Origin Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The interim financial statements are unaudited. Origin Bancorp is a Louisiana-based financial holding company operating primarily through Origin Bank, with 43 banking centers in Louisiana, Texas and Mississippi.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $43.0 million | $37.2 million | $85.0 million | $71.9 million |
| Provision (benefit) for credit losses | $2.0 million | $0.3 million | $3.0 million | ($1.2 million) |
| Noninterest income | $11.2 million | $10.6 million | $22.8 million | $20.4 million |
| Noninterest expense | $37.1 million | $32.0 million | $72.5 million | $61.9 million |
| Net income | $12.3 million | $12.7 million | $26.4 million | $26.1 million |
| Diluted earnings per share | $0.52 | $0.53 | $1.11 | $1.13 |
- Q2 fully tax-equivalent net interest margin was 3.70%, down from 3.74% a year earlier; GAAP net interest margin was 3.65%, versus 3.68%. For the first half, fully tax-equivalent margin was 3.75%, compared with 3.71%.
- At June 30, total assets were $5.12 billion; loans held for investment were $3.98 billion, up 5.2% from year-end 2018; deposits were $3.86 billion, up 1.9%; and stockholders’ equity was $584.3 million.
- Cash and cash equivalents were $199.6 million. For the first half, operating cash flow was $28.1 million, investing cash outflow was $178.4 million, financing cash inflow was $233.3 million, and cash increased by $82.9 million.
- FHLB advances and other borrowings totaled $601.3 million on the balance sheet; junior subordinated debentures were $9.7 million. The Bank’s capital ratios remained above regulatory “well capitalized” thresholds: total capital to risk-weighted assets was 12.54% and its leverage ratio was 10.70%.
Material changes and management commentary
- Year-over-year Q2 net interest income rose 15.6%, largely from loan growth and higher loan yields. Funding costs also increased: the Q2 average rate on interest-bearing deposits rose to 1.61% from 1.01%, and total interest-bearing liability cost rose to 1.68% from 1.07%.
- Net income declined from Q2 2018 despite higher net interest income, as credit-loss provision and operating expenses increased. First-half provision expense was $3.0 million versus a $1.2 million benefit in 2018, primarily reflecting loan growth.
- Noninterest income growth included higher insurance commissions, partly reflecting the July 2018 RCF acquisition, and mortgage banking revenue. Other income declined because the prior-year period included a larger positive valuation adjustment on an equity investment.
- Noninterest expense rose 15.9% year over year in Q2 and 17.1% for the first half. Management cited acquisition and team-related staffing, salary adjustments, software implementation, and branch expansion costs.
- Nonperforming loans held for investment were 0.76% of such loans at June 30, versus 0.79% at March 31 and 0.79% a year earlier per the quarterly summary. The allowance was 0.92% of loans held for investment; nonperforming assets were 0.70% of total assets. Management said credit quality had stabilized, but acknowledged that economic or borrower deterioration could cause losses.
- Management reported deposit-cost pressure as the company grows deposits to fund lending. It had strategically reduced brokered deposits and increased short-term FHLB advances. Cash and liquid securities were 7.1% of total assets, compared with 5.0% at year-end 2018.
- No earnings or revenue guidance was provided. Management expects its effective tax rate to remain below the 21% statutory rate because of tax-exempt income and credits.
Outlook, risks, contingencies and unusual items
- The company reported no material change to previously disclosed risk factors except LIBOR transition risk. About $1.29 billion of loans were LIBOR-indexed at June 30, including loans maturing after 2021; fallback contract language and replacement-rate uncertainty could create financial, operational, legal and compliance risks.
- Interest-rate simulation estimated that a sustained parallel +100 basis-point shock would increase one-year net interest income by 6.7%, while a -100 basis-point shock would reduce it by 4.6%. These are model estimates subject to uncertain assumptions, not forecasts.
- The company was preparing for CECL adoption, expected in 2020, and anticipated a one-time opening allowance adjustment; its magnitude and overall impact were not yet determinable.
- Off-balance-sheet commitments included $1.29 billion of commitments to extend credit and $42.4 million of standby letters of credit. Management did not expect ordinary-course legal proceedings to have a material adverse effect on financial position or liquidity.
- In July 2019, the board authorized a stock repurchase program of up to $40 million and raised the quarterly dividend from $0.0325 to $0.0925 per share, payable in August. After quarter-end, the company repurchased 300,000 shares for $10.1 million. These were post-period developments, not Q2 cash uses.
- The company adopted lease accounting guidance on January 1, 2019, recording a $321,000 after-tax retained-earnings adjustment. Q2 comprehensive income also included $4.1 million of other comprehensive income, principally unrealized gains on securities.
Important facts for investors to verify
- Whether loan growth and the associated credit-loss provision remain consistent with portfolio performance, especially in commercial, construction and real-estate lending.
- Whether deposit repricing and increased FHLB funding continue to constrain net interest margin and liquidity; review the callable $250 million FHLB advance and its terms.
- How the RCF acquisition, branch openings and other expense growth affect operating leverage and future profitability.
- The company’s progress on LIBOR fallback provisions for the approximately $1.29 billion of indexed loans, and its eventual CECL allowance impact.
- The execution and capital impact of the $40 million buyback and increased dividend, including the post-quarter $10.1 million repurchase.
- Comparability of EPS: the company changed its earnings-per-share calculation method after 2018, and 2018 preferred dividends and participating securities affected common-stockholder earnings.