ORIGIN BANCORP, INC. Unless the context indicates otherwise, references in this report to "we," "us," "our," "our company," "the Company" or "Origin" refer toOrigin Bancorp, Inc. , aLouisiana corporation, and its consolidated subsidiaries. All references to "Origin Bank " or "the Bank" refer toOrigin Bank , our wholly owned bank subsidiary. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, we conduct all of our material business operations through our wholly owned bank subsidiary,Origin Bank , and the discussion and analysis that follows primarily relates to activities conducted at the Bank level. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes contained in Item 1 of this report. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and "Item 1A. Risk Factors" and in the section titled "Risk Factors" in our Annual Report on Form 10-K. We assume no obligation to update any of these forward looking statements. General We are a financial holding company headquartered inRuston, Louisiana . Through our wholly owned bank subsidiary,Origin Bank , we provide a broad range of financial services to small and medium-sized businesses, municipalities, high net worth individuals and retail clients through 43 banking centers, located fromDallas/Fort Worth, Texas acrossNorth Louisiana toCentral Mississippi , as well as inHouston, Texas . As a financial holding company operating through one segment, we generate the majority of our revenue from interest earned on loans and investments, service charges and fees on deposit accounts. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and minimize expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans, securities and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders' equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. 2020 Financial Highlights •Net income for the quarter endedJune 30, 2020 , was$5.0 million , compared to$12.3 million for the quarter endedJune 30, 2019 . •Diluted earnings per share for the quarter endedJune 30, 2020 , was$0.21 , compared to$0.52 for the quarter endJune 30, 2019 . •Provision expense was$21.4 million for the quarter endedJune 30, 2020 , compared to provision expense of$2.0 million for the quarter endedJune 30, 2019 . •Pre-tax pre-provision earnings ("PTPP")(1) hit a historic high of$27.1 million for the quarter endedJune 30, 2020 , compared to$17.1 million for the quarter endedJune 30, 2019 . PTPP(1) was$46.0 million for the six months endedJune 30, 2020 , compared to$35.3 million for the six months endedJune 30, 2019 . •Growth in total loans held for investment ("LHFI") was robust, totaling$5.31 billion atJune 30, 2020 , an increase of$1.33 billion , or 33.3%, fromJune 30, 2019 . LHFI growth, excluding Paycheck Protection Program ("PPP") loans, net of deferred fees and costs, increased$778.5 million , or 19.5%, compared toJune 30, 2019 . 45 -------------------------------------------------------------------------------- •Total deposits atJune 30, 2020 , were$5.37 billion , an increase of$1.52 billion , or 39.4%, compared to$3.86 billion , atJune 30, 2019 . •Book value per common share was$26.16 atJune 30, 2020 , compared to$24.58 , atJune 30, 2019 . •Noninterest income reached a new historic high for the quarter endedJune 30, 2020 , driven by$10.7 million in mortgage banking revenue for the current quarter compared to$3.3 million in mortgage banking revenue for the quarter endedJune 30, 2019 . •PPP loans, gross of deferred fees and costs, totaled$563.6 million , atJune 30, 2020 , supporting approximately 63,300 jobs impacted by COVID-19. (1)PTPP is a non-GAAP financial measure. A reconciliation has been included under "Non-GAAP Financial Measures" below. Recent Developments and Impact of the COVID-19 Pandemic The effects of the COVID-19 pandemic and the governmental and societal response to the virus have negatively impacted financial markets and overall economic conditions on an unprecedented scale, resulting in the shuttering of businesses and significant job loss and continues to impact individuals, households and businesses in a multitude of ways. Many businesses have begun to reopen but may be operating at limited capacity and there is ongoing uncertainty as to when economic and operating conditions will return to normalcy. The duration and severity of the pandemic remain impossible to predict, as the initial slowing of the number of COVID-19 cases nationally and in some localities has recently reversed and the potential exists for further resurgences to occur. As ofJune 30, 2020 , approximately 33% of our workforce is continuing to work remotely, relying on our technology infrastructure and systems that we have designed for resilience and security. We continue to serve our customers, successfully manage critical functions and keep our lines of business operating while supporting our employees. We have maintained social distancing measures for our employees working in our offices, implemented certain measures such as return to work screening protocols following potential exposures or subsequent to employee travel, restricted lobby access to be by appointment only, and conducted sterilization cleanings of certain of our locations. In addition to monitoring new information from governmental and health authorities and providing timely communications to our employees, we implemented a hotline to assist our employees, as well as a temporary pandemic Paid Time Off policy. We are proactively offering a range of policies and programs to accommodate customer hardship across our business. In March andApril 2020 ,President Trump signed into law two relief bills, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the Paycheck Protection Program and Health Care Enhancement Act (the "PPP/HCE Act"), which are intended to provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. Among the numerous provisions contained in the CARES Act is the creation of the$349 billion PPP that provides federal government loan forgiveness forSmall Business Administration ("SBA") loans for small businesses, which includes some of our customers, to pay certain employee compensation and other basic expenses. The PPP/HCE Act included an additional$310 billion for PPP funding. As a result, we established a SBA Paycheck Protection Program task force and approved over 3,000 in loans as ofJune 30, 2020 , under this program as a result of the CARES Act. We also have offered forbearance (90 day extensions) and modification agreements to our customers affected by the COVID-19 pandemic. We continue to track pandemic impacted relationships and general economic conditions in our markets. In the second quarter of 2020, the deteriorating economic outlook affected our earnings and caused us to significantly increase our allowance for credit losses during the first half of 2020. We believe that certain sectors of theU.S. economy may be more affected than others by the ongoing economic impact of the COVID-19 pandemic. Some of the sectors that may experience a more significant impact include assisted living, nonessential retail, restaurants, energy and hotels. Excluding PPP loans, atJune 30, 2020 , we had$547.6 million , or 11.5%, of our LHFI invested in these sectors. We continue to monitor our loans, particularly in these sectors. Our allowance for credit losses on loans as a percentage of total loans LHFI was 1.33% atJune 30, 2020 , compared to 0.91% and 0.92% atDecember 31, 2019 , andJune 30, 2019 , respectively. As more information becomes available, including our ongoing evaluation of the economic impact of the COVID-19 pandemic on us and our customers, there could be further increases to our allowance for credit losses on loans. 46 -------------------------------------------------------------------------------- Additionally, in light of the volatility and disruptions in the capital and credit markets resulting from the COVID-19 pandemic and its negative impact on the economy, we took a number of precautionary actions to enhance our financial flexibility by bolstering our liquidity to ensure we have adequate cash readily available to meet both expected and unexpected funding needs. We borrowed a$300.0 million short-term FHLB advance obtained inMarch 2020 that matured onJune 25, 2020 andOrigin Bank completed an offering inFebruary 2020 of$70 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030. Additionally, as previously disclosed, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, and our commitment to maintain strong capital and liquidity to meet the needs of our customers and communities during this exceptional period of economic uncertainty, we suspended repurchases of our shares under our stock buyback program. There is significant ongoing uncertainty surrounding the course of the COVID-19 pandemic and the magnitude and duration of the continued disruption to economic activity and how this disruption will continue to impact demand for our products and services. It is difficult to forecast specific performance targets or time frames while the pandemic runs its course. We are actively monitoring and responding to developments across our markets related to measures designed to stop the spread of COVID-19, including social, financial, legal, regulatory and governmental measures and the impact on our business, customers and employees. See "Item 1A - Risk Factors" for additional information regarding risks and significant uncertainties relating to the COVID-19 pandemic. Comparison of the Results of Operations for the Three Months EndedJune 30, 2020 and 2019 Net Interest Income and Net Interest Margin Net interest income for the quarter endedJune 30, 2020 , was$46.3 million , an increase of$3.3 million , or 7.7%, compared to the quarter endedJune 30, 2019 . The largest factor in the increase was a$4.9 million decrease in deposit costs during the current quarter compared to the quarter endedJune 30, 2019 , combined with a$3.1 