10-Q: Origin Bancorp Reports Mixed Q2 Results Amidst Loan Portfolio Challenges

Origin Bancorp's second-quarter results show a slight decrease in net income and a compression of net interest margin, alongside an increase in nonperforming assets.

Summary

• Origin Bancorp's net income for the second quarter of 2024 decreased to $21.0 million, down from $21.8 million in the same period last year.
• Diluted earnings per share were $0.67 for the quarter, compared to $0.70 in the second quarter of 2023.
• Net interest income decreased by 1.9% to $73.9 million, primarily due to increased interest expenses.
• The net interest margin (NIM) was 3.17%, a slight increase of one basis point compared to the same period last year, but would have been 3.22% without a $1.2 million reversal of accrued interest.
• Total loans held for investment (LHFI) increased by 3.9% to $7.96 billion, with mortgage warehouse lines of credit contributing significantly to the growth.
• Total deposits increased by 3.1% to $8.51 billion, with brokered deposits and money market deposits showing notable growth.
• Noninterest income increased by 43.7% to $22.5 million, primarily due to a $5.2 million gain in the fair value of equity investments.
• Noninterest expense increased by 9.3% to $64.4 million, driven by higher salaries and employee benefits, and a $1.2 million loss contingency.
• The provision for credit losses increased to $5.2 million, up from $4.3 million in the same quarter last year, due to a $3.2 million provision related to questioned activity involving a former banker.
• Nonperforming LHFI increased to $75.8 million, up from $30.1 million at the end of 2023, with the increase primarily driven by five loan relationships related to the questioned loan activity.

Sentiment

Score: 4

Explanation: The document presents mixed results with some positive growth in loans and deposits, but the negative impacts of rising interest expenses, increased nonperforming assets, and a loss contingency related to a former banker's actions, lead to a negative sentiment.

Positives

• Total loans held for investment (LHFI) increased by 3.9% to $7.96 billion.
• Total deposits increased by 3.1% to $8.51 billion.
• Noninterest income increased by 43.7% to $22.5 million, primarily due to a $5.2 million gain in the fair value of equity investments.
• Book value per common share was $35.23 at June 30, 2024, reflecting an increase of $0.93, or 2.7%, compared to December 31, 2023.
• Stockholders equity was $1.10 billion at June 30, 2024, reflecting an increase of $33.0 million, or 3.1%, compared to December 31, 2023.

Negatives

• Net income decreased by 3.5% to $21.0 million for the second quarter of 2024.
• Net interest income decreased by 1.9% to $73.9 million.
• The net interest margin (NIM) was 3.17%, a slight increase of one basis point compared to the same period last year, but would have been 3.22% without a $1.2 million reversal of accrued interest.
• Noninterest expense increased by 9.3% to $64.4 million.
• The provision for credit losses increased to $5.2 million.
• Nonperforming LHFI increased to $75.8 million.
• The company experienced a $1.2 million reversal of accrued interest due to questioned activity involving a former banker.

Risks

• The company is facing increased credit risk due to a rise in nonperforming loans, primarily driven by a questioned activity involving a former banker.
• The company's net interest margin is under pressure due to rising interest expenses.
• The company is experiencing increased noninterest expenses, including salaries and employee benefits, and a loss contingency.
• The company is exposed to interest rate risk, which could impact net interest income and fair value of equity.
• The company is subject to regulatory capital requirements, and failure to meet these requirements could lead to regulatory actions.
• The company is exposed to potential losses on loans previously sold due to loan foreclosures and mortgage loan putback expenses.

Future Outlook

The company continues to monitor economic indicators and federal funds rate projections for informed decision-making, and expects professional fees to be elevated for the remainder of the 2024 fiscal year due to the questioned activity involving a former banker.

Management Comments

• Management believes that the unrealized losses detailed in the securities section are due to noncredit-related factors, including changes in interest rates and other market conditions.
• Management believes that any ultimate loss arising from the situation with the former banker will not be material to our financial position.
• Management believes, at June 30, 2024, and December 31, 2023, that the Company and the Bank met all capital adequacy requirements to which they are subject, including the capital buffer requirement.

Industry Context

The results reflect the challenges faced by regional banks in a rising interest rate environment, including increased funding costs and potential credit quality issues. The company's strategic focus on offering attractive returns to depositors while closely monitoring economic indicators and federal funds rate projections is consistent with industry trends.

Comparison to Industry Standards

• The company's net interest margin of 3.17% is within the range of other regional banks, but the compression of the margin due to rising deposit costs is a common trend.
• The increase in nonperforming assets is a concern, and the company's ratio of 0.95% is higher than some of its peers, indicating potential credit quality issues.
• The company's loan growth of 3.9% is moderate compared to some other banks, but the increase in mortgage warehouse lines of credit is notable.
• The company's deposit growth of 3.1% is in line with industry trends, but the shift from noninterest-bearing to interest-bearing deposits is a common challenge.
• The company's increase in noninterest income of 43.7% is higher than some of its peers, but this is primarily due to a one-time gain in the fair value of equity investments.
• The company's increase in noninterest expense of 9.3% is higher than some of its peers, and the company is facing increased professional fees due to the questioned activity involving a former banker.

Legal Proceedings

• One of the relationships impacted by the questioned activity filed a lawsuit against the Bank.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the increase in nonperforming assets.
• Employees may be affected by the increased scrutiny and potential changes in internal controls.
• Customers may be concerned about the stability of the bank due to the questioned activity involving a former banker.
• Creditors may be concerned about the increased credit risk and potential for losses.

Next Steps

• The company will continue to monitor economic indicators and federal funds rate projections.
• The company will continue to work with a third party forensic accounting team to confirm the Banks identification and reconciliation of the questioned activity.
• The company will continue to evaluate strategies to prevent being significantly impacted by future changes in interest rates.

Key Dates

Keywords

net interest margin, loan portfolio, nonperforming assets, credit losses, interest rate risk, regulatory capital, mortgage banking, deposits, financial results, Origin Bancorp