Origin Bancorp Inc
NYSE:OBK
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Good morning, and welcome to the Origin Bancorp, Inc. Third Quarter Earnings Conference Call. The format of this call includes prepared remarks on the company, followed by a question-and-answer session. [Operator Intrustions] Please note, this event is being recorded. I would now like to turn the call over to Chris Reigelman, Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this call. Please refer to Page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and use of non-GAAP financial measures. For those joining by phone, please note the slide presentation is available on our website at www.origin.bank. Please also note that our safe harbor statements are available on Page 5 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; President and CEO of Origin Bank Land Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crop; our Chief Accounting Officer, Steve Brolly; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we will be happy to address any questions you may have. Drake, the call is yours.
Thanks, Chris. Origin reported solid earnings this quarter as our team remained focused on executing our strategic plan and delivering for our customers and communities. Economic activity is robust throughout our markets and our credit metrics remain clean. As we've seen throughout the industry, the deposit environment remains extremely competitive. Even with that, I'm optimistic that our bankers will continue to bring new deposit relationships to the bank. This quarter's results exceeded our expectations as pretax pre-provision upside was driven by margin stability. We executed a trade in our securities portfolio late in the quarter that will benefit our net interest margin and EPS moving forward and allowed us to pay down borrowings, which reduced our asset size. As I discussed last quarter, we remain strategic in managing below the $10 billion threshold through this year and finished the third quarter with total assets of $9.7 billion. I'm also extremely proud from credit trends as classified assets decreased 20% from the linked quarter and NPAs were stable. Both tangible book value and our tangible common equity ratio grew again this quarter, ending the quarter at $26.78 and 8.7%. Even with broad uncertainty from a macro perspective, I'm confident in Origin's ability to deliver value for our stakeholders. We have strategic options to drive positive financial results and our increased focus on pricing discipline is paying off. We are effectively managing our operating expenses, which will have additional benefits moving forward. As I've consistently communicated, we are uniquely positioned throughout our footprint to capitalize on growth opportunities in the major metros and expand market share in our more rural markets. We have the right bankers in the right markets to drive long-term value for this company, and I'm very confident in our ability to be successful. Now I'll turn it over to Lance.
Thanks, and good morning. Drake is correct that the battle deposits is fiercely competitive throughout our markets. Origin's mix of rural deposits as well as our deposit-focused incentive plans, coupled with treasury management and deposit focused calling officers benefits us in a powerful way. We are competing every day to protect valuable relationships and are doing a good job of driving new deposit clients to the bank. The June 30, 2023, FDIC annual deposit market share report highlights our value proposition and the strength throughout our dynamic markets. Origin's ability to maintain deposits has been dramatically better than the banking industry as a whole in our footprint. During the 12-month period where industry deposits declined 8.7% year-over-year, even backing out our broker deposits, Origin's deposits declined by just 0.8% over the same period. Digging deeper into these numbers, the Louisiana results continue to show the value and strength of our rural deposit base. With #1 market share across our 6 parishes combined, we were able to grow $24 million, excluding broker deposits, while overall deposits in these parishes dropped $1.1 billion. I'm proud of our team for the results and what they continue to do to drive value for this company. To help further strengthen these positive trends, this past quarter, we implemented a new deposit initiative that incents our bankers on core deposit growth. This is in addition to our existing incentive plan that is already weighted toward deposits. With this new initiative, we have seen success throughout our lending and retail teams as our net new account openings continue to grow, up 8.2% year-over-year. Also, new customer acquisition accelerated in the third quarter, up 35% year-over-year. We continue to target a loan-to-deposit ratio of 90% or less, excluding mortgage warehouse and ended the quarter at 87%. We remain focused on client selection and have been disciplined in our loan pricing with new loans yielding over 8% throughout the quarter. Our focus on deposit gathering and loan pricing should continue to support our efforts to stabilize our margin moving forward. Now I'll turn it over to Jim.
