Origin Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited interim results; comparisons are with the corresponding 2022 periods unless otherwise noted. Origin is a Louisiana-based community banking company operating 61 banking centers across Texas, North Louisiana and Mississippi. The 2022 BT Holdings merger materially increased the scale of the business and affects year-over-year comparisons.
Financial performance and position
| Metric | Q2 2023 | Six months 2023 | Comparison / period-end context |
|---|---|---|---|
| Net interest income | $75.3 million | $152.4 million | Up 26.5% and 36.1%, respectively |
| Net income | $21.8 million | $46.1 million | Up 2.1% and 9.7%, respectively |
| Diluted EPS | $0.70 | $1.49 | Compared with $0.90 and $1.77, respectively |
| Net interest margin, fully tax-equivalent | 3.16% | 3.29% | Down 7 basis points year over year in Q2; up 25 basis points for six months |
| Net interest income after credit-loss provision | $71.0 million | $141.9 million | Provision was $4.3 million in Q2 and $10.5 million year to date |
| Noninterest income | $15.6 million | $32.0 million | Up 10.0% and 6.3%, respectively |
| Noninterest expense | $58.9 million | $115.6 million | Up 33.4% and 33.0%, respectively |
| Total assets | $10.17 billion at June 30 | Up $479.1 million, or 4.9%, from December 31, 2022 | |
| Total deposits | $8.49 billion at June 30 | Up $714.3 million, or 9.2%, from year-end | |
| Loans held for investment | $7.62 billion at June 30 | Up 7.5% from year-end; excluding mortgage warehouse lines, $7.09 billion, up 4.1% | |
| Cash and cash equivalents | $466.0 million at June 30 | Compared with $359.0 million at year-end | |
| Stockholders’ equity | $997.9 million at June 30 | Book value per share $32.33, up 4.6% from year-end |
Cash flow, margins and funding
- For the first half, operating activities provided $75.2 million of cash; investing activities used $397.4 million; financing activities provided $429.3 million. Cash and cash equivalents increased $107.0 million to $466.0 million.
- Higher rates lifted asset yields, but funding costs rose sharply. Q2 interest expense was $57.0 million versus $6.3 million a year earlier; the average rate paid on interest-bearing deposits was 3.05% in Q2 versus 0.29%. Management attributed the Q2 margin decline to liability costs rising faster than asset yields.
- Noninterest-bearing deposits were $2.12 billion, or 25.0% of deposits, versus $2.48 billion, or 32.0%, at year-end. Brokered time deposits increased to $677.9 million from $5.4 million. Estimated uninsured or uncollateralized deposits fell to $2.84 billion, 33.4% of total deposits, from $3.43 billion, 44.1%.
- FHLB advances and other borrowings totaled $342.9 million at June 30, down from $639.2 million at year-end; subordinated indebtedness was $196.7 million. The company reported $2.18 billion of additional FHLB borrowing capacity, $1.67 billion of discount-window capacity, and $393.4 million of securities eligible for the Federal Reserve Bank Term Funding Program.
- Company capital ratios at June 30 were 11.01% CET1, 11.19% Tier 1 risk-based, 14.11% total capital and 9.65% leverage. The Bank exceeded the regulatory “well capitalized” thresholds.
Material changes versus comparable periods
- Net interest income grew substantially with higher rates and a larger average earning-asset base. For Q2, interest income rose $66.5 million while interest expense rose $50.7 million; rate changes accounted for most of the increase in both.
- Despite higher net income, diluted EPS declined, reflecting a larger weighted-average share count after the BT Holdings merger and lower per-share earnings.
- Expense growth reflected the merger and expanded operations, including higher staffing, occupancy, acquired core-deposit intangible amortization and regulatory assessments. No merger-related expense was recorded in the first half of 2023, compared with $1.4 million in the first half of 2022.
- Mortgage banking revenue declined 40.4% in Q2 and 50.7% for the first half, as mortgage origination and sale volumes and sales margins fell. Insurance and service-charge income increased.
- Loans grew, while asset quality indicators weakened: nonperforming loans held for investment rose to $33.6 million, or 0.44% of LHFI, from $9.9 million, or 0.14%, at year-end. The allowance for loan credit losses was $94.4 million, or 1.24% of LHFI; first-half net charge-offs were $3.2 million.
- Available-for-sale securities were $1.54 billion, down from $1.64 billion at year-end. They had $195.1 million of gross unrealized losses at June 30; management attributed these to noncredit factors, principally interest rates and market conditions, and said it did not expect to be required to sell the securities before recovery.
Outlook, commentary and risks
- The filing gives no specific earnings, loan-growth, margin or other quantitative guidance. Management notes deposit pricing may continue to adjust as market rates change and that further Federal Reserve rate increases were possible.
- Management described liquidity and capital as strong amid 2023 banking-industry stress. It borrowed approximately $700 million in March and held excess cash for contingency liquidity for most of the quarter, then repaid the majority by June 30. The action added average interest-bearing assets but reduced Q2 fully tax-equivalent margin by 12 basis points.
- Key exposures include deposit competition and funding costs, interest-rate and securities-value fluctuations, economic slowdown and inflation, and credit risk in commercial real estate, construction/land development and commercial lending. Management also identifies borrower stress, collateral values, liquidity, cybersecurity, regulatory changes and natural disasters among risks.
- Interest-rate simulations estimated net interest income changes over 12 months ranging from +10.8% under an immediate +400-basis-point shock to -2.9% under a -400-basis-point shock. These are model scenarios, not forecasts; management cautions that assumptions are uncertain and actual outcomes may differ.
- All remaining LIBOR instruments transitioned to SOFR-based rates effective July 1, 2023; the company reported no material financial impact to date but noted possible customer disputes or other transition-related risks.
- Management did not expect legal proceedings, individually or collectively, to materially adversely affect consolidated financial position or liquidity. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
- Unusual items include a $471,000 gain from repurchasing $5.0 million of subordinated notes at a discount through the FDIC’s failed-bank process. No stock repurchases occurred during the quarter.
Most important facts for investors to verify
- Whether deposit mix and costs remain manageable, particularly the growth in brokered time deposits and the decline in noninterest-bearing deposits.
- Whether loan delinquencies, nonperforming loans, charge-offs and allowance requirements continue to rise, especially in commercial real estate, construction and commercial and industrial lending.
- Whether net interest margin stabilizes as deposit rates reprice and contingent liquidity funding is unwound; assess the sensitivity of earnings to rate changes.
- How much future expense growth reflects the BT Holdings merger, acquired-intangible amortization and ongoing staffing or operating costs, and whether revenue growth can absorb it.
- Whether liquidity capacity and capital ratios remain resilient under deposit outflows, loan draws and adverse economic conditions; consider the $3.05 billion of off-balance-sheet commitments and letters of credit.
- Whether the $195.1 million of gross unrealized losses on available-for-sale securities and the related accumulated other comprehensive loss affect capital, liquidity choices or the ability to avoid selling securities.