Origin Bancorp, Inc. — 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Origin Bancorp is a Louisiana-based financial holding company operating primarily through Origin Bank, with 43 banking centers across Texas, Louisiana and Mississippi. Figures below are unaudited unless otherwise noted; dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $44.6 | $39.5 | $129.6 | $111.4 |
| Provision (benefit) for credit losses | $4.2 | $0.5 | $7.2 | ($0.7) |
| Noninterest income | $12.9 | $10.2 | $35.7 | $30.7 |
| Noninterest expense | $35.1 | $34.3 | $107.5 | $96.2 |
| Net income | $14.6 | $12.3 | $41.1 | $38.4 |
| Diluted earnings per share | $0.62 | $0.52 | $1.73 | $1.64 |
| Net interest margin | 3.65% | 3.70% | 3.68% | 3.67% |
- Q3 net income rose about 19% year over year; nine-month net income rose about 7%. Q3 net interest income and noninterest income were both reported as quarterly records.
- Q3 efficiency ratio improved to 60.98% from 69.06%. The quarterly margin declined five basis points year over year, while the nine-month margin was broadly stable.
- At September 30, total assets were $5.40 billion, up 11.9% from December 31, 2018. Loans held for investment were $4.19 billion, up 10.5%; deposits were $4.28 billion, up 13.2%. Noninterest-bearing deposits increased 21.4%.
- Cash and cash equivalents were $308.8 million, compared with $116.7 million at year-end 2018. For the nine months, operating cash flow was $39.0 million, investing cash outflow was $315.4 million, and financing cash inflow was $468.5 million; cash increased $192.1 million.
- Reported FHLB advances and other borrowings were $419.7 million; junior subordinated debentures were $9.7 million. Stockholders’ equity was $588.4 million, up 7.0% from year-end.
- Regulatory capital remained above stated requirements. At September 30, the Company reported CET1 of 11.43% and total capital of 12.45%; the Bank reported CET1 of 11.25% and total capital of 12.08%, and was classified as well capitalized.
Material changes and credit quality
- Loan growth and higher loan yields were the main drivers of higher net interest income. Q3 interest income on loans increased, while deposit pricing and higher average borrowings increased funding costs. The average rate paid on interest-bearing deposits rose to 1.59% from 1.16% in Q3 2018.
- Noninterest income increased 25.8% in Q3, supported by swap fees, mortgage banking, service charges and improved limited-partnership results. For the nine months, insurance commission income also benefited from the 2018 RCF insurance-agency acquisition.
- Q3 provision expense increased to $4.2 million, primarily reflecting deterioration and a write-down in one commercial loan relationship, plus loan growth. Q3 net charge-offs were $3.0 million, including a roughly $3.0 million charge-off tied to that relationship; nine-month net charge-offs were $3.1 million.
- Nonperforming loans held for investment were $31.5 million, or 0.75% of such loans, versus 0.84% at year-end. The allowance was $37.1 million, or 0.89% of loans; coverage of nonperforming loans held for investment was 117.97%. The company cited overall credit quality improvement but disclosed the material single-relationship charge-off.
- Noninterest expense increased 11.8% for the nine months, including higher compensation, data processing, loan-related legal costs and expenses associated with branch expansion and the RCF acquisition. A $1.0 million FDIC insurance-fund benefit reduced 2019 regulatory-assessment expense.
- Available-for-sale securities declined to $492.5 million from $575.6 million at year-end. Accumulated other comprehensive income improved to $6.7 million from a $2.5 million loss, principally reflecting securities valuation changes.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management said deposit-cost pressure may continue as deposits grow to fund lending, particularly in higher-cost Texas markets, and noted use of brokered deposits.
- Management reported that the $350 million in long-term FHLB advances had 15-year final maturities and were callable beginning in Q4 2019 and quarterly thereafter. The advances were used to replace higher-cost liabilities and fund higher-yielding assets.
- Interest-rate simulation showed estimated one-year net interest income increasing 7.7% under an immediate +100 basis-point shock and decreasing 7.5% under -100 basis points; the filing notes that certain falling-rate scenarios were outside internal policy limits. Results depend on uncertain modeling assumptions.
- The company had approximately $1.42 billion of LIBOR-indexed loans, including loans maturing after 2021. It warned that the benchmark transition could create financial, operational, legal and compliance risks.
- The company expected to adopt CECL on January 1, 2020 and anticipated a one-time cumulative adjustment to the allowance, but could not yet estimate its size or overall financial impact.
- Mortgage servicing rights fell to $19.9 million from $25.1 million at year-end; a $6.8 million nine-month valuation adjustment was recorded, reflecting changes including mortgage prepayments. The company also disclosed $1.44 billion in off-balance-sheet commitments to extend credit and standby letters of credit.
- In July 2019 the board authorized repurchases of up to $40 million of common stock. The company repurchased 300,000 shares for approximately $10.1 million in August, leaving about $29.9 million available under the program. Management reported no material adverse effect expected from ordinary-course legal proceedings.
Important facts for investors to verify
- Whether loan growth can continue without further deterioration, particularly given the commercial relationship charge-off and the $73.0 million remaining exposure to the restaurant industry.
- Whether deposit costs and borrowing costs continue to rise relative to loan yields, and how falling-rate conditions affect net interest income and margins.
- The composition and funding terms of deposits, borrowings and callable FHLB advances, along with liquidity needs and credit-line drawdowns.
- The adequacy of the allowance and the eventual CECL transition adjustment, including its effect on earnings and capital.
- Progress on LIBOR fallback provisions for indexed loans and other contracts, and the potential impact of replacement benchmarks.
- The sustainability of noninterest income and expense trends, including mortgage servicing valuations, swap activity, acquisition-related costs and the pace of share repurchases.