Executive Summary / Key Takeaways

• Origin Bancorp has launched "Optimize Origin," a strategic initiative aimed at achieving sustainable elite-level financial performance, targeting a Return on Average Assets (ROAA) run rate of 1% or greater by the fourth quarter of 2025.
• First Quarter 2025 results demonstrated progress, with Net Interest Income increasing 7.0% year-over-year to $78.5 million and the Net Interest Margin (FTE) expanding by 25 basis points to 3.44%, driven by a significant reduction in deposit costs.
• Key actions under "Optimize Origin" are already contributing, including branch consolidations, banker profitability optimization, a securities portfolio trade, and the redemption of $70 million in subordinated debt, expected to drive approximately $23.4 million in annual pre-tax pre-provision earnings improvement.
• The company is strategically managing its balance sheet, successfully increasing deposits (up 1.4% sequentially, with brokered deposits significantly reduced) to fund expected mid-to-high single-digit loan growth in 2025, while maintaining strong capital ratios well above well-capitalized thresholds.
• While facing macroeconomic uncertainties and managing the impact of a specific operational issue involving a former banker, management expresses confidence in its credit quality, enhanced controls, and ability to leverage its dynamic geographic footprint and relationship-focused model for future growth and profitability.

Setting the Scene: A Community Bank's Evolution and Strategic Ambition

Origin Bancorp, Inc., the holding company for Origin Bank, traces its roots back to 1912 in Choudrant, Louisiana, built on a culture of personalized relationship banking. Over its long history, the institution has grown significantly, particularly since going public in 2018 with approximately $4.2 billion in assets. This post-IPO period saw strategic expansion across Texas, including the vital Dallas/Fort Worth and Houston markets, and increased presence in Louisiana and Mississippi. A notable step in this evolution was the merger with BTH Holdings, Inc. in August 2022, which further solidified its footprint, particularly in East Texas, and presented opportunities for operational efficiencies.

Operating primarily through its single community banking segment, Origin provides a comprehensive suite of financial services to businesses, municipalities, and individual clients. Its revenue is largely derived from interest on loans and investments, complemented by noninterest income from services like insurance and mortgage banking. The company's geographic footprint, stretching from Texas across North Louisiana and Mississippi to South Alabama and the Florida Panhandle, positions it in regions experiencing significant population and economic growth.

In recent years, Origin has strategically navigated the complexities of approaching and preparing for the $10 billion asset threshold, which triggers increased regulatory requirements, including the Durbin Amendment. Management made a deliberate decision to manage growth to remain below this threshold for a period, a strategy aimed at delaying the Durbin impact and strengthening the balance sheet. This phase involved a heightened focus on client selection, sometimes prioritizing relationship fit and profitability over sheer loan volume, and enhancing internal processes.

Recognizing the need to elevate profitability to peer-leading levels, Origin launched the "Optimize Origin" strategic initiative in late 2024. This comprehensive plan is designed to deliver sustainable elite financial performance by focusing on productivity, delivery and efficiency, balance sheet optimization, and culture and employee engagement. The stated goal is ambitious: achieve a 1% or greater ROAA run rate by the fourth quarter of 2025, with an ultimate target of reaching the top quartile of its peers. This initiative marks a pivotal moment, shifting the company's emphasis to maximizing returns while preparing for future growth beyond the $10 billion mark.

Competitive Dynamics and Differentiated Approach

Origin operates within a competitive landscape dominated by regional banks and increasingly influenced by larger national institutions and agile fintech firms. Key regional competitors like Regions Financial (RF), Hancock Whitney (HWC), Prosperity Bancshares (PB), and Trustmark Corporation (TRMK) offer similar core banking services across overlapping geographies.

Origin differentiates itself through its deep-rooted community banking model and a focus on personalized relationships. While larger peers like RF and PB benefit from greater scale and potentially more extensive digital infrastructure, Origin leverages its localized presence to foster stronger customer loyalty. This approach, particularly effective in its diverse footprint spanning both dynamic metro areas and more rural communities, allows Origin to potentially capture market share by offering tailored services and building long-term relationships that larger, more standardized institutions may struggle to replicate. The company's strategic focus on client selection, even exiting relationships that do not align with its desired return profile, underscores this commitment to profitable, relationship-driven growth, contrasting with strategies solely focused on volume.

In terms of technology, Origin is investing strategically to enhance efficiency and customer experience. Its Robotics Process Automation (RPA) platform is a notable operational detail, saving thousands of hours of manual work annually and contributing to efficiency gains. Investments in strategic technology aim to improve automation, process management, pricing decisions, and digital delivery, including mobile banking features like peer-to-peer payments. While some larger competitors may possess more advanced or widely adopted digital platforms, Origin's targeted technology investments support its relationship model by enhancing service delivery and internal efficiency, aiming for a competitive edge in operational cost per unit or transaction speed in specific areas. The ongoing third-party benchmarking study is intended to further identify areas for process improvement and efficiency gains relative to peers.