million increase in interest income earned on PPP loans and$1.6 million increase in interest income earned on mortgage warehouse loans. These net interest income benefits were primarily offset by a decrease in interest on most other loan categories due to declining loan yields. Lower market interest rates facilitated a significant decline in our cost of funds, which decline was slightly offset by an increase in the average balances of interest-bearing liabilities. Savings and interest-bearing transaction accounts saw the most significant reduction in cost, where these accounts decreased to 0.51% for the current quarter, from 1.39% for the quarter endedJune 30, 2019 . The decline in rate was partially offset by a$583.5 million increase in the average balances of savings and interest-bearing transaction accounts. The decrease in the cost of interest-bearing deposit accounts was primarily due to our efforts to reduce rates on deposit accounts to offset falling interest rates on loans. The increase in average balances of savings and interest-bearing transaction accounts was caused by a focus on deposit growth in the intervening period, and by PPP loans funded into deposit accounts at the Bank. There was also an increase in average balances on FHLB advances which was driven by bolstering our on-balance sheet liquidity at the end of the quarter endedMarch 31, 2020 , by adding four short-term advances totaling$400 million . Due to the uncertainty in the market, and our observation that commercial customers were starting to draw on their lines of credit in lateMarch 2020 , we decided to secure the funding at advantageous rates on a short-term basis until we could determine how the uncertainty would turn out. AtJune 30, 2020 , only$50 million of the$400 million was still outstanding, and the remainder was replaced with deposits and other funding sources. The net interest margin was 3.05% for the second quarter of 2020, a 60 basis point decrease from the second quarter of 2019. The yield earned on interest-earning assets for the quarter endedJune 30, 2020 was 3.65%, a 120 basis points decrease from 4.85% for the quarter endedJune 30, 2019 . This decrease was partially offset by the decrease in interest rates paid on interest-bearing deposits. The rate paid on total interest-bearing liabilities for the quarter endedJune 30, 2020 , was 0.89%, representing a decrease of 79 basis points compared to the quarter endedJune 30, 2019 . We continue to experience margin compression primarily caused by decreasing loan yields driven by consistently declining short-term market interest rates experienced over the last several quarters. Interest rates may continue to decline, particularly due to the ongoing deterioration of the economy due to the ongoing COVID-19 pandemic, and further decrease our loan yields, which may continue to put pressure on our net interest margin due to both maturing assets and floating rate assets repricing at lower rates. 47 -------------------------------------------------------------------------------- The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months endedJune 30, 2020 and 2019. Three Months Ended June 30, (Dollars in thousands) 2020 2019 Assets Average Balance(1) Income/Expense Yield/Rate(2) Average Balance(1) Income/Expense Yield/Rate(2) Commercial real estate$ 1,307,715 $ 14,460 4.45 %$ 1,209,645 $ 15,576 5.16 % Construction/land/land development 562,233 6,155 4.40 505,119 7,175 5.70 Residential real estate 742,657 8,250 4.44 640,123 7,843 4.90 Paycheck Protection Program ("PPP") 449,680 3,052 2.72 - - - Commercial and industrial ("C&I") excl. PPP 1,378,898 13,443 3.92 1,310,611 17,530 5.36 Mortgage warehouse lines of credit 462,088 4,354 3.79 203,524 2,765 5.45 Consumer 18,362 296 6.45 20,902 366 7.01 LHFI 4,921,633 50,010 4.09 3,889,924 51,255 5.29 Loans held for sale 91,991 712 3.10 23,927 206 3.45 Loans receivable 5,013,624 50,722 4.07 3,913,851 51,461 5.27 Investment securities-taxable 492,752 2,732 2.22 492,169 3,208 2.61 Investment securities-non-taxable 208,667 1,391 2.67 103,485 871 3.37 Non-marketable equity securities held in other financial institutions 51,713 295 2.29 44,974 426 3.80 Interest-bearing balances due from banks 345,906 324 0.38 164,686 1,097 2.67 Total interest-earning assets 6,112,662$ 55,464 3.65 % 4,719,165$ 57,063 4.85 % Noninterest-earning assets(3) 334,864 324,786 Total assets$ 6,447,526 $ 5,043,951 Liabilities and Stockholders' Equity Liabilities Interest-bearing liabilities Savings and interest-bearing transaction accounts$ 2,633,520 $ 3,353 0.51 %$ 2,050,058 $ 7,120 1.39 % Time deposits 751,607 3,267 1.75 830,399 4,420 2.13 Total interest-bearing deposits 3,385,127 6,620 0.79 2,880,457 11,540 1.61 FHLB advances and other borrowings 657,332 1,638 1.00 436,260 2,299 2.11 Securities sold under agreements to repurchase 13,776 3 0.10 34,049 116 1.36 Subordinated debentures 78,557 913 4.65 9,654 139 5.69 Total interest-bearing liabilities 4,134,792$ 9,174 0.89 % 3,360,420$ 14,094 1.68 % Noninterest-bearing liabilities Noninterest-bearing deposits 1,578,987 1,018,081 Other liabilities(3) 115,849 88,689 Total liabilities 5,829,628 4,467,190 Stockholders' Equity 617,898 576,761 Total liabilities and stockholders' equity$ 6,447,526 $ 5,043,951 Net interest spread 2.76 % 3.17 % Net interest income and margin$ 46,290 3.05 %$ 42,969 3.65 % Net interest income and margin - (tax equivalent)(4)$ 46,963 3.09 %$ 43,504 3.70 % ____________________________ (1)Nonaccrual loans are included in their respective loan category for the purpose of calculating the yield earned. All average balances are daily average balances. (2)Yields earned and rates paid are calculated at the portfolio level using the actual number of days in each month over the actual number of days in the year, except for our securities, consumer real estate and held for sale loan portfolios and our subordinated debentures, which are calculated using 30 days in a month over 360 days in a year. The yields on PPP loans are calculated using actual days in the month over 365 days in a year. 48 -------------------------------------------------------------------------------- (3)Includes Government National Mortgage Association ("GNMA") repurchase average balances of$29.0 million and$25.8 million for the three months endedJune 30, 2020 and 2019, respectively. The GNMA repurchase asset and liability accounts are recorded as equal offsetting amounts in the consolidated balance sheets, with the asset included in loans held for sale and the liability included in FHLB advances and other borrowings. For more information on the GNMA repurchase option, see Note 7 - Mortgage Banking in the condensed notes to our consolidated financial statements. (4)In order to present pre-tax income and resulting yields on tax-exempt investments comparable to those on taxable investments, a tax-equivalent adjustment has been computed. This adjustment also includes income tax credits received on Qualified School Construction Bonds. Income from tax-exempt investments and tax credits were computed using a federal income tax rate of 21% for the three months endedJune 30, 2020 and 2019. Rate/Volume Analysis The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate changes has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. For purposes of this table, changes attributable to day count and to both rate and volume that cannot be segregated have been allocated to rate. Three
Months Ended
vs.
Three Months Ended
Increase (Decrease)
(Dollars in thousands) due to Change in
Interest-earning assets Volume Yield/Rate Total Change
Loans:
Commercial real estate $ 1,263 $ (2,379) $ (1,116)
Construction/land/land development 811 (1,831) (1,020)
Residential real estate 1,256 (849) 407
Commercial and industrial 6,928 (7,963) (1,035)
Mortgage warehouse lines of credit 3,512 (1,923) 1,589
Consumer (45) (25) (70)
Loans held for sale 587 (81) 506
Loans receivable 14,312 (15,051) (739)
Investment securities-taxable 4 (480) (476)
Investment securities-non-taxable 885 (365) 520
Non-marketable equity securities held in other financial institutions
64 (195) (131)
Interest-bearing deposits in banks 1,207 (1,980) (773)
Total interest-earning assets 16,472 (18,071) (1,599)
Interest-bearing liabilities
Savings and interest-bearing transaction accounts 2,027 (5,794) (3,767)
Time deposits (419) (734) (1,153)
FHLB advances and other borrowings 1,165 (1,826) (661)
Securities sold under agreements to repurchase (69) (44) (113)
Subordinated debentures 980 (206) 774
Total interest-bearing liabilities 3,684 (8,604) (4,920)
Net interest income $ 12,788 $ (9,467) $ 3,321
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Provision for Credit Losses
The provision for credit losses, which includes the provision for loan losses,
provision for off-balance sheet commitments and provision for securities credit
losses, is based on management's assessment of the adequacy of both our
allowance for credit losses ("ACL") for both loans and securities and our
reserve for off-balance sheet lending commitments. Factors impacting the
provision include inherent risk characteristics in our loan portfolio, the level
of nonperforming loans and net charge-offs, both current and historic, local
economic and credit conditions, the direction of the change in collateral
values, reasonable and supportable forecasts, and the funding probability on
unfunded lending commitments. The provision for credit losses is charged against
earnings in order to maintain our ACL, which reflects management's best estimate
of life of loan credit losses inherent in our loan portfolio at the balance
sheet date, and our reserve for off-balance sheet lending commitments, which
reflects management's best estimate of losses inherent in our legally binding
lending-related commitments. The allowance is increased by the provision for
loan credit losses and decreased by charge-offs, net of recoveries.