Thanks, Lance. As reflected on Slide 12, I am pleased to report solid credit metrics for the quarter as evidenced by stable levels of both past dues and nonperforming loans and a decrease in our level of classified loans. Past due loans held for investment came in at 0.27% as of September 30, which is right in line with the 0.26% reflected for the prior quarter end. Nonperforming loans as a percentage of loans held for investment declined slightly, coming in at 0.42% as of September 30 compared to 0.44% as of June 30 of this year. I'm especially pleased with the reduction reported in classified loans held for investment from 1.11% last quarter to 0.85% as of September 30. As we discussed last quarter, we continue to diligently monitor our loan portfolio and proactively address any identified issues. As a result of these efforts, for the quarter, we were able to achieve a $20 million reduction in classified loans, which were primarily due to payoffs with upgrades providing additional benefit. I'd also like to mention that during the third quarter, we completed our annual third-party loan review. The outcome of this review was only one rating adjustment in the past category on a $250,000 credit. As such, I continue to be very pleased with the effectiveness of our internal loan rating process and portfolio management. Annualized net charge-offs for the quarter came in at 0.14% compared to a level of 0.10% for the prior quarter and was in line with expectations. For the quarter, our allowance for credit losses increased $824,000 to $94.2 million, increasing from 1.24% to 1.26% as a percentage of total loans held for investments. Net of Mortgage Warehouse, our reserve ratio reduced slightly from 1.32% as of June 30 to 1.30% as of quarter end. This reduction was primarily driven by the improvement in levels of classified loans mentioned previously. As to reserve levels and as discussed in previous quarters, we continue to balance our sound credit quality and the resilience of our loan portfolio with continued economic headwinds. On Slide 13, we have updated the additional information on our CRE office portfolio that we have shared for the last 2 quarters. As of September 30, this segment of our portfolio totaled $363.5 million with an average loan size of only $2.1 million. The credit profile of this segment continues to be sound, reflecting a weighted average loan-to-value of 60.3%, no past dues, no classifieds, no nonperforming and no charge-offs. This segment of our portfolio continues its sound performance, driven by our constant focus on relationship banking. In summary, we continue to be pleased with our credit performance and our strong and stable credit profile. I'll now turn it over to Wally.
Thanks, Jim, and good morning, everyone. Turning to the financial highlights. In Q3, we reported diluted earnings per share of $0.79. And on an adjusted basis, Q3 EPS were $0.71 after excluding a $10.1 million write-up on an equity investment and a $7.2 million loss on securities sold during the quarter. Starting with deposits. Total deposits declined 1.4% during the quarter. We continue to see a shift of noninterest-bearing deposits into interest-bearing accounts. Noninterest-bearing deposits declined 5.4% this quarter, and the mix fell to 24% of total deposits in Q3 from 25% in Q2 and 28% in Q1. Importantly, the pace of the decline in Q3 was a slight deceleration from the pace we saw in the first half of the year and was better than our expectations. Though we do continue to forecast some additional mix pressure over the next couple of quarters to our noninterest-bearing deposit mix. Ultimately, combined with the continued need to price up interest-bearing deposits, our total deposit beta increased again, though at a slowing rate from 35% in Q1 to 42% in Q2 and 47% in Q3. We continue to expect our deposit beta will increase in the fourth quarter. Importantly, loan pricing discipline and a positive shift in the earning asset mix helped offset funding cost pressures and drove stabilization in our net interest margin, which contracted just 2 basis points during the quarter to 3.14%. Excluding net purchase accounting accretion of $530,000 in Q2 and purchase accounting amortization of $38,000 in Q3, our adjusted NIM was flat at 3.14% for both quarters, better than our expectations. As Drake mentioned earlier, at the end of the quarter, we decided to execute a strategic trade in our securities portfolio. We sold securities with a book value of $182 million at a realized loss of $7.2 million, and we paid down FHLB advances with the proceeds. This strategy serves a dual purpose of: one, boosting forward margin and EPS results in a financially attractive manner; and two, providing ample balance sheet room to manage our assets below the important $10 billion threshold through year-end. With the net interest income benefit we received from the trade, we estimate a stand-alone NIM benefit of 11 basis points and a 1.7-year earn-back period on the realized loss. While our continued expectation of deposit mix and pricing pressures, we'll eat away at some of the 11 basis point NIM