10-Q: Origin Bancorp Q3 Net Income Plunges Amid Fraud-Related Provision

Origin Bancorp, Inc. reported a significant decrease in net income for the third quarter of 2025, primarily driven by a substantial increase in provision for credit losses related to suspected borrower fraud.

Summary

• Net income decreased by $10.0 million (53.6%) to $8.6 million for the three months ended September 30, 2025, compared to $18.6 million for the same period in 2024.
• Diluted earnings per common share was $0.27 for Q3 2025, down from $0.60 in Q3 2024.
• The provision for credit losses surged to $36.8 million for Q3 2025, an increase of $32.2 million from Q3 2024, primarily due to $28.4 million in net charge-offs related to suspected borrower fraud impacting the Tricolor Holdings, LLC loan relationship.
• Net interest income increased by $8.9 million (11.9%) to $83.7 million for Q3 2025, driven by a $17.0 million decrease in interest expense, partially offset by an $8.1 million decrease in total interest income.
• The fully tax equivalent net interest margin (NIM-FTE) expanded by 47 basis points to 3.65% for Q3 2025, primarily due to an 82 basis point reduction in rates paid on interest-bearing liabilities.
• Total deposits increased by $108.7 million (1.3%) to $8.33 billion at September 30, 2025, with strong growth in money market and noninterest-bearing deposits.
• Book value per common share increased by $2.52 (6.9%) to $39.23 at September 30, 2025, from $36.71 at December 31, 2024.
• The company repurchased 265,248 shares of its common stock for $9.5 million in Q3 2025, and 401,647 shares for $13.9 million year-to-date 2025.
• Increased ownership in Argent Financial Group, Inc. above 20% resulted in the application of the equity method of accounting, leading to a $7.0 million fair value adjustment gain and $1.2 million equity method investment income in Q3 2025.
• The 'Optimize Origin' initiative aims for a greater than 1% return on average assets (ROAA) run rate by Q4 2025 and an ultimate target of top quartile ROAA, involving branch consolidation, headcount reduction, securities optimization, capital optimization, cash/liquidity management, and mortgage restructuring.

Sentiment

Score: 4

Explanation: While the company demonstrated strong net interest income growth, NIM expansion, and deposit growth, and is proactively addressing efficiency through its 'Optimize Origin' initiative, the significant decline in net income and the substantial increase in provision for credit losses due to fraud are major concerns. The unresolved fraud and ongoing litigation introduce considerable uncertainty and risk, tempering overall sentiment despite some positive operational aspects.

Positives

• Net interest income increased by $8.9 million (11.9%) for the three months ended September 30, 2025, and by $22.3 million (10.0%) for the nine months ended September 30, 2025.
• The fully tax equivalent net interest margin (NIM-FTE) expanded by 47 basis points to 3.65% for Q3 2025, driven by an 82 basis point reduction in interest-bearing liability rates.
• Total deposits increased by $108.7 million (1.3%) to $8.33 billion at September 30, 2025, with money market deposits increasing by $470.8 million and noninterest-bearing deposits by $99.7 million.
• Book value per common share increased by $2.52 (6.9%) to $39.23 at September 30, 2025.
• Equity method investment gain of $7.0 million and income of $1.2 million from Argent Financial Group, Inc. due to increased ownership and fair value adjustment.
• Swap fee income increased by $1.3 million for Q3 2025 and $3.1 million for YTD Q3 2025, attributed to a favorable interest rate environment and increased marketing focus.
• Other income increased by $2.2 million for Q3 2025 and $1.9 million for YTD Q3 2025, primarily due to $2.1 million in insurance recoveries related to previously disclosed questioned activity.
• Successful bond portfolio optimization strategy involved selling $215.8 million of lower-yielding securities (2.60% yield) and purchasing $201.8 million of higher-yielding securities (5.23% yield) year-to-date Q3 2025.
• The average cost of interest-bearing deposits declined by 73 basis points to 3.21% for the nine months ended September 30, 2025.
• The company and Origin Bank met all capital adequacy requirements, with the Bank categorized as well capitalized, including a Common Equity Tier 1 Capital to Risk-Weighted Assets ratio of 13.59% for the Company and 12.93% for the Bank at September 30, 2025.
• A new stock repurchase program was authorized in July 2025 for up to $50 million of outstanding common stock.