On January 1, 2020 , we adopted CECL and recognized a one-time cumulative effect
adjustment to the allowance for loan credit losses of $1.2 million . At adoption
on January 1, 2020 , the economic effects resulting from the COVID-19 pandemic
were unknown. As such, the economic scenario used to develop our estimate of
CECL as of the adoption date assumed a continued moderate U.S. economic
expansion compared to 2019. CECL requires recording life-of-loan projected
losses in the loan portfolio based on future economic events and related loan
portfolio credit performance. The prior accounting standard recorded reserves
based on incurred losses at the balance sheet date, generally resulting in lower
reserve levels at the outset of an economic downturn.
Our earnings for the first half of 2020 were significantly impacted by the
COVID-19 pandemic and the uncertainty surrounding the economic outlook and
ongoing COVID-19 pandemic, which shaped the forecast we used in our calculation
of the CECL estimate at June 30, 2020 and caused us to significantly increase
our allowance for credit losses beginning in March 2020 .
Excluding PPP loans, at June 30, 2020 , we had $547.6 million , or 11.4%, of our
LHFI invested in key sectors that appear to be heavily affected by COVID-19
including: assisted living, nonessential retail, restaurants, hotels and energy.
Nonperforming LHFI in these COVID-19 impacted sectors was $7.6 million at June
30, 2020 , while past due LHFI, excluding PPP loans, defined as loans 30 days or
more past due, as a percentage of LHFI, excluding PPP loans, in these COVID-19
impacted sectors, was 1.3% at June 30, 2020 .
We recorded provision expense of $21.4 million for the quarter ended June 30,
2020 , an increase of $19.4 million from $2.0 million for the quarter ended June
30, 2019 . The increase in provision expense from the quarter ended June 30,
2019 , was primarily driven by an increase in the allowance for credit losses
within the loan portfolio, primarily due to the COVID-19 impact on the economy
and the adoption of CECL. Net charge-offs were $6.5 million during the current
quarter, compared to $677,000 during the quarter ended June 30, 2019 . The
increase is the result of charge-offs on four nonperforming loans totaling $5.9
million , leaving a total remaining outstanding balance on these four loans of
$4.8 million at June 30, 2020 . Our allowance for loan credit losses was 1.33% of
total LHFI at June 30, 2020 , compared to 0.92% at June 30, 2019 . The allowance
for loan credit losses as a percentage of nonperforming LHFI was 234.53% at June
30, 2020 , compared to 120.36% at June 30, 2019 .
We continue to gather the latest information available, and as more information
becomes available concerning the economic impact and duration of the COVID-19
pandemic, we will update our forecast and related qualitative factors, which
could lead to further increases to our allowance for credit losses on loans.
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Noninterest Income
The table below presents the various components of, and changes in, our
noninterest income for the periods indicated.
(Dollars in thousands) Three Months Ended June 30,
Noninterest income: 2020 2019 $ Change % Change
Service charges and fees $ 2,990 $ 3,435 $ (445) (13.0) %
Mortgage banking revenue 10,717 3,252 7,465 N/M
Insurance commission and fee income 3,109 3,036 73 2.4
Loss on sales and disposals of other
assets, net (908) (166) (742) N/M
Limited partnership investment income
(loss) 9 (418) 427 (102.2)
Swap fee income 1,527 172 1,355 N/M
Change in fair value of equity
investments - 367 (367) (100.0)
Other fee income 607 360 247 68.6
Other income 1,025 1,138 (113) (9.9)
Total noninterest income $ 19,076 $ 11,176 $ 7,900 70.7 %
Noninterest income for the three months ended June 30, 2020 , increased by $7.9
million , or 70.7%, to $19.1 million , compared to $11.2 million for the quarter
ended June 30, 2019 . The increase was largely driven by an increase of $7.5
million and $1.4 million in mortgage banking revenue and swap fee income,
respectively, which were offset by a $742,000 increase on loss on sales and
disposals of other assets, net.
Mortgage banking revenue. The $7.5 million increase in mortgage banking revenue
compared to the quarter ended June 30, 2019 , was primarily driven by positive
valuation adjustments in our mortgage pipeline values and increases in gain on
sale of mortgage loans, reflecting increased volume in the mortgage pipeline due
to higher volumes of purchases and refinance activity during the quarter due to
falling interest rates.
Swap fee income. The $1.4 million increase in swap fee income during the three
months ended June 30, 2020 , compared to the same period in 2019, was driven by a
higher volume of back-to-back swaps executed with commercial customers in the
current period compared to the same period in 2019. The increase in swap fees
was driven by the current low market rate environment that allowed customers to
obtain low fixed rates for longer terms using swaps.
Loss on sales and disposals of other assets, net. The $742,000 increase in loss
on sales and disposals of other assets, net, for the three months ended June 30,
2020 , compared to the three months ended June 30, 2019 , was primarily due to the
decline in value and subsequent write down of two commercial real estate owned
properties during the quarter.
Limited partnership investment (loss) income. The $427,000 increase in limited
partnership investment income for the three months ended June 30, 2020 , compared
to the three months ended June 30, 2019 , was due to unfavorable valuation
adjustments to certain limited partnership investments during the quarter ended
June 30, 2019 , with no such adjustment during the current quarter.
Change in fair value of equity investments. The $367,000 decrease in the fair
value of equity investments for the three months ended June 30, 2020 , compared
to the three months ended June 30, 2019 , was due to a positive valuation
adjustment recorded in the quarter ended June 30, 2019 , on a common stock
investment, with no such valuation adjustment recorded in the current quarter.
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Noninterest Expense
The following table presents the significant components of noninterest expense
for the periods indicated.
(Dollars in thousands) Three Months Ended June 30,
Noninterest expense: 2020 2019 $ Change % Change
Salaries and employee benefits $ 24,045 $ 22,764 $ 1,281 5.6 %
Occupancy and equipment, net 4,267 4,200 67 1.6
Data processing 2,075 1,810 265 14.6
Electronic banking 890 892 (2) (0.2)
Communications 419 647 (228) (35.2)
Advertising and marketing 610 1,089 (479) (44.0)
Professional services 843 839 4 0.5
Regulatory assessments 766 691 75 10.9
Loan related expenses 1,509 790 719 91.0
Office and operations 1,344 1,849 (505) (27.3)
Intangible asset amortization 287 353 (66) (18.7)
Franchise tax expense 514 492 22 4.5
Other expenses 651 679 (28) (4.1)
Total noninterest expense $ 38,220 $ 37,095 $ 1,125 3.0 %
Noninterest expense for the quarter ended June 30, 2020 , increased by $1.1
million , or 3.0%, to $38.2 million , compared to $37.1 million for the quarter
ended June 30, 2019 . Significant fluctuations in noninterest expense categories
are discussed below.
Salaries and employee benefits. The $1.3 million increase in salaries and
employee benefits between the quarters was primarily due to $1.5 million in
incentive compensation allocated to employees for their significant efforts in
delivering $563.6 million in PPP loans, gross of deferred loan fees, during the
quarter.
Data processing. The increase in data processing expenses was driven by new
software implemented during the intervening period.
Communications. The decrease in communication expenses was primarily due to over
billing for converted data circuits during the quarter ended June 30, 2019 .
Advertising and marketing. The decrease in advertising and marketing expenses
for the quarter ended June 30, 2020 , when compared to the quarter ended June 30,
2019 , was due to decreased advertising and marketing expenses following the
launch of a performance checking campaign in April 2019 .
Loan related expenses. The increase in loan related expenses was driven by a
$437,000 increase in loan sub-servicing costs in connection with the mortgage
loan portfolio servicing transfer that occurred in the fourth quarter of 2019.
The increase in sub-servicing costs were partially offset by decreases in
salaries and employee benefits due to head count reductions of in-house
servicing staff at the completion of the servicing transfer.
Office and operations. The decrease in office and operations expense was
primarily due to a $282,000 decrease in business development costs as social
distancing constraints impacted in-person activities and kept more people at
home during the quarter ended June 30, 2020 .
Income Tax Expense
For the three months ended June 30, 2020 , we recognized income tax expense of
$786,000 , a decrease of $2.0 million compared to the three months ended June 30,
2019 . Our effective tax rate for the three months ended June 30, 2020 , was
13.7%, compared to 18.5% for the three months ended June 30, 2019 . Our effective
tax rate decreased due to the larger than proportional effect of tax-exempt
items (described below) with a decrease in pre-tax income in the 2020 period.
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Our quarterly provision for income taxes has historically been calculated using
the AETR method, which applies an estimated annual effective tax rate to pre-tax
income or loss. However, we recorded our interim income tax provision using the
actual effective tax rate as of June 30, 2020 , as allowed under ASC 740-270,
Accounting for Income Taxes - Interim Reporting. We utilized the actual
effective rate to record tax expense, rather than the AETR method, as a reliable
estimate of ordinary income. Significant permanent items are not able to be made
at this time, primarily driven by the COVID-19 crisis, which results in
significant variations in income tax expense and would have resulted in a
disproportionate and unreliable effective tax rate under the AETR method. We
determined current and deferred income tax expense as if the interim period were
an annual period.
