Origin Bancorp, Inc. quarterly report, Q2 FY2018

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Origin Bancorp, Inc. — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018; balance sheet compared with December 31, 2017. Origin is a Louisiana-based financial holding company operating 41 banking centers in Louisiana, Texas and Mississippi, principally through community banking.

Financial results and condition

  • Q2 earnings: Net income was $12.7 million, versus $3.8 million a year earlier; diluted EPS was $0.53, versus $0.13. Net income available to common stockholders was $11.9 million.
  • First-half earnings: Net income was $26.1 million, versus $11.1 million; diluted EPS was $1.13, versus $0.43. Net income available to common stockholders was $23.3 million.
  • Net interest income and margin: Q2 net interest income rose 16.5% to $37.2 million; reported net interest margin was 3.68%, up 30 basis points year over year (3.74% tax-equivalent). First-half net interest income rose 15.5% to $71.9 million; margin was 3.65%, up 33 basis points (3.71% tax-equivalent). Higher loan yields and loan growth more than offset higher funding costs.
  • Credit costs: Q2 provision for credit losses was $0.3 million, compared with $2.0 million in Q2 2017. First-half results included a $1.2 million benefit, versus $4.8 million of provision expense in the prior-year period. Allowance for loan losses was $34.2 million, or 1.01% of loans held for investment, down from $37.1 million, or 1.14%, at year-end.
  • Revenue and expenses: Q2 noninterest income was $10.6 million, up $5.3 million, while noninterest expense rose 4.4% to $32.0 million. First-half noninterest income was $20.4 million, up 32.3%, and expenses increased 5.8% to $61.9 million.
  • Balance sheet: Assets were $4.37 billion, up 5.2% from year-end. Loans held for investment were $3.37 billion, up 4.0%; deposits were $3.67 billion, up 4.6%. Noninterest-bearing deposits were 25.9% of deposits.
  • Funding, liquidity and capital: Cash and cash equivalents totaled $169.6 million. Cash and liquid securities were 7.1% of assets, versus 5.7% at year-end. FHLB advances and other borrowings were $139.1 million; junior subordinated debentures were $9.6 million. The Bank was reported as well capitalized, with a 12.90% total risk-based capital ratio and an 11.11% leverage ratio.
  • Cash flows, first half: Operating activities provided $30.0 million; investing activities used $247.6 million; financing activities provided $200.0 million. Cash and cash equivalents decreased $17.6 million to $169.6 million.

Material changes and unusual items

  • The May IPO issued 3,045,426 company shares at $34 per share and generated approximately $94.7 million net proceeds after offering costs. The company used approximately $49.1 million to redeem all SBLF preferred stock, eliminating its 9% dividend obligation; remaining proceeds were placed in securities. Series D preferred shares were converted one-for-one into common shares.
  • Comparisons with 2017 benefit from the absence of a $7.3 million loss on energy loans held for sale recorded in Q2 2017. Q2 2018 other income also included a positive $2.0 million valuation adjustment on a common-stock investment. These items affect interpretation of reported earnings growth.
  • Mortgage banking revenue fell 50.8% in Q2 and 46.5% in the first half, primarily reflecting lower loan-sale volume and a smaller servicing portfolio. Noninterest expense growth included higher salaries and benefits, partly related to banker teams added in Houston and Shreveport.
  • Nonperforming loans held for investment increased to $26.8 million from $23.8 million at year-end; total nonperforming assets rose to $29.4 million from $24.4 million. Management attributed the increase primarily to a $7.9 million commercial real estate loan secured by a healthcare facility placed on nonaccrual following lower-than-expected occupancy.
  • On July 1, 2018, the company acquired substantially all assets of DH Reeves, LLC, issuing 66,824 common shares valued at approximately $2.7 million.

Outlook, commentary and risks

  • The filing provides no specific earnings or revenue guidance. Management cited continued development of lending and deposit relationships in Houston and Shreveport and expected its effective tax rate to remain below the statutory federal rate because of tax-exempt income and tax credits.
  • Interest-rate risk is material: the company said it was outside policy limits in certain modeled rate-shock scenarios due to asset sensitivity. Its simulation showed net interest income down 8.2% under an instantaneous 100-basis-point decline and up 30.7% under a 400-basis-point increase. Management said it was monitoring sensitivity and evaluating strategies against declining rates; model results depend on uncertain assumptions.
  • Other stated risks include deterioration in credit quality, real estate and collateral values, construction and commercial borrower performance, deposit retention and liquidity, competition, operational and regulatory risks, and interest-rate volatility. Management expects to adopt the expected-credit-loss standard in 2020 but could not yet estimate the size of the initial allowance adjustment or total impact.
  • Off-balance-sheet commitments included $1.14 billion to extend credit and $82.8 million of standby letters of credit. Management did not believe pending litigation or regulatory matters would materially adversely affect financial position or liquidity. No material changes to previously disclosed risk factors were reported.

Investor verification priorities

  • Assess the performance and collateral of the healthcare-facility loan and the trend in nonaccrual loans, impaired credits, charge-offs and reserve coverage.
  • Separate recurring earnings from the prior-year energy-loan loss and the current-period $2.0 million investment valuation adjustment; examine the sustainability of mortgage banking revenue.
  • Track deposit pricing and funding costs against loan yields and net interest margin, particularly under changing interest rates.
  • Review the IPO proceeds, preferred-stock redemption and conversion, post-IPO share count, and the DH Reeves acquisition and integration.
  • Monitor capital and liquidity, unfunded commitments, interest-rate model assumptions and the still-undetermined adoption impact of the expected-credit-loss standard.