Origin Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Origin Bancorp is a Louisiana-based bank holding company operating through Origin Bank, with 43 banking centers across Texas, Louisiana and Mississippi. The unaudited quarter and nine-month periods ended September 30, 2020 are compared with the corresponding 2019 periods; balance-sheet comparisons are to December 31, 2019. The company reported one business segment, community banking.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $50.6 million | $44.6 million | $139.7 million | $129.6 million |
| Provision for credit losses | $13.6 million | $4.2 million | $53.6 million | $7.2 million |
| Noninterest income | $18.1 million | $12.9 million | $49.3 million | $35.7 million |
| Noninterest expense | $38.7 million | $35.1 million | $113.1 million | $107.5 million |
| Net income | $13.1 million | $14.6 million | $18.8 million | $41.1 million |
| Diluted earnings per share | $0.56 | $0.62 | $0.80 | $1.73 |
- Margins and operating earnings: Q3 net interest margin was 3.14%, versus 3.65% a year earlier; tax-equivalent NIM was 3.18%, versus 3.69%. Nine-month NIM was 3.18%, versus 3.68% (tax-equivalent: 3.22%, versus 3.73%). Management reported record quarterly pre-tax, pre-provision earnings of $29.9 million, up from $22.4 million; nine-month PTPP was $75.9 million, up from $57.7 million. PTPP is a non-GAAP measure.
- Balance sheet at September 30: Total assets were $7.10 billion, up 33.4% from year-end 2019. Deposits were $5.94 billion, up $1.71 billion; loans held for investment were $5.61 billion, up $1.47 billion. The allowance for loan credit losses was $81.6 million, or 1.45% of LHFI, compared with $37.5 million, or 0.91%, at year-end 2019. Stockholders’ equity was $627.6 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $8.1 million, investing cash outflow was $1.76 billion, and financing cash inflow was $1.68 billion; cash and cash equivalents fell $69.6 million to $221.9 million. Management reported cash and liquid securities equal to 11.0% of assets and $3.32 billion of contingent liquidity sources available, including FHLB and PPPLF capacity.
- Debt and capital: FHLB advances and other borrowings totaled $360.3 million; subordinated debentures, net, were $78.6 million. The Bank’s September 30 capital ratios included 9.61% CET1, 12.00% total risk-based capital and an 8.75% leverage ratio; management stated the Bank was “well capitalized.”
Material changes versus prior periods
- Quarterly net interest income rose 13.4%, principally from lower deposit costs and higher PPP and mortgage warehouse loan income. Lower asset yields compressed NIM. The nine-month NIM and loan yields also declined year over year.
- Net income fell 10.4% in Q3 and 54.2% for the first nine months. The main pressure was the substantially higher credit-loss provision, reflecting CECL and COVID-19-related economic uncertainty. Nine-month net charge-offs were $9.4 million, compared with $3.1 million.
- Mortgage banking revenue increased to $9.5 million in Q3 from $3.1 million, and to $23.0 million for nine months from $9.0 million, supported by higher purchase and refinancing activity and lower interest rates.
- Growth included $552.3 million of PPP loans and a $742.8 million increase in mortgage warehouse lines from year-end. PPP loans were 1% loans guaranteed by the U.S. government; management expected many to be forgiven.
- Available-for-sale securities increased to $797.3 million from $501.1 million at year-end. The company said it purchased high-quality securities to support income in a low-rate environment.
- CECL adoption on January 1, 2020 increased the loan allowance by $1.2 million and reduced retained earnings by $0.8 million after tax. The company elected to defer CECL’s regulatory-capital impact under the applicable transition provisions.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said the duration and severity of COVID-19 and its economic effects remained uncertain, making targets and time frames difficult to forecast. Further deterioration could increase credit provisions and pressure earnings.
- At quarter-end, $297.1 million of loans were under COVID-related forbearance. Management identified hotel, energy, non-essential retail, restaurant and assisted living as potentially more affected sectors; their loans totaled $551.2 million, excluding PPP loans.
- Management cited continued margin pressure from low interest rates and repricing of loans. Its interest-rate simulation showed net interest income down 18.1% under an instantaneous, sustained 200-basis-point decline; the filing said this scenario was marginally outside policy limits.
- Other risks include commercial real estate and commercial borrower credit exposure, deposit and liquidity needs, and the transition away from LIBOR. About $2.29 billion of loans were LIBOR-indexed at September 30, 2020.
- Origin Bank issued $70 million of subordinated notes in February. After quarter-end, the holding company completed an $80 million subordinated-note offering in October 2020. A $475,000 reserve for a judgment currently on appeal contributed to higher other expense. Management did not expect ordinary-course legal proceedings to materially adversely affect financial position or liquidity.
- Management reported effective disclosure controls. The filing was not audited by an independent public accounting firm, as is typical for an interim 10-Q.
Important facts for investors to verify
- Reconcile reported margin figures: the financial highlights cite tax-equivalent Q3 NIM of 3.18%, while the MD&A gives GAAP NIM of 3.14% and tax-equivalent NIM of 3.18%.
- Check COVID-forbearance counts: the loan note says 233 loans totaling $297.1 million, while the MD&A says 1,298 loans totaling the same amount. The filing does not explain the differing counts.
- Confirm the COVID-affected-sector nonperforming-loan amount: the filing cites $7.1 million in one discussion and $7.3 million in another.
- Assess the allowance’s assumptions and adequacy as economic forecasts evolve, alongside loan performance in the named higher-risk sectors and the scale of PPP and warehouse lending.
- Review the impact of falling rates on margins and capital, the cost and terms of the October debt issuance, and the company’s LIBOR transition plans.