Our effective income tax rates have differed from the U.S. statutory rate of 21%
during the quarters ended June 30, 2020 and 2019, due to the effect of
tax-exempt income from securities, low income housing and qualified school
construction bond tax credits, tax-exempt income from life insurance policies
and income tax effects associated with stock-based compensation. Because of
these items, we expect our effective income tax rate to continue to remain below
the U.S. statutory rate. These tax-exempt items can have a smaller than
proportional effect on the effective income tax rate as net income increases.
Comparison of the Results of Operations for the Six Months Ended June 30, 2020
and 2019
Net Interest Income and Net Interest Margin
Net interest income for the six months ended June 30, 2020 , was $89.1 million ,
an increase of $4.1 million , or 4.8%, compared to the six months ended June 30,
2019 . The largest factor in the increase was a $5.2 million decrease in deposit
costs during the current period compared to the six months ended June 30, 2019 ,
combined with a $3.1 million increase in interest income earned on PPP loans and
a $1.9 million increase in interest income earned on mortgage warehouse loans.
These net interest income benefits were primarily offset by a decrease in
interest on most other loan categories due to declining loan yields. The yield
earned on the total loan portfolio was 4.42% for the six months ended June 30,
2020 , compared to 5.28% for the six months ended June 30, 2019 .
Lower market interest rates provided opportunities for management and our
bankers to reduce rates on deposit accounts across our footprint, driving the
reduction in deposit interest expense in 2020 compared to 2019. Decreases in
rates on interest-bearing liabilities contributed a combined increase to net
interest income of $10.1 million , while increases in average interest-bearing
liability balances and subordinated debentures offset the increase by $3.3
million and $1.6 million , respectively. Average savings and interest bearing
deposit accounts increased $503.9 million compared to the quarter ended June 30,
2019 , primarily as a result of a $308.0 million increase in average business
accounts. The increase in the average subordinated debentures balance is
primarily due to the completion of an offering of notes by Origin Bank as
discussed in the Comparison of the Results of Operations for the Three Months
Ended June 30, 2020 and 2019 - Subordinated Debentures above.
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The following table presents average balance sheet information, interest income,
interest expense and the corresponding average yields earned and rates paid for
the six months ended June 30, 2020 and 2019.
Six Months Ended June 30,
(Dollars in thousands) 2020 2019
Assets Average Balance(1) Income/Expense Yield/Rate(2) Average Balance(1) Income/Expense Yield/Rate(2)
Commercial real estate $ 1,291,174 $ 29,937 4.66 % $ 1,212,149 $ 31,072 5.17 %
Construction/land/land development 553,655 13,219 4.80 481,280 13,648 5.72
Residential real estate 718,848 16,521 4.60 637,221 15,476 4.86
PPP 224,840 3,052 2.72 - - -
Commercial and industrial ("C&I") excl. PPP 1,375,850 29,610 4.33 1,299,100 34,528 5.36
Mortgage warehouse lines of credit 336,284 6,687 4.00 175,644 4,810 5.52
Consumer 19,024 628 6.60 20,693 716 6.92
LHFI 4,519,675 99,654 4.43 3,826,087 100,250 5.28
Loans held for sale 62,640 1,117 3.57 20,824 386 3.70
Loans receivable 4,582,315 100,771 4.42 3,846,911 100,636 5.28
Investment securities-taxable 471,664 5,444 2.31 495,433 6,549 2.64
Investment securities-non-taxable 155,810 2,149 2.76 102,644 1,729 3.37
Non-marketable equity securities held in other financial institutions
46,104 606 2.64 43,575 727 3.36
Interest-bearing deposits in banks 332,930 1,510 0.91 144,120 1,916 2.68
Total interest-earning assets 5,588,823 $ 110,480 3.98 % 4,632,683 $ 111,557 4.86 %
Noninterest-earning assets(3) 335,292 325,294
Total assets $ 5,924,115 $ 4,957,977
Liabilities and Stockholders' Equity
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts $ 2,539,236 $ 9,751 0.77 % $ 2,035,331 $ 13,379 1.33 %
Time deposits 766,757 7,119 1.87 839,464 8,658 2.08
Total interest-bearing deposits 3,305,993 16,870 1.03 2,874,795 22,037 1.55
FHLB advances and other borrowings 477,541 2,970 1.25 386,363 3,997 2.09
Securities sold under agreements to repurchase 15,321 22 0.29 36,887 252 1.38
Subordinated debentures 64,932 1,518 4.68 9,650 276 5.69
Total interest-bearing liabilities 3,863,787 $ 21,380 1.11 % 3,307,695 $ 26,562 1.62 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 1,338,317 995,475
Other liabilities(3) 107,481 86,335
Total liabilities 5,309,585 4,389,505
Stockholders' Equity 614,530 568,472
Total liabilities and stockholders' equity $ 5,924,115 $ 4,957,977
Net interest spread 2.87 % 3.24 %
Net interest income and margin $ 89,100 3.21 % $ 84,995 3.70 %
Net interest income and margin - (tax equivalent)(4) $ 90,279 3.25 % $ 86,058 3.75 %
____________________________(1)Nonaccrual loans are included in their respective loan category for the purpose of calculating the yield earned. All average balances are daily average balances.
54
--------------------------------------------------------------------------------
(2)Yields earned and rates paid are calculated at the portfolio level using the
actual number of days in each month over the actual number of days in the year,
except for our securities, consumer real estate, held for sale and PPP loan
portfolios, which are calculated using 30 days in a month over 360 days in a
year. Rates paid for subordinated debentures are calculated at the portfolio
level using the actual number of days in each month over 360 days in a year.
(3)Includes GNMA repurchase average balances of $28.4 million and $27.9 million
for the six months ended June 30, 2020 and 2019, respectively. The GNMA
repurchase asset and liability are recorded as equal offsetting amounts in the
consolidated balance sheets, with the asset included in loans held for sale and
the liability included in FHLB advances and other borrowings. For more
information on the GNMA repurchase option, see Note 7 - Mortgage Banking in the
condensed notes to our consolidated financial statements.
(4)In order to present pre-tax income and resulting yields on tax-exempt
investments comparable to those on taxable investments, a tax-equivalent
adjustment has been computed. This adjustment also includes income tax credits
received on Qualified School Construction Bonds. Income from tax-exempt
investments and tax credits were computed using a Federal income tax rate of 21%
for the six months ended June 30, 2020 and 2019.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to changes in interest rates. The change in
interest attributable to rate changes has been determined by applying the change
in rate between periods to average balances outstanding in the earlier period.
The change in interest due to volume has been determined by applying the rate
from the earlier period to the change in average balances outstanding between
periods. For purposes of this table, changes attributable to both rate and
volume that cannot be segregated have been allocated to rate.
Six
Months Ended
vs.
