The company's focus on client selection and the planned reduction of loans may lead to short-term reductions in loan balances, affecting interest income and earnings.
  
• The decision to close eight banking centers, while aimed at reducing expenses, could disrupt local customer relationships and deposit growth, impacting revenue.
  
• Continued reliance on strategic transformations like Optimize Origin creates execution risk, which might not deliver the anticipated benefits, affecting net margins.
  
• Increases in classified and nonperforming loans raise concerns about credit quality and potential credit losses, which could negatively influence earnings.

Valuation

• The analysts have a consensus price target of $42.0 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 2028, revenues will be $454.0 million, earnings will come to $125.3 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $30.37, the analyst price target of $42.0 is 27.7% 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.