benefit provided by the trade -- our current expectations are that 3Q NIM of 3.14% may represent the trough. Shifting to fee income. We reported $18.1 million in Q3. Excluding the previously mentioned $10.1 million write-up on an equity investment and $7.2 million loss on securities sold, our adjusted fee income was $15.2 million in Q3, flat from $15.2 million in Q2, which excluded the $471,000 gain on the retirement of sub debt. Our noninterest expense also remained relatively stable at $58.7 million in Q3 and down slightly from $58.9 million in Q2. We remain focused on operating expense management and continue to expect relatively stable expense levels in the fourth quarter. Turning to capital. We note that our TCE ratio remained above 8% for the fourth consecutive quarter, ending at 8.7% as slight growth in tangible common equity, coupled with the decline in tangible assets due to the securities trade at the end of the quarter. Furthermore, as shown on Slide 22 of our investor presentation, all of our regulatory capital levels at both the bank and holding company levels remain above levels considered well capitalized even if we were to include our AOCI loss in the calculations. As such, we remain confident that we have the capital flexibility to take advantage of any potential future capital deployment opportunities to drive value for our shareholders. With that, I'll now turn it back to Drake.
Thanks, Wally. Our story is unique, and we have proven throughout a history that we can successfully navigate cycles. We operate in driving growth markets with diverse economies. We have a seasoned management team that is committed to our culture and has a shared vision of who we are and what we can be. Our credit profile is strong, and our rural deposit base has provided the foundation to capitalize on growth opportunities. To say I am pleased is an understatement as I think about our company's trends and the overall performance of our people in the midst of current conditions. Thank you for being on the call today. Now we'll open the call for questions.
Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Matt at Stephens.
I want to start on loan growth. You saw some really good trends in the third quarter, and it sounds like some of the loan growth trends in the third quarter maybe even surprised you guys. Anything to note there, especially in the utilization rates, any shift there? And then as you look at the pipeline, how are you thinking about loan growth in the fourth quarter into 2024?
Yes. This is Lance. I think it was a little bit of timing. We picked up probably a little bit more in Q3 than we thought would be I looked at the line utilization is right at 50%. So it was a 1% change from 49% to 50%. So not a big shift there. I think it's just the timing around some projects. Wally and his team already forecasted Q4 and we're looking at about 1.2% growth in the quarter for 4, which would be right under 5% annualized, which I think is kind of right in line with where we thought we would be.
And Lance, as you think about 2024, any shift or updates from that kind of that mid-single-digit range for the fourth quarter? Can we assume that trend could hold maybe for a few more quarters beyond that?
Yes. I would -- as I sit here today, I think that's what we're going to think about for '24. And again, as we've talked about for us, it's all about our ability to maintain the right loan-to-deposit ratio, making sure we're getting the right loan deals and manage into the appropriate NIM. It's a challenge in the fact that we have dynamic markets, and we continue to see growth opportunities in Texas that are attractive, but we've got to be very strategic and smart in the way that we manage our loan-to-deposit ratio.
And Matt, this is Drake. I want to make a point again I did last quarter that strategically, we are committed to and are focused on managing sub-90% loan deposit ratio ex mortgage warehouse. So that's -- as I've said in the past, for years, we had to run higher levels than that because of our expansion into de novo markets, but we do feel like long haul multiples are better in that space, and we're going to commit to that strategy.
Yes. Okay. I appreciate that, Drake. And on the credit front, really good report on the classified loans coming down this quarter. I think a lot of your peers are going the opposite direction. So that's great to see. Jim, I think you mentioned that the payoffs were a big part of that. Any more color on that? Did those borrowers pay off the loans themselves? Was it refinanced at a separate bank? Just kind of any color on that drop of classified loans?
Right. Most of that was, I would say, a bit split between just refinancing into other financial institutions. And also we had one relationship where they actually sold a portion of their business, and so it results in proceeds from the sale. So just really good results, Matt, from a lot of work over the last several quarters, it came to fruition for us in the third quarter, and we saw some nice reductions in some credits that we would like to see some reductions in. So it worked out well.