Six Months Ended
Increase (Decrease)
(Dollars in thousands) due to Change in
Interest-earning assets Volume Yield/Rate Total Change
Loans:
Commercial real estate $ 2,026 $ (3,161) $ (1,135)
Construction/land/land development 2,052 (2,481) (429)
Residential real estate 1,982 (937) 1,045
Commercial and industrial 8,016 (9,882) (1,866)
Mortgage warehouse lines of credit 4,399 (2,522) 1,877
Consumer (58) (30) (88)
Loans held for sale 774 (43) 731
Loans receivable 19,191 (19,056) 135
Investment securities-taxable (314) (791) (1,105)
Investment securities-non-taxable 895 (475) 420
Non-marketable equity securities held in other financial institutions
42 (163) (121)
Interest-bearing deposits in banks 2,510 (2,916) (406)
Total interest-earning assets 22,324 (23,401) (1,077)
Interest-bearing liabilities
Savings and interest-bearing transaction accounts 3,312 (6,940) (3,628)
Time deposits (750) (789) (1,539)
FHLB advances and other borrowings 943 (1,970) (1,027)
Securities sold under agreements to repurchase (147) (83) (230)
Subordinated debentures 1,574 (332) 1,242
Total interest-bearing liabilities 4,932 (10,114) (5,182)
Net interest income $ 17,392 $ (13,287) $ 4,105
55-------------------------------------------------------------------------------- Provision for Credit Losses We recorded provision expense of$39.9 million for the six months endedJune 30, 2020 , a$36.9 million increase from a provision of$3.0 million for the six months endedJune 30, 2019 . The increase in provision expense for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , was impacted by economic uncertainty caused by the COVID-19 pandemic, which drove an increase in the current estimate of expected credit losses within the loan portfolio. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods. Net charge-offs were$7.6 million during the six months endedJune 30, 2020 , compared to net charge-offs of$125,000 during the six months endedJune 30, 2019 . The increase is the result of charge-offs on four nonperforming loans as referenced in the quarterly Provision for Credit Losses section above. Noninterest Income The table below presents the various components of, and changes in, our noninterest income for the periods indicated. Six Months Ended (Dollars in thousands) June 30, Noninterest income: 2020 2019 $ Change % Change Service charges and fees$ 6,310 $ 6,751 $ (441) (6.5) % Mortgage banking revenue 13,486 5,858 7,628 130.2 Insurance commission and fee income 6,796 6,546 250 3.8 Gains on sales of securities, net 54 - 54 N/A Loss on sales and disposals of other assets, net (933) (163) (770) N/M Limited partnership investment loss (420) (18) (402) N/M Swap fee income 2,203 683 1,520 N/M Change in fair value of equity investments - 367 (367) (100.0) Other fee income 1,073 636 437 68.7 Other income 2,651 2,120 531 25.0 Total noninterest income$ 31,220 $ 22,780 $ 8,440 37.1 % Noninterest income for the six months endedJune 30, 2020 , increased by$8.4 million , or 37.1%, to$31.2 million , compared to$22.8 million for the six months endedJune 30, 2019 . The increase in noninterest income was largely driven by increases of$7.6 million and$1.5 million in mortgage banking revenue and swap fee income, respectively. These increases were partially offset by a$770,000 increase in loss on sales and disposals of other assets, net. Mortgage banking revenue. The$7.6 million increase in mortgage banking revenue during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , was primarily driven by positive valuation adjustments in our mortgage pipeline values and increases in gain on sale of mortgage loans, reflecting increased volume in the mortgage pipeline due to higher volumes of purchases and refinance activity during the period and falling interest rates. Swap fee income. The$1.5 million increase in swap fee income during the six months endedJune 30, 2020 , compared to the same period in 2019, was driven by higher volume of back-to-back swaps executed with commercial customers in the current period compared to 2019. Given the low interest rate environment, customers had the opportunity to lock in fixed rates through swaps, driving increases in swap fees. Loss on sales and disposals of other assets, net. The$770,000 increase in loss on sales and disposals of other assets, net, was primarily due to the decline in value and subsequent write down of two commercial real estate owned properties during the quarter. 56 -------------------------------------------------------------------------------- Noninterest Expense The following table presents the significant components of noninterest expense for the periods indicated: (Dollars in thousands) Six Months Ended June 30, Noninterest expense: 2020 2019 $ Change % Change Salaries and employee benefits$ 46,033 $ 45,377 $ 656 1.4 % Occupancy and equipment, net 8,488 8,244 244 3.0 Data processing 4,078 3,397 681 20.0 Electronic banking 1,790 1,581 209 13.2 Communications 896 1,233 (337) (27.3) Advertising and marketing 1,321 1,887 (566) (30.0) Professional services 2,014 1,743 271 15.5 Regulatory assessments 1,381 1,402 (21) (1.5) Loan related expenses 2,651 1,459 1,192 81.7 Office and operations 2,785 3,330 (545) (16.4) Intangible asset amortization 586 717 (131) (18.3) Franchise tax expense 1,010 981 29 3.0 Other expenses 1,284 1,125 159 14.1 Total noninterest expense$ 74,317 $ 72,476 $ 1,841 2.5 % Noninterest expense for the six months endedJune 30, 2020 , increased by$1.8 million , or 2.5%, to$74.3 million , compared to$72.5 million for the six months endedJune 30, 2019 . Significant fluctuations in noninterest expense categories are discussed below. Loan related expenses. The increase in loan related expenses was driven by a$875,000 increase in loan sub-servicing costs in connection with the mortgage loan portfolio servicing transfer that occurred in the fourth quarter of 2019. The increase in sub-servicing costs were partially offset by decreases in salaries and employee benefits due to head count reductions of in-house servicing staff at the completion of the servicing transfer. In addition, loan related legal fees increased$219,000 due to the workout of nonperforming loan relationships during the six months endedJune 30, 2020 . Data processing. The increase in data processing costs during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , was primarily due to the implementation of new software during the intervening period. Salaries and employee benefits. The$656,000 increase in salaries and employee benefits expense during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , was primarily due to$1.5 million in incentive compensation allocated to employees for their significant efforts in delivering$563.6 million in PPP loans during the period. Commissions also increased$1.4 million compared to the six months endedJune 30, 2019 , primarily due to higher mortgage production. Advertising and marketing. The decrease is primarily due to the launch of two main marketing campaigns during the six months endedJune 30, 2019 , with no comparable expenses incurred in 2020. Office and operations. Office and operations expenses decreased by$545,000 during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily due to reductions in travel and entertainment spending from the COVID-19 pandemic and related restrictions. Communications. The decrease in communication expenses was primarily due to over billing for converted data circuits during the six months endedJune 30, 2019 . 57 -------------------------------------------------------------------------------- Income Tax Expense For the six months endedJune 30, 2020 , we recognized income tax expense of$359,000 , compared to$5.9 million for the six months endedJune 30, 2019 . Our effective tax rate for the six months endedJune 30, 2020 , was 5.9% compared to 18.2% for the six months endedJune 30, 2019 . Our effective tax rate decreased due to the larger than proportional effect of tax-exempt items as discussed in the Comparison of the Results of Operations for the Three Months EndedJune 30, 2020 and 2019 - Income Tax Expense above. Comparison of Financial Condition atJune 30, 2020 , andDecember 31, 2019 General Total assets increased by$1.32 billion , or 24.8%, to$6.64 billion atJune 30, 2020 , from$5.32 billion atDecember 31, 2019 . The increase was primarily attributable to an increase in LHFI of$1.17 billion and an increase of$229.7 million in total securities, which were offset by a decrease in cash and cash equivalents of$135.2 million . Loan Portfolio AtJune 30, 2020 , 85.2% of our loan portfolio held for investment consisted of commercial and industrial loans, commercial real estate loans, construction/land/land development and mortgage warehouse lines of credit, which were primarily originated within our market areas ofNorth Louisiana ,Texas andMississippi . The following table presents the ending balance of our loan portfolio held for investment by purpose category at the dates indicated. (Dollars in thousands) June 30, 2020 December 31, 2019 Real estate: Amount Percent Amount Percent $ Change % Change Commercial real estate$ 1,323,754 24.9 %$ 1,296,847 31.3 %$ 26,907 2.1 % Construction/land/land development 570,032 10.7 517,688 12.5 52,344 10.1 Residential real estate 769,354 14.5 689,555 16.6 79,799 11.6 Total real estate 2,663,140 50.1 2,504,090 60.4 159,050 6.4 Commercial and industrial 1,862,534 35.1 1,343,475 32.5 519,059 38.6 Mortgage warehouse lines of credit 769,157 14.5 274,659 6.6 494,498 180.0 Consumer 17,363 0.3 20,971 0.5 (3,608) (17.2) Total LHFI$ 5,312,194 100.0 %$ 4,143,195 100.0 %$ 1,168,999 28.2 % AtJune 30, 2020 , total LHFI were$5.31 billion , an increase of$1.17 billion , or 28.2%, compared to$4.14 billion atDecember 31, 2019 . The increase reflected growth in all significant loan categories, the largest of which is primarily reflected in commercial and industrial loans and mortgage warehouse lines of credit, which increased$519.1 million and$494.5 million , respectively. The increase in commercial and industrial loans is primarily due to$549.1 million increase in PPP loans, net of deferred fees and costs. The increase in mortgage warehouse lines of credit is primarily due to increased activity due the current low interest rate environment. Due to the increased mortgage related activity in our markets, as well as market disruption following merger activity by our peers and competitors, we have added new customers in the warehouse lines of credit portfolio, and increased limits to support the record volume of loan purchase and refinance activity. Our lending focus is on operating companies, including commercial loans and lines of credit as well as owner-occupied commercial real estate loans. We currently do not plan to significantly alter the real estate concentrations within our loan portfolio. Under the CARES Act,Congress allocated funds to the PPP, which is designed to provide short-term loans to certain qualifying businesses who retain employees during the COVID-19 pandemic. By participating in the PPP, as ofJune 30, 2020 , we have originated 3,044 loans totaling$563.6 million , supporting approximately 63,300 jobs. These loans have maximum maturities of two years, and we anticipate many of them will be forgiven under the terms of the Paycheck Protection Program before the maturity date. The loans will bear a fixed rate of interest at one percent for the entire term. 58 -------------------------------------------------------------------------------- Loan Portfolio Maturity Analysis The table below presents the maturity distribution of our LHFI atJune 30, 2020 . The table also presents the portion of our loans that have fixed interest rates, rather than interest rates that fluctuate over the life of the loans based on changes in the interest rate environment. June 30, 2020 Over One Year One Year Through Five Over Five
(Dollars in thousands) or Less Years Years Total Real estate: Commercial real estate$ 112,521
84,219 379,509 106,304 570,032
Residential real estate loans 100,077 268,561 400,716 769,354
Total real estate 296,817 1,457,110 909,213 2,663,140
Commercial and industrial loans 383,690 1,330,783 148,061 1,862,534
Mortgage warehouse lines of credit 769,157 - - 769,157
Consumer loans 2,455 13,020 1,888 17,363
Total LHFI $ 1,452,119 $ 2,800,913 $ 1,059,162 $ 5,312,194
Amounts with fixed rates $ 210,993
1,241,126 1,195,001 545,700 2,981,827
Total $ 1,452,119 $ 2,800,913 $ 1,059,162 $ 5,312,194
Loan Portfolio COVID-19 Impact
The COVID-19 pandemic has continued to have a severe impact on the U.S. economy
leading to severe unemployment and a recession. Consequently, the deteriorating
economic outlook caused us to significantly increase the allowance for credit
losses during the first half of 2020, resulting in additional provision expense
and reduced earnings during the period. Due to the ongoing economic impact of
the COVID-19 pandemic and governmental efforts to contain it, we believe that
certain sectors of the U.S. economy may be more affected than others. Some of
the sectors that may experience a more significant impact include assisted
living, nonessential retail, restaurants, energy and hotels. At June 30, 2020 ,
we had $547.6 million , or 11.4%, of our LHFI, excluding PPP loans, invested in
these sectors and, while we have recorded significant loss reserves in the event
our loan portfolio experiences losses in the future, the reserves are an
estimate and subject to change. Nonperforming LHFI in the sectors impacted by
COVID-19 was $7.6 million at June 30, 2020 , while past due LHFI, excluding PPP
loans, defined as loans 30 days or more past due, as a percentage of LHFI,
excluding PPP loans, in the sectors impacted by COVID-19, was 1.3% at June 30,
2020 .
