Origin Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. Origin is a Louisiana-based community banking company operating 43 banking centers across Louisiana, Texas and Mississippi.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $46.3 million | $43.0 million | $89.1 million | $85.0 million |
| Provision for credit losses | $21.4 million | $2.0 million | $39.9 million | $3.0 million |
| Noninterest income | $19.1 million | $11.2 million | $31.2 million | $22.8 million |
| Noninterest expense | $38.2 million | $37.1 million | $74.3 million | $72.5 million |
| Net income | $5.0 million | $12.3 million | $5.7 million | $26.4 million |
| Diluted EPS | $0.21 | $0.52 | $0.24 | $1.11 |
| Net interest margin | 3.05% | 3.65% | 3.21% | 3.70% |
- Quarterly pre-tax, pre-provision earnings, a non-GAAP measure, were $27.1 million versus $17.1 million; first-half results were $46.0 million versus $35.3 million.
- Mortgage banking revenue rose to $10.7 million for the quarter from $3.3 million, driven by mortgage production, refinancing activity and favorable pipeline valuation adjustments. Swap fee income also increased.
- Lower funding costs supported net interest income, but falling asset yields compressed margins. Management noted continued margin pressure could result from repricing and maturing assets.
Balance sheet, liquidity and capital
- Total assets were $6.64 billion at June 30, up 24.8% from December 31, 2019. Loans held for investment were $5.31 billion, up 28.2%; deposits were $5.37 billion, up 27.0%.
- Loan growth included $549.1 million of PPP loans, net of deferred fees and costs, and a $494.5 million increase in mortgage warehouse lines. PPP originations totaled 3,044 loans, or $563.6 million gross, supporting approximately 63,300 jobs.
- Cash and cash equivalents were $156.3 million, down from $291.5 million at year-end. Cash and liquid securities represented 9.8% of total assets, versus 8.4% at year-end. The company reported access to $3.12 billion in contingent liquidity sources, including FHLB and PPPLF availability.
- Six-month cash flows were $(15.5) million from operations, $(1.38) billion from investing and $1.27 billion from financing; net cash decreased $135.2 million. Financing reflected $1.14 billion of deposit growth and $68.8 million net proceeds from subordinated notes, among other items.
- FHLB advances and other borrowings totaled $478.3 million; subordinated debentures, net, were $78.6 million. In February, the Bank issued $70 million of 4.25% fixed-to-floating subordinated notes due 2030, qualifying as Tier 2 capital.
- Stockholders’ equity was $614.8 million. The Bank’s June 30 capital ratios were 10.12% CET1, 10.12% Tier 1 risk-based, 12.52% total risk-based and 8.75% leverage. The Bank remained “well capitalized”; ratios were lower than at year-end, while management said capital requirements were met.
Credit quality, changes and risks
- Allowance for loan credit losses increased to $70.5 million, or 1.33% of loans held for investment, from $37.5 million and 0.91% at year-end. The first-half provision reflected CECL adoption and management’s revised economic outlook for COVID-19. Net charge-offs were $7.6 million, versus $0.1 million in the first half of 2019.
- Nonperforming loans held for investment were $30.0 million, or 0.57% of loans, versus $31.1 million and 0.75% at year-end. However, 1,386 loans totaling $1.01 billion were under COVID-19-related forbearance at June 30; eligible short-term deferrals were not reported as past due or nonaccrual solely because of the deferral.
- Loans in selected COVID-sensitive sectors—including assisted living, nonessential retail, restaurants, energy and hotels—totaled $547.6 million, excluding PPP loans. Management warned that further deterioration or revised forecasts could require additional credit-loss provisions.
- CECL was adopted January 1, 2020, with a $1.2 million increase to the opening loan allowance and a $0.8 million retained-earnings reduction after related adjustments. The company elected a two-year delay of CECL’s estimated regulatory-capital impact, in addition to the existing transition period.
- Management described the pandemic’s duration and economic effects as highly uncertain and gave no specific earnings or performance guidance. It suspended share repurchases; none occurred in Q2. The filing reports no material expected adverse effect from ordinary-course legal proceedings.
- Other risks include exposure to commercial real estate, construction and commercial lending; energy-sector weakness and volatile oil prices; possible increases in delinquencies and collateral losses; funding and deposit stability; interest-rate sensitivity; and the transition away from LIBOR. Approximately $1.98 billion of loans were LIBOR-indexed, including loans maturing after 2021. The company reported it was outside policy in certain falling-rate simulations.
Most important facts for investors to verify
- How COVID-19 borrower performance, forbearance expirations and economic forecasts affect future credit provisions, charge-offs and the allowance.
- PPP forgiveness, associated deferred-fee recognition and the durability of loan and deposit growth, including mortgage warehouse activity and brokered funding.
- Whether mortgage banking revenue and elevated mortgage volume persist, and the impact of lower rates on servicing-rights valuations and net interest margin.
- Liquidity and capital resilience if economic conditions deteriorate, while considering the company’s increased borrowings and suspended repurchases.
- Progress on LIBOR contract transition and exposure to energy, commercial real estate and other COVID-sensitive sectors.