Origin Bancorp, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Origin is a Louisiana-based financial holding company operating 41 banking centers across Louisiana, Texas, and Mississippi. Its principal business is community banking, supplemented by mortgage banking and insurance.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets, year-end | $4.82 billion | $4.15 billion |
| Total loans held for investment, year-end | $3.79 billion | $3.24 billion |
| Total deposits, year-end | $3.78 billion | $3.51 billion |
| Net interest income | $153.5 million | $130.3 million |
| Net income | $51.6 million | $14.7 million |
| Diluted earnings per share | $2.20 | $0.50 |
| Net interest margin, GAAP | 3.69% | 3.42% |
| Net interest margin, fully tax-equivalent | 3.75% | 3.52% |
| Efficiency ratio | 67.41% | 81.93% |
- Revenue growth reflected higher loan yields and balances: average yield on loans held for investment rose to 4.96% from 4.38%. Average cost of interest-bearing deposits increased to 1.10% from 0.74%, contributing to higher funding costs.
- Provision for credit losses was $1.0 million, down from $8.3 million. Net charge-offs declined to $4.5 million from $21.7 million; the allowance for loan losses was $34.2 million, or 0.90% of loans, versus $37.1 million, or 1.14%.
- Noninterest income rose 41.3% to $41.2 million, partly because 2017 included $12.7 million of losses on non-mortgage loans held for sale. Mortgage banking revenue fell 39.1% to $9.6 million; insurance commission and fee income grew 34.9% to $9.7 million.
- Noninterest expense was nearly flat at $131.2 million. Higher salaries, marketing, and technology-related costs were largely offset by the absence of the $10.0 million 2017 ResCap litigation settlement and lower professional and loan-related expenses.
- Operating cash flow was $77.8 million; investing cash outflow was $764.9 million and financing cash inflow was $616.6 million. Cash and cash equivalents fell $70.5 million to $116.7 million.
- Borrowings increased to $445.2 million from $144.4 million, including a $250 million FHLB advance and $100 million of short-term FHLB advances. Junior subordinated debentures were $9.6 million.
- Year-end stockholders’ equity was $549.8 million. Origin Bank’s CET1, Tier 1 risk-based, total risk-based, and leverage ratios were 11.73%, 11.73%, 12.55%, and 10.81%, respectively; the Bank met the “well capitalized” standard.
Fourth-quarter results
For Q4 2018, net income was $13.2 million and diluted EPS was $0.55, compared with net income of $5.8 million and diluted EPS of $0.23 in Q4 2017. Net interest income increased to $42.1 million from $34.2 million. Provision for credit losses was $1.7 million versus $0.2 million; noninterest expense was $35.0 million versus $31.8 million.
Material changes, outlook, and risks
- Assets grew 16.1% year over year, and loans held for investment grew 16.9%, led by commercial and industrial and commercial real estate lending. The company attributed growth partly to new Houston bankers and lending teams.
- Nonperforming loans held for investment rose to $31.9 million, or 0.84% of loans, from $23.8 million, or 0.73%. Nonperforming assets increased to 0.75% of total assets from 0.59%. Management cited downgrades in three commercial relationships, including a $6.3 million healthcare-facility loan affected by lower occupancy.
- Real estate-backed loans were 60.3% of loans held for investment; the company also disclosed geographic concentration in Texas, Louisiana, and Mississippi. Management identifies local economic conditions, real estate values, commercial borrower performance, and natural disasters as material risks.
- Management describes the balance sheet as asset-sensitive. Its model estimated that a parallel 100-basis-point rate increase would raise one-year net interest income 4.9%, while a 100-basis-point decline would reduce it 6.2%. The company reported results outside internal limits in certain rate-shock scenarios.
- No specific earnings or growth guidance was provided. Management stated it would monitor growth, liquidity, and capital. The company’s strategy emphasizes organic growth and selective acquisitions.
- The July 2018 RCF insurance-agency acquisition cost $9.5 million and added $4.5 million of goodwill and $4.9 million of identifiable intangibles. The May 2018 IPO generated approximately $95.2 million net of offering expenses; the company redeemed its SBLF preferred stock and converted Series D preferred stock into common shares.
- CECL adoption was expected in 2020; management could not reasonably estimate the impact and warned it could increase the allowance for credit losses. Adoption of lease accounting in January 2019 was expected to add approximately $26 million of right-of-use assets and lease liabilities, with an immaterial retained-earnings adjustment.
- Management reported disclosure controls were effective. The filing notes that the annual internal-control assessment and auditor attestation were not included because of the transition period for newly public companies. The financial statement auditor issued an unqualified opinion.
- Management did not expect pending ordinary-course legal matters to materially affect consolidated financial position or results, while noting outcomes cannot be predicted with certainty.
Investor verification priorities
- Review the increase in nonperforming loans and assets, the healthcare-facility credit, and subsequent-period credit trends and reserve adequacy.
- Assess the sustainability of 2018 earnings growth given the unusually low provision, the absence of 2017 litigation and loan-sale charges, and reduced mortgage banking revenue.
- Verify funding-cost trends, deposit stability and composition, and the continued need for elevated FHLB borrowings following rapid loan growth.
- Examine sensitivity to interest-rate declines and the assumptions underlying management’s asset-liability simulation and mortgage-servicing-right valuations.
- Review the CECL transition estimate when available, as well as post-IPO internal-control reporting and the integration and performance of the RCF acquisition.