Certain key data regarding the sectors that may experience a more significant
impact due to COVID-19 at June 30, 2020 , is reflected in the table below. The
information presented excludes PPP loans.
Outstanding Average Allowance Loans under
Balance Loan Size Amount Forbearance Past Due NPL
Selected sectors (dollars in thousands)
Assisted living $ 140,218 $ 8,764 $ 4,150 $ 48,935 $ 2,270 $ 2,270
Nonessential retail 146,566 838 1,274 82,424 2,754 3,052
Restaurant 134,104 798 2,910 100,209 - -
Energy 62,695 936 6,551 6,776 2,311 2,311
Hotel 64,043 2,562 827 59,258 - -
Selected sectors 547,626 1,214 15,712 297,602 7,335 7,633
All other LHFI 4,215,439 468 54,756 709,564 16,416 22,414
Total LHFI $ 4,763,065 $ 504 $ 70,468 $ 1,007,166 $ 23,751 $ 30,047
59-------------------------------------------------------------------------------- Nonperforming Assets Nonperforming assets consist of nonperforming loans and property acquired through foreclosures or repossession, as well as bank-owned property not currently in use and listed for sale. Loans are considered past due when principal and interest payments have not been received at the date such payments are contractually due. We discontinue accruing interest on loans when we determine the borrower's financial condition is such that collection of interest and principal payments in accordance with the terms of the loan is not reasonably assured. Loans may be placed on nonaccrual status even if the contractual payments are not past due if information becomes available that causes substantial doubt about the borrower's ability to meet the contractual obligations of the loan. All interest accrued but not collected for loans that are placed on nonaccrual status is reversed against interest income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. If a loan is determined by management to be uncollectible, regardless of size, the portion of the loan determined to be uncollectible is then charged to the allowance for loan credit losses. We manage the quality of our lending portfolio in part through a disciplined underwriting policy and through continual monitoring of loan performance and each borrower's financial condition. There can be no assurance, however, that our loan portfolio will not become subject to losses due to declines in economic conditions or deterioration in the financial condition of our borrowers. Although we have seen an impact from the COVID-19 pandemic, the ultimate impact is still unknown. The ongoing economic uncertainty and increased unemployment rate has created conditions that could cause an increase in nonperforming loans in future periods. ThroughJune 30, 2020 , we have granted COVID-19 forbearances in the form of principal and interest deferments, rate concessions and principal deferments to 1,386 loans with outstanding loan amounts totaling$1.01 billion . The following table shows our nonperforming loans and nonperforming assets at the dates indicated. (Dollars in thousands) June 30, 2020 December 31, 2019 Nonperforming LHFI: Commercial real estate$ 4,717 $ 6,994 Construction/land/land development 3,726 4,337 Residential real estate 6,713 5,132 Commercial and industrial 14,772 14,520 Consumer 119 163 Total nonperforming LHFI 30,047 31,146 Nonperforming loans held for sale 734 927 Total nonperforming loans 30,781 32,073 Other real estate owned: Commercial real estate, construction/land/land development 3,285 4,165 Residential real estate 769 487 Total other real estate owned 4,054 4,652 Other repossessed assets owned 101 101 Total repossessed assets owned 4,155 4,753 Total nonperforming assets$ 34,936 $ 36,826 Troubled debt restructuring loans - nonaccrual$ 5,817 $ 6,609 Troubled debt restructuring loans - accruing 1,815 1,843 Total LHFI 5,312,194 4,143,195 Ratio of nonperforming LHFI to total LHFI 0.57 % 0.75 % Ratio of nonperforming assets to total assets 0.53 0.69 AtJune 30, 2020 , total nonperforming LHFI decreased by$1.1 million or 3.5%, compared toDecember 31, 2019 . Please see Note 4 - Loans in the condensed notes to our consolidated financial statements for more information on nonperforming loans. 60 -------------------------------------------------------------------------------- Potential Problem Loans From a credit risk standpoint, we classify loans using risk grades which fall into one of five categories: pass, special mention, substandard, doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on loans and adjust them to reflect the degree of risk and loss that is felt to be inherent or expected in each loan. Information regarding the internal risk ratings of our loans atJune 30, 2020 , is included in Note 4 - Loans in the condensed notes to our consolidated financial statements included in Item 1 of this report. Allowance for Credit Losses EffectiveJanuary 1, 2020 , the Company adopted CECL resulting in a change to the Company's reporting of credit losses for assets held at amortized cost basis and available for sale debt securities. Please see the discussion in Note 1 - Significant Accounting Policies in the condensed notes to our consolidated financial statements titled "Effect of Recently Adopted Accounting Standards" for a description of policy revisions resulting from the Company's adoption of ASU 2016-13. The allowance for loan credit losses represents the estimated losses for financial assets accounted for on an amortized cost basis. Expected losses are calculated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company evaluates LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score. The Company applied a probability of default, loss given default loss methodology to the loan pools atJanuary 1 andJune 30, 2020 . Historical loss rates for each pool are calculated based on charge-off and recovery data beginning with the second quarter of 2012. These loss rates are adjusted for differences between current period conditions, including the ongoing effects of COVID-19 on theU.S economy, and the conditions existing during the historical loss period. Historical losses are additionally adjusted for the effects of certain economic variables forecast over a one-year period. Subsequent to the forecast effects, historical loss rates are used to estimate losses over the estimated remaining lives of the loans. The estimated remaining lives consist of the contractual lives, adjusted for estimated prepayments. Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Certain of these loans are considered to be collateral dependent with the borrower experiencing financial difficulty. For these loans, the fair value of collateral practical expedient is elected whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell (if applicable). Those individual loans that are not collateral dependent are evaluated based on a discounted cash flow methodology. The amount of the allowance for loan credit losses is affected by loan charge-offs, which decrease the allowance, recoveries on loans previously charged off, which increase the allowance, as well as the provision for loan credit losses charged to income, which increases the allowance. In determining the provision for loan credit losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and periodically reviews the size and composition of the loan portfolio in light of current and forecasted economic conditions. If actual losses exceed the amount of allowance for loan credit losses, it could materially and adversely affect our earnings. As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or at 90 days past due, we will reflect that loan as nonperforming. It will remain nonperforming until it performs in a manner that it is reasonable to expect that we will collect principal and accrued interest in full. When the amount or likelihood of a loss on a loan has been confirmed, a charge-off will be taken in the period it is determined. We establish general allocations for each major loan category and credit quality. The general allocation is based, in part, on historical charge-off experience and the probability of default, loss given default loss methodology, derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. We give consideration to trends, changes in loan mix, delinquencies, prior losses, reasonable and supportable forecasts and other related information. 61 -------------------------------------------------------------------------------- In connection with the review of our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include: •for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type; •for construction, land and land development loans, the perceived feasibility of the project, including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio; •for residential mortgage loans, the borrower's ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and •for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial or professional enterprise, the borrower's business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral. Our allowance for loan credit losses increased by$32.9 million , or 87.8%, to$70.5 million atJune 30, 2020 , from$37.5 million atDecember 31, 2019 . The ratio of the allowance for credit losses to LHFI atJune 30, 2020 , andDecember 31, 2019 , was 1.33% and 0.91%, respectively. The increase in the total allowance for credit losses was primarily driven by the impact of the COVID-19 pandemic after the adoption of CECL. Please see the section titled Nonperforming Assets included above in this section for additional information and metrics related to the impact of the COVID-19 pandemic. 62 -------------------------------------------------------------------------------- (Dollars in thousands) Six Months Ended June 30, Year Ended December 31, 2020 2019 2019 Allowance for loan credit losses Balance at beginning of period$ 37,520 $ 34,203 $ 34,203 Impact of adopting ASC 326 1,248 N/A N/A Provision for loan credit losses 39,274 2,605 9,207
