Origin Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019 unless noted. Origin is a community bank holding company operating 43 banking centers across Texas, Louisiana and Mississippi. The interim financial statements are unaudited.
Financial performance and condition
- Earnings: Net income was $0.8 million, or $0.03 per diluted share, versus $14.2 million, or $0.60 per diluted share, in Q1 2019. Pretax income was $0.3 million versus $17.2 million; an income-tax benefit of $0.4 million partly offset the decline.
- Revenue and margin: Net interest income rose 1.9% to $42.8 million; noninterest income rose 4.7% to $12.1 million. Net interest margin was 3.40% on a reported basis (3.44% tax-equivalent), versus 3.75% (3.80% tax-equivalent) a year earlier. Management cited falling asset yields and continued margin pressure.
- Credit costs: Provision for credit losses increased to $18.5 million from $1.0 million. The allowance for loan credit losses was $56.1 million, or 1.25% of loans held for investment, versus $37.5 million, or 0.91%, at year-end. Net charge-offs were $1.1 million, compared with net recoveries of $0.6 million in Q1 2019.
- Loans and asset quality: Loans held for investment grew 8.2% to $4.48 billion. Nonperforming loans held for investment were $33.0 million, or 0.74% of those loans, versus $31.1 million, or 0.75%, at year-end. Total nonperforming assets were $39.2 million.
- Liquidity and funding: Total assets increased 13.6% to $6.05 billion. Cash and cash equivalents were $560.2 million, up $268.7 million; cash and liquid securities equaled 15.4% of assets, versus 8.4% at year-end. Deposits increased 7.7% to $4.56 billion. FHLB advances and other borrowings were $716.9 million, and subordinated debentures, net, were $78.5 million. Operating cash flow was $7.7 million; investing activities used $431.5 million and financing activities provided $692.4 million.
- Capital: Stockholders’ equity was $606.6 million. Origin Bank’s common equity Tier 1 ratio was 10.68%, total capital ratio 13.02%, and leverage ratio 10.36%; the Bank remained “well capitalized.”
Material changes and unusual items
- Net income fell sharply year over year, primarily reflecting the higher credit-loss provision amid COVID-19 uncertainty and CECL adoption. CECL adoption increased the opening loan allowance by $1.2 million and reduced retained earnings by $0.8 million.
- Interest income increased modestly, but yields on interest-earning assets fell to 4.37% from 4.86%. Lower rates on interest-bearing liabilities partly cushioned the decline.
- Origin issued $70 million of 4.25% fixed-to-floating subordinated notes in February 2020; proceeds were approximately $68.9 million net and qualify as Tier 2 capital for the Bank.
- Other comprehensive income was $9.5 million, mainly from unrealized gains on available-for-sale securities. Mortgage servicing rights valuation adjustments reduced mortgage banking revenue by $5.2 million, partly offset by a $3.0 million MSR hedge impact.
- The company repurchased 30,868 shares for $0.7 million in March. It said it was not actively repurchasing shares because of pandemic-related economic uncertainty.
Outlook, commentary and risks
- Management gave no specific earnings or efficiency guidance, citing the difficulty of forecasting while the pandemic’s duration and economic effects remain uncertain. It warned that further deterioration in conditions could increase credit-loss allowances and nonperforming loans.
- At March 31, $992.7 million, or 22.2%, of loans held for investment was in sectors management identified as particularly exposed to COVID-19, including healthcare, retail, transportation, restaurants, energy and hotels. Nonperforming loans in those sectors were $23.3 million.
- After quarter-end, through April 30, the company reported 1,242 COVID-related forbearances totaling $880.2 million. It also reported approval of 2,772 PPP loans totaling $565.8 million, funded after quarter-end.
- Management cited risks from the pandemic, borrower repayment and collateral deterioration, energy-sector and oil-price volatility, deposit and liquidity pressure, cybersecurity and operational demands, and interest-rate sensitivity. Its interest-rate model estimated net interest income would increase 5.3% under an immediate +100-basis-point shock and decrease 4.9% under a −100-basis-point shock over 12 months; these are model estimates, not guidance.
- The filing said ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes to internal control other than changes related to CECL implementation.
Investor facts to verify
- How subsequent credit performance, forbearance outcomes and updated CECL forecasts affect provisions, charge-offs and nonperforming loans.
- PPP loan balances, funding and forgiveness, and the planned replacement of maturing FHLB funding if liquidity needs persist.
- Deposit stability and the availability of liquidity: reported remaining FHLB borrowing capacity was $140.2 million at March 31.
- Whether falling asset yields, low rates and the company’s asset sensitivity continue to compress net interest margin.
- Exposure to energy and other pandemic-affected sectors, and changes in collateral values or borrower conditions.
- The filing reports a $70 million note issuance and $78.5 million of subordinated debentures, net; investors should verify the components and capital treatment in the debt footnotes.