However, Origin faces competitive disadvantages related to its smaller scale compared to national and larger regional banks, which can impact operating costs and access to capital markets. The pace of technological innovation among larger peers and fintech can also pose a challenge, potentially eroding market share in certain transaction-based services if Origin cannot keep pace with digital offerings and pricing.

Financial Performance and Operational Momentum

Origin's First Quarter 2025 results provide tangible evidence of the "Optimize Origin" strategy beginning to yield results, particularly in core profitability metrics. Net income for the quarter was $22.4 million, or $0.71 per diluted share, compared to $22.6 million, or $0.73 per diluted share, in the prior year quarter. While net income saw a slight year-over-year decrease, the underlying trends, especially in net interest income and margin, signal positive momentum.

Net interest income for the three months ended March 31, 2025, increased by $5.1 million, or 7.0%, to $78.5 million compared to $73.3 million in the same period last year. This expansion was primarily driven by an $11.3 million decrease in total interest expense, significantly outpacing the $6.2 million decrease in total interest income. The average rate paid on total interest-bearing liabilities declined by a notable 58 basis points to 3.30% in Q1 2025 from 3.88% in Q1 2024. This reduction in funding costs was the primary driver behind the 25 basis point expansion in the fully tax-equivalent net interest margin (NIM-FTE), which rose to 3.44% in Q1 2025 from 3.19% in Q1 2024.

Interest income on loans decreased by $10.1 million year-over-year, influenced by lower average balances and yields, as well as one less calendar day. However, this was partially offset by increased interest income from interest-earning deposits in banks (up $2.8 million) and investment securities (up $1.3 million). The improvement in securities income reflects the impact of a bond portfolio optimization strategy executed in the fourth quarter of 2024, where lower-yielding securities were replaced with higher-yielding ones, contributing to asset repricing benefits.

Noninterest income decreased by $1.7 million, or 9.6%, to $15.6 million in Q1 2025, primarily due to a $1.8 million decrease in limited partnership investment income (impacted by fair value adjustments) and a $1.5 million decrease in mortgage banking revenue. The decline in mortgage banking revenue largely stemmed from the sale of substantially all of the company's Mortgage Servicing Rights (MSR) asset in Q1 2024, resulting in lower servicing revenue and related adjustments compared to the prior year. Partially offsetting these decreases was a $0.5 million increase in other income, including an expected insurance settlement recovery on other real estate owned and interest received related to an employee retention credit.

Noninterest expense increased by $3.4 million, or 5.7%, to $62.1 million. This rise was mainly attributable to a $1.9 million increase in salaries and employee benefits (reflecting higher incentive compensation, merit increases, and medical costs), a $1.9 million increase in occupancy and equipment expense (tied to the strategic profitability initiative, including branch consolidation and higher depreciation), and a $0.5 million increase in office and operations expense (driven by check and card fraud/disputes). These increases were partially mitigated by decreases in intangible asset amortization, regulatory assessments, advertising, and loan-related expenses (lower subservicing costs post-MSR sale).

Total assets grew modestly by 0.7% to $9.75 billion at March 31, 2025, compared to December 31, 2024, primarily due to an increase in available-for-sale securities, as deposit growth outpaced loan growth during the quarter. Total deposits increased by 1.4% sequentially to $8.34 billion, with non-brokered deposits growing by 1.8%. Money market deposits saw a significant increase, while time deposits and interest-bearing demand deposits decreased. Noninterest-bearing deposits experienced a slight sequential decline due to seasonality but showed modest year-over-year growth, stabilizing around 23% of total deposits. The company successfully reduced brokered deposits, leveraging excess liquidity, reaching their lowest level since Q4 2022. The loan-to-deposit ratio (excluding mortgage warehouse) remained below the 90% target, indicating ample liquidity.

Total loans held for investment (LHFI) saw a modest increase of 0.2% sequentially to $7.59 billion. Excluding mortgage warehouse lines, LHFI decreased by 0.6%. This reflects the ongoing strategic focus on client selection, which has involved exiting relationships that do not fit the desired return profile, even if performing. Over the past four quarters, the company has achieved approximately $200 million in targeted reductions through this initiative.