Charge-offs:
Commercial real estate 3,668 195 1,420 Construction/land/land development - 38 38 Residential real estate 49 - 265 Commercial and industrial 4,253 1,133 8,231 Mortgage warehouse lines of credit - 29 29 Consumer 42 53 148 Total charge-offs 8,012 1,448 10,131 Recoveries: Commercial real estate 6 59 341 Construction/land/land development - 1 40 Residential real estate 169 45 185 Commercial and industrial 256 1,195 3,627 Consumer 7 23 48 Total recoveries 438 1,323 4,241 Net charge-offs 7,574 125 5,890 Balance at end of period$ 70,468 $ 36,683 $ 37,520 Ratio of allowance for loan credit losses to: Nonperforming LHFI 234.53 % 120.36 % 120.46 % Total LHFI 1.33 0.92 0.91 Securities Our securities portfolio totaled$770.9 million atJune 30, 2020 , representing an increase of$229.7 million , or 42.4%, from$541.2 million atDecember 31, 2019 . During the period, we utilized excess liquidity and took advantage of dislocated bond markets during the recent market turmoil, purchasing high quality municipal and corporate bonds to support our interest margin in low-rate environments. Our strategy for the portfolio is to protect net interest income levels in the current environment and in the event rates move lower from current levels. Please see Note 3 - Securities in the condensed notes to our consolidated financial statements for more information on our securities portfolio. Deposits Deposits are the primary funding source used to fund our loans, investments and operating needs. We offer a variety of products designed to attract and retain both consumer and commercial deposit customers. These products consist of noninterest and interest-bearing checking accounts, savings deposits, money market accounts and time deposits. Deposits are primarily gathered from individuals, partnerships and corporations in our market areas. We also obtain deposits from local municipalities and state agencies. We also utilize brokered deposits from time to time, and the increase in brokered deposits at the end ofJune 2020 was due to short term needs for funding warehouse lines of credit. We manage our interest expense on deposits through specific deposit product pricing that is based on competitive pricing, economic conditions and current and anticipated funding needs. We may use interest rates as a mechanism to attract or deter additional deposits based on our anticipated funding needs and liquidity position. We also consider potential interest rate risk caused by extended maturities of time deposits when setting the interest rates in periods of future economic uncertainty. 63 --------------------------------------------------------------------------------
The following table presents our deposit mix at the dates indicated and the dollar and percentage change between periods.
June 30, 2020 December 31, 2019
(Dollars in thousands) Balance % of Total Balance % of Total $ Change % Change
Noninterest-bearing demand $ 1,584,746 29.5 % $ 1,077,706 25.5 % $ 507,040 47.0 %
Interest-bearing demand 854,399 15.9 776,037 18.4 78,362 10.1
Money market 1,513,026 28.2 1,277,053 30.2 235,973 18.5
Time deposits 745,617 13.9 790,810 18.7 (45,193) (5.7)
Brokered 490,881 9.1 152,556 3.6 338,325 221.8
Savings 183,553 3.4 154,450 3.6 29,103 18.8
Total deposits $ 5,372,222 100.0 % $ 4,228,612 100.0 % $ 1,143,610 27.0 %
Due to the funding of PPP loans into deposit accounts during the quarter ended
June 30, 2020 , noninterest-bearing demand and money market accounts increased
significantly. Also, due to the high volume of mortgage loans funded under the
mortgage warehouse lines of credit near the end of the quarter, we utilized
short term brokered deposits to fund the growth in warehouse lines, which drove
the increase in brokered deposits from December 31, 2019 to June 30, 2020 .
The following table reflects the classification of our average deposits and the
average rate paid on each deposit category for the periods indicated.
Six Months Ended June 30,
2020 2019
Annualized Annualized
Average Interest Average Average Interest Average
(Dollars in thousands) Balance Expense Rate Paid Balance Expense Rate Paid
Interest-bearing demand $ 817,701 $ 2,674 0.66 % $ 702,960 $ 2,944 0.84 %
Money market 1,363,448 6,144 0.91 906,684 6,940 1.54
Time deposits 766,757 7,119 1.87 833,729 8,573 2.07
Brokered (1) 193,232 814 0.85 278,903 3,463 2.50
Savings 164,855 119 0.15 152,519 117 0.15
Total interest-bearing $ 3,305,993 $ 16,870 1.03 $ 2,874,795 $ 22,037 1.55
Noninterest-bearing demand 1,338,317 995,475
Total average deposits $ 4,644,310 $ 16,870 0.73 % $ 3,870,270 $ 22,037 1.15 %
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(1)Average brokered time deposits of zero and$7.2 million are included in the brokered category during the six months endedJune 30, 2020 and 2019, respectively. Our average deposit balance was$4.64 billion for the six months endedJune 30, 2020 , an increase of$774.0 million , or 20.0%, from$3.87 billion for the six months endedJune 30, 2019 . Average deposits excluding average brokered deposits was$4.45 billion for the six months endedJune 30, 2020 , compared to$3.59 billion for the six months endedJune 30, 2019 . The decrease in average brokered deposits is primarily the result of the strategic decision to replace certain brokered deposits with advances from the FHLB during certain times throughout the periods presented. The increase in total average deposits was primarily due to our continued relationship-based efforts to attract deposits within our key markets and due to PPP loan proceeds that were deposited into customer accounts during the 2020 period. The average annualized rate paid on our interest-bearing deposits for the six months endedJune 30, 2020 , was 1.03%, compared to 1.55% for the six months endedJune 30, 2019 . The decrease in the average cost of our deposits was primarily the result of steadily falling interest rates that occurred sinceJune 2019 , along with a shift in mix away from higher cost time and brokered deposits to lower cost core relationship deposits, driving a 36.5% decrease in our total average deposit costs period over period. TheFederal Reserve lowered the federal funds target rate five times fromJune 30, 2019 toMarch 31, 2020 , resulting in an aggregate 225 basis point decrease in the target rate. When the target rate reductions began, we took action to lower deposit rates on nonmaturity deposits, but the most meaningful cuts came inMarch 2020 in conjunction with the latest round of target rate reductions. OurLouisiana market deposits also increased$324.6 million compared toJune 30, 2019 , which historically carry lower cost of deposits than those inTexas , helping to lower our overall cost of deposits. 64 -------------------------------------------------------------------------------- Average noninterest-bearing deposits atJune 30, 2020 , were$1.34 billion , compared to$995.5 million atJune 30, 2019 , an increase of$342.8 million , or 34.4%. Average noninterest-bearing deposits represented 28.8% and 25.7% of average total deposits for the six months endedJune 30, 2020 and 2019, respectively. Borrowings During the period, we received an extension of credit of$113.4 million in Federal Reserve Bank Paycheck Protection Program Liquidity Facility funds used to support PPP loans originated in conjunction with the CARES Act. We approved and funded 3,044 PPP loans, or$549.1 million , net of deferred fees and costs, throughout our markets throughJune 30, 2020 . The demand for PPP loans has decreased significantly during the intervening time fromApril 2020 toJune 2020 . Offsetting the increase in borrowed funds was a$50 million decrease in short-term FHLB advances atJune 30, 2020 , compared toDecember 31, 2019 . The table below shows FHLB advances by maturity and weighted average rate atJune 30, 2020 : (Dollars in thousands) Balance Weighted Average Rate Less than 90 days$ 30,000 0.58 % 90 days to less than one year 20,677 0.80 One to three years 5,663 5.31 Three to five years 6,492 5.14 After five years 258,691 1.72 Total$ 321,523 1.69 % AtJune 30, 2020 , we were eligible to borrow an additional$655.7 million from the FHLB. Please see Note 8 - Borrowings in the condensed notes to our consolidated financial statements for more detail on our borrowings. Subordinated Debentures InFebruary 2020 ,Origin Bank completed an offering of$70 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030 (the "Notes") to certain accredited investors in a transaction exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended. The Notes initially bear interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, to but excludingFebruary 15, 2025 . From and includingFebruary 15, 2025 , to but excluding the maturity date or early redemption date, the interest rate will equal three-month LIBOR (provided, that in the event the three-month LIBOR is less than zero, the three-month LIBOR will be deemed to be zero) plus 282 basis points, payable quarterly in arrears.Origin Bank is entitled to redeem the Notes, in whole or in part, on or afterFebruary 15, 2025 , and to redeem the Notes at any time in whole upon certain other specified events.Origin Bank intends to use the proceeds from the offering for general corporate purposes. The Notes qualify as Tier 2 capital for regulatory capital purposes forOrigin Bank . Liquidity and Capital Resources Overview Management oversees our liquidity position to ensure adequate cash and liquid assets are available to support our operations and satisfy current and future financial obligations, including demand for loan funding and deposit withdrawals. Management continually monitors, forecasts and tests our liquidity and non-core dependency ratios to ensure compliance with targets established by our Asset-Liability Management Committee and approved by our board of directors. Management measures our liquidity position by giving consideration to both on-balance sheet and off-balance sheet sources of, and demands for, funds on a daily and weekly basis. AtJune 30, 2020 , andDecember 31, 2019 , our cash and liquid securities totaled 9.8% and 8.4% of total assets, respectively, providing liquidity to support our existing operations. 