Negatives

• Net income decreased by $10.0 million (53.6%) to $8.6 million for Q3 2025 and by $16.5 million (26.6%) to $45.7 million for YTD Q3 2025.
• Provision for credit losses increased significantly by $32.2 million to $36.8 million for Q3 2025, primarily due to $28.4 million in net charge-offs related to suspected borrower fraud (Tricolor Holdings, LLC).
• Net charge-offs increased by $21.9 million to $31.4 million for Q3 2025 and by $21.4 million to $36.4 million for YTD Q3 2025.
• Nonperforming loans held for investment (LHFI) increased by $13.3 million to $88.3 million at September 30, 2025, with the ratio of nonperforming LHFI to total LHFI rising to 1.17% from 0.99%.
• A $14.3 million loss on sales of securities, net, was recognized year-to-date Q3 2025 as a result of the bond portfolio optimization strategy.
• Equity method investment (loss) income decreased by $3.6 million for YTD Q3 2025, including a $3.3 million loss on one limited partnership investment.
• Mortgage banking revenue decreased by $2.4 million for YTD Q3 2025, primarily due to the sale of substantially all mortgage servicing rights asset during YTD Q3 2024.
• Construction/land/land development loans decreased by $248.2 million (28.7%) and commercial and industrial loans decreased by $82.9 million (4.1%) at September 30, 2025.
• Subordinated indebtedness decreased by $70.2 million (43.9%) due to redemptions, reducing a source of funding.
• Average interest-bearing deposit balances declined by $316.2 million for Q3 2025, and average time deposit balances decreased by $650.2 million for Q3 2025 and $636.3 million for YTD Q3 2025.
• Bank full-time equivalent (FTE) employees decreased to 860 at September 30, 2025, from 929 at September 30, 2024, partly due to the 'Optimize Origin' initiative, indicating cost-cutting measures.

Risks

• Economic uncertainty or a deterioration in economic conditions or slowdowns in economic growth in the United States generally, and particularly in the market areas in which the company operates and where loans are concentrated.
• Risks relating to technological change, including the adoption of new technology such as artificial intelligence by the Bank and its competitors, as well as consumer demands.
• Adverse developments in the banking industry, highlighted by high-profile bank failures, and the impact on customer confidence, liquidity, and regulatory responses (e.g., increased deposit insurance assessments, increased regulatory scrutiny).
• Ability to comply with applicable capital and liquidity requirements, including generating liquidity internally or raising capital on favorable terms.
• Fluctuating and/or volatile interest rates, capital markets, and the impact of inflation on business, financial results, and customers.
• Changes in the interest rate environment may reduce interest margins.
• Prepayment speeds, loan origination and sale volumes, charge-offs, and loan loss provisions may vary substantially from period to period.
• The credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial loans in the loan portfolio.
• The credit risks of lending activities, including the ability to estimate credit losses and the allowance for credit losses.
• Factors that can impact the performance of the loan portfolio, including real estate values and liquidity in primary market areas, the financial health of commercial borrowers, and the success of construction projects.
• Changes in the prices, values, and sales volumes of residential and commercial real estate.
• Natural disasters and adverse weather events, acts of terrorism, outbreaks of hostilities (e.g., Russia-Ukraine, Israel conflict), regional or national protests and civil unrest, widespread illness or public health outbreaks, and other matters beyond control.
• System failures, cybersecurity threats, and/or security breaches and the cost of defending against them.
• The failure to maintain an effective system of controls and procedures, including internal control over financial and non-financial reporting.
• Deterioration of asset quality.
• Risks associated with widespread inflation or deflation.
• The risks of mergers, acquisitions, and divestitures, including the ability to identify, acquire, and integrate desirable financial institutions.
• Changes in the value of collateral securing loans.
• Ability to anticipate interest rate changes and manage interest rate risk.
• The effectiveness of the risk management framework and quantitative models.
• The impact of fraud or misconduct by internal or external parties which may not be preventable, detectable, or mitigable.
• Inability to receive dividends from the bank subsidiary and to service debt, pay dividends to common stockholders, repurchase shares, and satisfy obligations.
• Changes in operation or expansion strategy or ability to prudently manage growth and execute strategy.
• Changes in management personnel.
• Ability to maintain important deposit customer relationships, reputation, or otherwise avoid liquidity risks.
• Increasing costs as the company grows and competes for deposits.
• Operational risks associated with the business.
• Increased competition in the financial services industry, particularly from regional and national institutions, as well as fintech companies.
• Level of nonperforming assets and the costs associated with resolving any problem loans, including litigation.
• Potential claims, damages, penalties, fines, and reputational damage resulting from pending or future litigation, regulatory proceedings, or enforcement actions.
• Risks related to environmental, social, and governance (ESG) strategies and initiatives.
• Changes in the utility of non-GAAP measurements and their underlying assumptions or estimates.
• Changes in the laws, rules, regulations, interpretations, or policies relating to financial institutions, as well as tax, trade, monetary, and fiscal matters.
• Periodic changes to the extensive body of accounting rules and best practices.
• Further government intervention in the U.S. financial system.
• Compliance with governmental and regulatory requirements, including the Dodd-Frank Act.
• A deterioration of the credit rating for U.S. long-term sovereign debt, actions the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and federal budget.
• The risk that the regulatory environment may not be conducive to, or may prohibit the consummation of, future mergers and/or business combinations.
• Ability to manage the risks involved in the foregoing.