Okay. Appreciate that. And then just lastly, I heard Wally's comments there at the end about being ready for capital deployment opportunities, kind of a broader comment. I didn't know if Wally or Drake or anybody else want to kind of just stack order or kind of update us on the kind of capital strategy deployment thoughts here?
Yes, Matt, Drake, there is a number of opportunities that continue to present themselves. And I'm not going to stack rank these opportunities, but we certainly have conversations around M&A that continue disconnected from a couple. We also have market expansion opportunities through lift-out scenarios that could come our way that are very attractive. We also are starting to look at sub debt as an opportunity to deploy the excess capital as we look at the burn off rates of the capital utilization of those opportunities and also looking towards 25 and 26 as we see some of the sub-debt start to reprice. So we think there's a number of opportunities that we are going to make the best effort to deploy that capital that's most beneficial to our stockholders at this point. But really pleased with the overall opportunities as a whole.
Okay. That's all for me.
Our next question comes from Michael at Raymond James.
The third quarter may be the trough for the NIM. I just wanted to get a sense if that was inclusive or exclusive of all the restructuring this quarter? And then maybe separately, just on the betas, I think you guys had kind of talked about 50% beta by the end of the year. Is that still kind of in the thinking and kind of what are your expectations for kind of NIB mix as we move forward.
Yes. Mike. So maybe the way to think about this is take the securities trade out of the equation right now. In that scenario, we do -- we are modeling that the noninterest-bearing deposit mix will continue to decline. We're going to stick around the same level that we said last quarter, which is low 20s. That on a stand-alone basis, would add pressure to the net interest margin. But then you add in the 11 basis points from the securities trade, and we think net interest margin expands in the fourth quarter, probably get more than half of that 11 basis points. And then I think we're in the process of bottoming and we don't see the pressure going down further than where we reported in the third quarter. So we think the third quarter could be the bottom for us because of the benefits of the securities trade.
Very clear. And then just maybe as a separate, I know Matt asked about loan growth, but I just wanted to talk about the warehouse specifically and what the expectations might be as we move forward.
This is Drake, we ended up at the quarter, I think, around $286 million and where we think in the fourth quarter will come in between $225 million and $250 million based on a couple of scenarios. We're still looking very closely at quality of those relationships. And we, at one point, had a high of, I think, 43 relationships for clients, then we have 35. So our team has done an excellent job. It's one of our better ROA errors in our organization. So they've reduced it. Like I said, it's 35 clients. I'd say the bottom was $2.25 and maybe the upside is 250. Very helpful.
And maybe just finally for me. You guys have an insurance business. We've seen a couple of sales here. Just doing some back of the envelope math, it looks like you can get about $120 million if you sold it at a 5x revenue multiple. Just wanted to get your thoughts there and just general what you think about the insurance business?
I still believe there's a lot of value in noninterest income and continuing to push. We have some opportunities to, I think, in '24, then potentially enhance our levels of noninterest income. I like that business a lot. I like the relationships we have within those agencies. I love the fact that we are able to cross-sell those relationships. We have a great relationship out of Streetport Bossier and the PolyWhite group that does a great job. We're going through a potential branding opportunity here. So for me, long haul, I love the business. I love what it does for this organization. And I just wouldn't say that's something that we're truly considering at this point.
Our next question comes from Kevin at D.A. Davidson.
I'm just curious about -- you mentioned earlier about one of the considerations with paying down borrowings with the bond restructuring proceeds. Was that keeping the balance sheet size below $10 billion as you cross year-end. As you look out with 1 quarter left, do you feel incrementally more comfortable at coming in below that? Or are there other kind of things you need to be looking at just next quarter in terms of does it limit the amount of loan growth you put on? Does it -- just trying to think through what restraints you might have this next quarter to ensure you meet that goal?
Kevin, I think if you look at the size of our balance sheet at September 30 after we paid down the FHLB, we feel highly confident that we can stay under $10 billion without having to make any decisions that would limit growth in the loan portfolio or anything like that. We feel pretty comfortable where we are.