65 -------------------------------------------------------------------------------- The Company, which is a separate legal entity apart from the Bank, must provide for its own liquidity, including payment of any dividends that may be declared for its common stockholders and interest and principal on any outstanding debt or trust preferred securities incurred by the Company. The Company had available cash balances of$7.3 million and$5.9 million atJune 30, 2020 , andDecember 31, 2019 , respectively. This cash is available for general corporate purposes described above, as well as providing capital support to the Bank. In addition, the Company has up to$50.0 million available under a line of credit. There are regulatory restrictions on the ability of the Bank to pay dividends under federal and state laws, regulations and policies, please see Note 13 - Capital and Regulatory Matters in the condensed notes to our consolidated financial statements for more information on the availability of Bank dividends. COVID -19 As previously discussed, in light of the volatility and disruptions in the capital and credit markets resulting from the COVID-19 pandemic and its negative impact on the economy, we took a number of precautionary actions to enhance our financial flexibility by bolstering our liquidity to ensure we have adequate cash readily available to meet both expected and unexpected funding needs. We began accessing liquidity under the PPPLF duringJune 2020 , and have access to$3.12 billion of contingent liquidity sources including FHLB availability and PPPLF availability. Additionally, as previously disclosed, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, and our commitment to maintain strong capital and liquidity to meet the needs of our customers and communities during this exceptional period of economic uncertainty, we suspended repurchases of our shares under our stock buyback program. We believe we currently have sufficient liquidity from the available on- and off-balance sheet liquidity sources. We continue to review actions that we may take to further enhance our financial flexibility in the event that market conditions deteriorate further or for an extended period. Liquidity Sources In addition to cash generated from operations, we utilize a number of funding sources to manage our liquidity, including core deposits, investment securities, cash and cash equivalents, loan repayments, federal funds lines of credit available from other financial institutions, as well as advances from the FHLB. We may also use the discount window at theFederal Reserve Bank ("FRB") as a source of short-term funding. Core deposits, which are total deposits excluding time deposits greater than$250,000 and brokered deposits, are a major source of funds used to meet our cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring our liquidity. Our investment portfolio is another source for meeting our liquidity needs. Monthly payments on mortgage-backed securities are used for short-term liquidity, and our investments are generally traded in active markets that offer a readily available source of cash liquidity through sales, if needed. Securities in our investment portfolio are also used to secure certain deposit types, such as deposits from state and local municipalities, and can be pledged as collateral for other borrowing sources. Other sources available for meeting liquidity needs include long- and short-term advances from the FHLB, and unsecured federal funds lines of credit. Long-term funds obtained from the FHLB are primarily used as an alternative source to fund long-term growth of the balance sheet by supporting growth in loans and other long-term interest-earning assets. We typically rely on such funding when the cost of such borrowings compares favorably to the rates that we would be required to pay for other funding sources, including certain deposits. We also had unsecured federal funds lines of credit available to us, with no amounts outstanding at eitherJune 30, 2020 , orDecember 31, 2019 . These lines of credit primarily provide short-term liquidity and in order to ensure the availability of these funds, we test these lines of credit at least annually. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. Additionally, we had the ability to borrow at the discount window of the FRB using our commercial and industrial loans as collateral. There were no borrowings against this line atJune 30, 2020 . InFebruary 2020 ,Origin Bank completed an offering of$70 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030 (the "Notes") to certain investors in a transaction exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended. The Notes provided us with$68.9 million in additional liquidity. 66 -------------------------------------------------------------------------------- InJuly 2019 , our board of directors authorized a stock buyback program pursuant to which we may, from time to time, purchase up to$40 million of our outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of theSecurities and Exchange Commission . The stock buyback program is intended to expire in 2022, but may be terminated or amended by our board of directors at any time. The stock buyback program does not obligate us to purchase any shares at any time. In three transactions that were consummated inMarch 2020 , we repurchased a total of 30,868 shares of our common stock pursuant to our stock buyback program at an average price per share of$23.44 for an aggregate purchase price of$723,000 . Prior to 2020, we had repurchased cumulatively$10.1 million of shares under the stock buyback program, and as of the date of this report, our board of directors has approved approximately$29.2 million additional shares to be purchased under the stock buyback program. Due to the uncertainty in the economic conditions due to the impact of the COVID-19 pandemic, we are not actively repurchasing shares. Off-Balance Sheet Arrangements and Contractual Obligations In the normal course of business as a financial services provider, we enter into financial instruments, such as certain contractual obligations and commitments to extend credit and letters of credit, to meet the financing needs of our customers. These commitments involve elements of credit risk, interest rate risk and liquidity risk. Some instruments may not be reflected in our consolidated financial statements until they are funded, and a significant portion of commitments to extend credit may expire without being drawn, although they expose us to varying degrees of credit risk and interest rate risk in much the same way as funded loans. The table below presents the funding requirements of our most significant financial commitments, excluding interest and purchase discounts atJune 30, 2020 . Payments Due by Period Less than One-Three Three-Five Greater than (Dollars in thousands) One Year Years Years Five Years Total FHLB advances & PPPLF$ 50,677 $ 119,088
- - - 80,826 80,826
Time deposits 548,537 163,266 33,814 - 745,617
Limited partnership investments(1) 3,545 - - - 3,545
Low income housing tax credits 505 165 204 319 1,193
Overnight repurchase agreements with
depositors 11,906 - - - 11,906
Operating leases 4,485 7,737 5,091 12,128 29,441
Total contractual obligations
____________________________
(1)These commitments represent amounts we are obligated to contribute to various
limited partnership investments in accordance with the provisions of the
respective limited partnership agreements. The capital contributions may be
required at any time, and are therefore reflected in the Less than One Year
category.
Credit Related Commitments
Commitments to extend credit include revolving commercial credit lines,
non-revolving loan commitments issued mainly to finance the acquisition and
development or construction of real property or equipment, and credit card and
personal credit lines. The availability of funds under commercial credit lines
and loan commitments generally depends on whether the borrower continues to meet
credit standards established in the underlying contract and has not violated
other contractual conditions. Loan commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee by the
borrower. Credit card and personal credit lines are generally subject to
cancellation if the borrower's credit quality deteriorates. A number of
commercial and personal credit lines are used only partially or, in some cases,
not at all before they expire, and the total commitment amounts do not
necessarily represent future cash requirements.
A substantial majority of the letters of credit are standby agreements that
obligate us to fulfill a customer's financial commitments to a third party if
the customer is unable to perform. We issue standby letters of credit primarily
to provide credit enhancement to our customers' other commercial or public
financing arrangements and to help them demonstrate financial capacity to
vendors of essential goods and services.
67
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The table below presents our commitments to extend credit by commitment
expiration date at
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