Credit quality indicators showed some fluctuation. Nonperforming LHFI increased by $6.4 million sequentially to $81.4 million, representing 1.07% of total LHFI, up from 0.99% at December 31, 2024. This increase was primarily driven by two specific loan relationships, partially offset by a payoff. Classified loans also increased sequentially, driven by downgrades in certain relationships, again partially offset by payoffs. Net charge-offs for Q1 2025 were $2.7 million, or 0.15% annualized of average LHFI, slightly higher than the prior year quarter but better than management's expectations. The Allowance for Loan Credit Losses (ALCL) to nonperforming LHFI decreased to 113.08% at March 31, 2025, from 121.41% at December 31, 2024, primarily due to the increase in nonperforming loans.

A specific factor impacting credit metrics in recent quarters has been questioned activity involving a former banker in the East Texas market. This operational issue, which violated bank policy, led to certain loans being placed on non-accrual status and impacted credit metrics and provision expense in Q2 and Q3 2024. While management views this as a non-credit event and expects any ultimate loss to be immaterial, it has resulted in a contingency reserve ($2.8 million at March 31, 2025) and associated expenses. Management is confident its controls identified the issue post-acquisition integration and that the impact is contained to a single former banker's actions.

Capital levels remain robust, with the company and the bank subsidiary exceeding all regulatory capital requirements and the bank classified as well-capitalized. The tangible book value per common share increased sequentially for the tenth consecutive quarter, and the TCE ratio improved to 10.6%. The redemption of $70 million in subordinated debentures in Q1 2025, part of the "Optimize Origin" initiative, reduced outstanding debt and is expected to result in approximately $2.1 million in annualized future net interest expense savings. This action, along with strong internal capital generation, provides flexibility for future capital deployment.

Outlook and Strategic Trajectory

Management's outlook for 2025 is firmly centered on executing the "Optimize Origin" strategy to achieve its profitability targets. The near-term goal is a 1% or greater ROAA run rate by the fourth quarter of 2025, driven by the identified pre-tax pre-provision benefits of approximately $23.4 million annually from actions already underway or recently completed.

Loan growth is expected to reaccelerate to a mid-to-high single-digit range in 2025, funded by continued deposit growth and existing liquidity. While macroeconomic uncertainty has led to an adjustment towards the lower end of this range, management is encouraged by building pipelines and the dynamism of their key markets. Deposit growth remains a priority, with Q1 2025 showing strong annualized growth excluding brokered deposits, positioning the company well to fund loan expansion.

The net interest margin is projected to expand further, with guidance for a NIM-FTE of 3.50% in Q4 2025 and 3.45% for the full year 2025 (plus or minus 10 basis points). This outlook assumes two Federal Reserve rate cuts in 2025, a relatively stable yield curve, and deposit betas in line with historical trends. The benefits of asset repricing and the impact of Optimize Origin initiatives (securities optimization, sub debt redemption, liquidity management) are expected to drive this margin expansion.

Noninterest expense is anticipated to decline in the latter half of 2025 compared to 2024 levels, reflecting the full impact of efficiency initiatives like branch consolidations and banker optimization. The mortgage business is undergoing restructuring to a partnership model, expected to generate approximately $1.5 million in annual pre-tax earnings improvement starting in the second half of 2025, albeit with a lower non-interest income run rate from this segment.

Beyond the initial 1% ROAA target, Origin is exploring additional levers for profitability enhancement. These include potentially increasing its ownership stake in Argent Financial, a regional wealth firm, which could change the accounting methodology and benefit fee income, and leveraging insights from the ongoing third-party benchmarking study to identify further process improvements and efficiencies. Management views these as opportunities to drive performance towards the ultimate goal of top quartile ROAA.

The company is also strategically approaching the $10 billion asset threshold. While managing growth in 2024 helped delay the Durbin impact, management is now positioned to cross this threshold, leveraging its strong capital base and operational readiness. The focus remains on profitable growth and maintaining a strong balance sheet as it becomes a larger institution.

Conclusion

Origin Bancorp is at a pivotal point, actively executing its "Optimize Origin" strategy to transition from a growth-focused regional bank to an elite financial performer. The First Quarter 2025 results demonstrate tangible progress, particularly in expanding net interest margin through disciplined deposit cost management and leveraging strategic balance sheet actions. While macroeconomic headwinds and specific operational issues present challenges, management's transparent approach, focus on client selection, and investment in efficiency initiatives are designed to build a more profitable and resilient institution. The clear targets for ROAA improvement and the identified levers for achieving them provide a compelling narrative for investors. As Origin moves towards and beyond the $10 billion asset mark, its ability to successfully integrate efficiency gains, capitalize on growth opportunities in its key markets, and navigate the competitive landscape will be critical factors determining its success in achieving its ambitious profitability goals. The ongoing execution of the Optimize Origin plan, coupled with a strong capital position and a commitment to relationship banking, forms the core of the investment thesis for OBK.