Okay. That's what I thought. I just wanted to make sure. And you mentioned earlier, I think Drake might have mentioned earlier that expenses are a priority, and you're looking at that. And when revenues are under pressure, obviously, you want to limit that growth. Are there any specific initiatives that you have going on right now or are contemplating that you can give any color on for that?
Yes. We are -- there's no stone. We're not turning over to look at opportunities right now from an expense standpoint. Lance and his team, I think, are doing an awesome job of everything from personnel or nonproductive people to another different things that we're doing. And our focus here is to try to create a flat expense environment over the next several quarters. And what I mean by that is we have opportunities to do a few things that would increase expenses, but yet long haul significantly increased revenue opportunities for us. So if we can mine the expenses at this point and create this environment moving far in a flat environment, that's a big win for us because we are creating what I think are ROE opportunities for us, utilizing expenses, but yet on the back end cutting out nonproductive expenses.
And Drake, those opportunities, I'm assuming, are kind of like lift out potential like you said it before.
Yes.
Okay. And one last one for me, just -- and I apologize if you covered this already earlier. But just in terms of credit quality, we've had some instances of banks seeing some problems spike up, Granted, we're coming off a low base. So maybe if you could just address, are there any areas you're specifically concerned with and limiting your exposure to? And if you could also address your SNC exposure and what that is as a percent of loans, just given that we've had some larger banks report or we're involved in a problem loan there?
Thanks. Yes. I wish there was in a more precise way to tell you this is where I'm very concerned about credit. It's amazing how resilient I said office was a big concern of mine. Certainly, for us, we're not seeing any deterioration in that area, and we continue to stress those levels pretty heavily. We're fortunate that we don't have a lot of concentration in metro office. I said anything that had to do with consumer spending in retail, especially around the restaurant and hotel I'd be concerned about. We're not seeing deterioration there, which is surprising. We are seeing a little bit of -- not a little bit, a lot of weakness in the automobile area. Our dealerships are holding up well. We don't have a tremendous number of those, had a conversation with a dealer and it is really impacting those sales. But overall, there's not a single area with the exception, and we clean that up of assisted living, and we just have a couple of credits left in that portfolio. So I'm very pleased with not only the -- what we're seeing as far as quality, but the depth of analysis that we're doing from a stress standpoint in our portfolios and how well those cash flows are holding up as we continue to stress them up. But from that, I think Jim is going to address the SNC percentages because we just don't have a big SNC portfolio, Jim.
Yes. Right now, we only have a Kevin, right now, we only have 11 relationships, about $153 million in the SNC portfolio. And I would say these are really relationship-driven opportunities that we have. So while they meet that criteria, we have relationships with all of these. So -- and to echo what Drake said, as we go through the portfolio and look at the various areas, obviously, we're relationship focused. And I've shared before when the analysis, when we look at sectors and look at the overall Ganter support, it just really, really does point out the -- I think, the resiliency of the portfolio and the relationship focus that we've had. So I'd be happy to address any other questions you may have. But right now, we feel really good about the resiliency of our portfolio.
[Operator Instructions] Our next question comes from Graeme at Piper Sandler.
I just wanted to circle back to the bond transaction quickly. Obviously, pretty attractive financially. There's a little bit of a capital hit, but you guys have plenty of that right now. Would you consider doing any more of this or a similar transaction in the future? I know borrowings aren't huge anymore, but maybe you could pay down some brokered or reinvest the cash flows elsewhere. What are your thoughts on, I guess, additional transactions like this one?
Graeme, the way we're approaching that decision strategically is purely around the period of time it takes to pay back the realized loss. We believe that if we have the opportunity to deploy capital in a manner that would pay back a loss less than 2 years that, that is an attractive period that we should consider. Rates have obviously moved against us so far this quarter. But if we see opportunity, we will jump on it. Okay.
That's helpful. And then I guess just, Drake, I think you mentioned some lift-out opportunities and maybe some market expansion opportunities. What sort of markets are you interested in today? And what would be the size or the scale of the level of team you would want to bring on?