Future Outlook

The company's 'Optimize Origin' initiative targets achieving a greater than 1% return on average assets (ROAA) run rate by the fourth quarter of 2025, with an ultimate goal of top quartile ROAA. This strategy involves ongoing efforts in branch consolidation, headcount reduction, securities optimization, capital optimization, cash/liquidity management, and mortgage restructuring. The Federal Reserve's recent reductions in the federal funds target rate range (a total of 150 basis points from mid-2023 to October 29, 2025) are expected to influence future loan and deposit rates, impacting the company's interest margins.

Management Comments

• The 'Optimize Origin' initiative is built on three primary pillars: Productivity, Delivery & Efficiency; Balance Sheet Optimization; and Culture & Employee Engagement.
• A near-term target of greater than a 1% return on average assets (ROAA) run rate by the fourth quarter of 2025 has been established, with an ultimate target of top quartile ROAA.
• In pursuit of the near-term target, various strategic initiatives are being executed, including branch consolidation, headcount reduction, securities optimization, capital optimization, cash/liquidity management, mortgage restructuring, and other opportunistic efficiency optimizations.
• The company is pursuing all possible recovery outcomes related to the suspected borrower fraud.
• Management believes that the company and Origin Bank met all capital adequacy requirements, including the capital buffer requirement, at September 30, 2025, and December 31, 2024.
• Management continues to monitor asset sensitivity and evaluate strategies to prevent being significantly impacted by future changes in interest rates.
• At this time, management continues to believe that any ultimate loss arising from the questioned activity involving a former banker will not be material to the financial position, though there is a reasonable possibility of additional loss that cannot be estimated.

Industry Context

The banking industry is currently navigating a dynamic interest rate environment, with the Federal Reserve having reduced the federal funds target rate range by a total of 150 basis points from its mid-2023 high to October 29, 2025. This shift impacts interest margins and the cost of deposits for financial institutions. The sector also faces increased competition from regional and national institutions, as well as fintech companies, which may accelerate due to the current economic environment. Furthermore, adverse developments, such as high-profile bank failures, continue to influence customer confidence, liquidity management, and regulatory scrutiny across the industry.

Corporate Governance

Legal Proceedings

• Ongoing litigation against the bank in response to certain questioned activity involving a former banker in the East Texas market, which negatively impacted classified and nonperforming LHFI.
• An additional $1.3 million in recorded provision (net of $375,000 released) for the nine months ended September 30, 2025, primarily due to the ongoing litigation extending longer than initial expectations.
• A contingency reserve of $2.8 million was held at September 30, 2025, related to this matter.
• Total expenses associated with the questioned activity for the nine months ended September 30, 2025, were $1.2 million.
• The company received $2.1 million of related insurance recoveries during the three months ended September 30, 2025.
• Management believes any ultimate loss arising from this situation will not be material to the financial position, but there is a reasonable possibility that an additional loss may have been incurred in excess of the accrued amount, and an estimate of any potential additional loss cannot be made.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and diluted EPS, but saw an increase in book value per share. The stock repurchase program could provide support for share price. Potential for further losses from fraud and litigation introduces uncertainty.
• Employees: The 'Optimize Origin' initiative led to a reduction of approximately 94 full-time equivalent employees, indicating workforce adjustments. Stock-based compensation plans continue to be a part of employee incentives.
• Customers: May be impacted by branch consolidation efforts as part of the 'Optimize Origin' initiative. The company aims to provide personalized relationship banking.
• Creditors: Subordinated debt redemptions reduce outstanding debt obligations. The company maintains strong capital ratios, which provides a degree of security.
• Regulatory Authorities: The company remains in compliance with all applicable regulatory capital requirements and is categorized as 'well capitalized'.

Next Steps

• Continue to execute the 'Optimize Origin' initiative, focusing on branch consolidation, headcount reduction, securities optimization, capital optimization, cash/liquidity management, and mortgage restructuring.
• Redeem the remaining 4.50% subordinated notes on November 1, 2025.
• Pursue all possible recovery outcomes related to the suspected borrower fraud impacting the Tricolor Holdings, LLC loan relationship.
• Monitor asset sensitivity and evaluate strategies to mitigate future interest rate changes.
• Evaluate the impact of newly issued accounting standards, specifically ASU No. 2023-09 and ASU No. 2024-03.
• Continue the stock repurchase program, with up to $40.49 million remaining under the July 2025 authorization.

Key Dates

Recommendation

While Origin Bancorp demonstrated strong net interest income growth, NIM expansion, and deposit growth, and is proactively addressing efficiency through its 'Optimize Origin' initiative, the substantial increase in provision for credit losses due to suspected borrower fraud and the resulting sharp decline in net income are significant concerns. The unresolved fraud and ongoing litigation introduce considerable uncertainty and risk, warranting a cautious 'hold' stance until the full impact and resolution of these issues become clearer. The strong capital ratios provide a buffer, but the immediate negative impacts outweigh the positive operational trends for a more aggressive recommendation.

Keywords

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