Origin Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and period. Origin Bancorp is a Louisiana-based financial holding company operating through Origin Bank, with 42 banking centers in Louisiana, Mississippi and Texas. It reports one community-banking segment. This unaudited report covers the quarter ended March 31, 2019; comparative income and cash-flow figures are for Q1 2018, and balance-sheet comparisons are to December 31, 2018.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $42.0 million | $34.7 million, Q1 2018 |
| Net interest margin | 3.75%; 3.80% tax-equivalent | 3.61%; 3.68% tax-equivalent, Q1 2018 |
| Provision for credit losses | $1.0 million expense | $1.5 million benefit, Q1 2018 |
| Noninterest income | $11.6 million | $9.8 million, Q1 2018 |
| Noninterest expense | $35.4 million | $29.9 million, Q1 2018 |
| Net income | $14.2 million; diluted EPS $0.60 | $13.4 million; diluted EPS $0.60, Q1 2018 |
| Efficiency ratio | 65.97% | 67.06%, Q1 2018 |
| Total assets | $4.87 billion | $4.82 billion, December 31, 2018 |
| Loans held for investment, net | $3.80 billion; gross $3.84 billion | $3.75 billion net; $3.79 billion gross, December 31, 2018 |
| Total deposits | $3.90 billion | $3.78 billion, December 31, 2018 |
| Cash and cash equivalents | $111.2 million | $116.7 million, December 31, 2018 |
| FHLB advances and other borrowings | $335.1 million | $445.2 million, December 31, 2018 |
| Stockholders’ equity | $568.1 million | $549.8 million, December 31, 2018 |
| Operating cash flow | $18.3 million | $26.4 million, Q1 2018 |
Net income rose about 5.6% year over year, while net interest income increased 21.0%. The allowance for loan losses was $35.6 million, or 0.93% of loans held for investment. Nonperforming loans held for investment were $30.3 million, or 0.79% of that portfolio, versus 0.84% at year-end. The Bank’s March 31 regulatory ratios included 11.85% common equity Tier 1, 12.69% total capital to risk-weighted assets and 10.85% Tier 1 leverage; the filing says the Bank remained “well capitalized.”
Material changes and management commentary
- Net interest income increased as loan interest income rose $11.7 million, supported by loan growth and higher yields; the average yield on loans held for investment rose to 5.28% from 4.73%.
- Funding costs increased: the average rate on interest-bearing deposits rose to 1.48% from 0.90%, and the average rate on total interest-bearing liabilities increased to 1.55% from 0.97%.
- Noninterest income grew 18.4%, primarily reflecting higher insurance commissions following the July 2018 RCF acquisition. Noninterest expense grew 18.5%, chiefly from salaries and benefits, including the Houston lift-out team, RCF, and higher incentive compensation.
- Deposits increased $115.1 million from year-end, while loans held for investment grew $49.2 million. Borrowings declined $110.2 million; management attributed the reduction in short-term FHLB advances to resolution of a temporary liquidity need related to delayed municipal deposits.
- The allowance for loan losses increased from $34.2 million at year-end. Q1 2018’s credit-loss benefit reflected paydowns and improvements in certain impaired loans; Q1 2019 included provision expense.
- Management expects continued pressure on deposit costs as the company grows deposits to fund lending. It reported that modeled net interest income fell 8.9% under a 100-basis-point rate decline and 18.3% under a 200-basis-point decline, and that all modeled down-rate scenarios were outside internal policy limits. Management said it was evaluating mitigation strategies.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or growth guidance. Management expects the effective tax rate to remain below the 21% federal statutory rate, citing tax-exempt income and credits.
- Origin adopted lease accounting standard ASU 2016-02 on January 1, 2019, recording a $321,000 after-tax credit to retained earnings. Operating lease liabilities were $28.2 million at quarter-end.
- The company expects a significant change in credit-loss estimation processes from upcoming CECL adoption and anticipates a one-time opening allowance adjustment, but could not determine its amount or overall financial impact.
- Credit and market risks include borrower and collateral deterioration, economic conditions in its markets, deposit retention and pricing, loan growth, and interest-rate movements. The loan portfolio is concentrated in real estate, commercial and industrial, and mortgage warehouse lending; management noted that adverse economic conditions could result in loan losses.
- Off-balance-sheet commitments included $1.22 billion to extend credit and $50.8 million in standby letters of credit. The filing says a substantial majority of credit-line commitments may not be drawn and includes $372.0 million of unconditionally cancellable commitments.
- Management did not expect ordinary-course legal proceedings to have a material adverse effect on consolidated financial position or liquidity. No material changes to previously disclosed risk factors were reported. The company opened a Dallas/Fort Worth branch on April 1, 2019.
Important facts for investors to verify
- Confirm the original cover-page filing-status checkboxes: the supplied filing text renders “No” as checked for whether required reports had been filed during the preceding 12 months, a potentially important item that may reflect text-extraction ambiguity.
- Track deposit pricing and funding mix against loan yields, particularly given management’s stated deposit-cost pressure and modeled downside-rate exposure.
- Review subsequent asset-quality trends, charge-offs, allowance coverage and the composition of past-due and criticized loans.
- Monitor CECL implementation progress and any disclosed estimate of the transition adjustment.
- Assess growth in noninterest expenses and integration-related costs following the RCF acquisition and expansion initiatives.