Yes. That's kind of open. As you know, we're highly interested in Texas and invested in Texas and continue to see significant growth. I think 90% of our loan growth this past quarter was Texas. So there are Texas opportunities that we will continue to look at. And the size of these teams aren't going to be something to the point to where we look at many people. We really look at the deposit portfolio and also their relationships on the loan side, do they fit with us is at C&I. That's what we look for. And in these cases, I would think if I was an investor and I am, that it's much easier to look at a $1 billion team that has, let's say, deposits and C&I loans and be able to manage through that to the M&A deal. So we've got a couple of opportunities that might add up to that. But again, we're still in negotiation process.
Okay. I appreciate it. All my other questions have been asked. Thanks. Nice quarter.
[Operator Instructions] Our next question is a follow-up from Matt at Stephens.
I want to make sure I understand these new disclosures around repricing the loan and securities portfolio on Slide 15. And it looks like you're expecting the cash flow some securities portfolio around, call it, $29 million over the next year. I guess the first question is, can we just assume that these maturities will continue to help fund the organic loan growth during this time?
Yes, Matt, that is exactly what our expectation is. We -- as you know, with the deposit side of the institution is where the battle is where basically governing our loan growth and a lot of excellent opportunities in our footprint. We don't see that necessarily slowing down. So any opportunity we have to redeploy a 2% instrument into a 8%, 9%, 10% loan. We're going to take advantage of that, and that's our plans at this point. Go ahead.
Matt, you bring up a good point. I think it's important to remember the asset side of the NIM equation as we continue to have deposit pricing pressures, we have been extraordinarily focused on the pricing of new loans. And we're pretty proud at how disciplined our lenders have been new and renewed loan yields are coming in, in the mid-8s, as Lance mentioned in his prepared remarks. And obviously, as Drake mentioned, as securities roll off and the 2s, that's a pretty attractive redeployment opportunity. So if you look at the fourth quarter and next year, we have a sizable amount of principal coming out of the securities portfolio and principal coming out of the loan portfolio that will give us the opportunity to reprice. On an average basis, the price coming off is in the 4s, and it's coming back on in the 8s. So that's what gives us pretty good comfort in our commentary around the margin moving forward.
Yes. Good point, [indiscernible]. Appreciate that. And I want to make sure I understand the disclosures on the loan repricing side. I think we're all trying to appreciate for Origin and other banks, the level of the fixed asset repricing we should anticipate going forward. And looking at Slide 15, I see there's about $3.4 billion of loans or pricing over the next year. And on the right-hand part of that slide, it looks like there's about $3.3 billion of loans that are floating. So I guess the question is trying to appreciate kind of how much of those loans that are repricing but are not floating. Is it just the 3.4 minus, 3.3, so call it $100 million of fixed rate loans set to reprice over the next year. Is that the right way to look at that?
I'll make it easier for you, Matt. Over the next 5 quarters, we've got $500 million to $600 million in principal coming out of securities and loan portfolio.
$500 million to $600 million and then includes loans and securities.
Yes.
Perfect. Okay. That's what I'm looking for. Appreciate that, Wally, and everybody else, and thanks for your time.
This concludes the Q&A. Handing it back to Drake Mills for any final remarks.
I want to thank everybody for the time today. I want to close with saying that I am extremely positive about the outlook for our company. When you look at -- we are in the process of really getting the first year behind us with our BTH transaction, on a wonderful group of people that we brought on. What they bring to us in East Texas, Dallas, Fort Worth has been extremely valuable, and we appreciate the process we've gone through there. We've been very successful with that. Our geography, strong economies, attractive demographics, our team. I've never been more proud of the experience, the adhesive work that we have, just a true love for each other that we work through. Our credit profile is strong. Client selection is really good. We're focused on yields. Our teams are doing extremely well, deposit base, rural deposits continue to show their value. We're deepening relationships on every side of -- in each one of our markets. the opportunities we have in our geography and the opportunities we have to -- for expansion continue to impress me. So I appreciate very much the investments you have the time today, and we're open for questions at any time. Appreciate the relationships, and thank you for being on the call.
This cocludes today earning call thank you, and have a great day.