Origin Bancorp, Inc. (NYSE:OBK) Q3 2023 Earnings Call Transcript

Origin Bancorp, Inc. (NYSE:OBK) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning and welcome to the Origin Bancorp, Inc Third Quarter Earnings Conference Call. The format of this call includes prepared remarks from the company, followed by a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Chris Reigelman, Director of Investor Relations. Please go ahead.

Chris Reigelman: 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 a slide presentation that we’ll refer to during this call. Please refer to page two 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 five 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.

A senior investment banker in a tailored suit with a financial market graph chart in the background.

I’m joined this morning by Origin Bancorp’s Chairman, President and CEO, Drake Mills; President and CEO of Origin Bancorp, Lance Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crapo; 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.

Drake Mills: Thanks Chris. Origin reported solid earnings this quarter as our team remain focused on executing our strategic plan and delivering for our customers and communities. Economic activity is robust throughout our markets and our credit metrics remained clean. As we’ve seen throughout the industry, the deposit environment remain 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 pre-tax 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 and 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 of our credit trends as classified assets decreased 20% from the linked quarter and NPAs were stable. 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 manage our operating expenses, which will have additional benefits moving forward.

As I have 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.

Lance Hall: Thanks and good morning. Drake is correct that the battle deposits is fiercely competitive throughout our markets. Origins makes a 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 number one market share across our six 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 8.3% 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 will turn it over to Jim.

Jim Crotwell: 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 30th, 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 30th compared to 0.44% as of June 30th 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 30th. 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 pay-offs 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 the $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 30th, 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 two quarters. As of September 30th, 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.

Wally Wallace: Thanks, Jim and good morning everyone. Turning to the financial highlights. In Q3, we reported diluted earnings per share of $0.79. 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 non-interest-bearing deposits into interest bearing accounts. Non-interest-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.

So we do continue to forecast some additional mixed pressure over the next couple of quarters to our non-interest-bearing deposit mix. Ultimately, combined with 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 the 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 the 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 standalone 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 will 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 non-interest expense also remained relatively stable at $58.7 million in Q3 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 a 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.

Drake Mills: Thanks Wally. Our story is unique and we have proven throughout our history that went 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 a shared vision of who we are and what we can be. Our credit profile is strong and our Rule 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.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question and answer session. [Operator Instructions] Our first question comes from Matt at Stephens. Matt, your line is open.

Matt Olney: Hi, thanks, good morning everybody.

Drake Mills: Good morning, Matt.

Matt Olney: Wanted to start on loan growth saw some really good trends in the third quarter, and it sounds like some of the loan growth trends in 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 and into 2024? Thanks.

Lance Hall: Yes. Hi, Matt. Good morning, this is Lance. I think it was a little bit of timing, we picked up probably a little bit more in Q3 that we thought would be in Q4. I looked at the line utilization it’s right at 50%. So it was a 1% change from 49% to 50%. So not a big shift there. Think it’s just the timing around some projects. Wally and his team have 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 you’ve kind of right in line with where we thought we would, we would be.

Matt Olney: And, 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?

Lance Hall: Yes, I would. As I sit here today, I think that’s what we’re going to think about for 2004 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 yields and managing to the appropriate NIM, you know it’s a challenge and 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.

Drake Mills: And Matt, this is Drake. I really 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 four years, we had to run higher levels than that because of our expansion into the Novo markets, but we do feel like long haul multiples are better in that space and we’re going to commit to that strategy.

Matt Olney: 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 with a refinance at a separate bank just kind of any color on that drop of classified loans?

Jim Crotwell: 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 on proceeds from the sale. So, so just really good results, Matt, from a lot of work over the last several quarters that came to fruition for us in the third quarter and we saw some nice reductions and some, and some credits that we would like to see some reductions and worked out well.

Matt Olney: Okay, I 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, 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. Thanks.

Drake Mills: Yes, Matt, Drake. There is a number of opportunities that continue to present themselves. You know, and I’m not going to stack rank these opportunities, but we certainly have conversations around M&A they 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 excess capital as we look at the burn off rate of capital utilization and there’s 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 we’re really pleased with the overall opportunities as a whole.

Matt Olney: Okay, that’s all from me. Thanks guys.

Drake Mills: Thank you, Matt.

Operator: Thank you. Our next question comes from Michael at Raymond James. Michael, your line is open.

MichaelRose: Hi, good morning guys. Thanks for taking my questions. Wally I heard you that you said that–

Drake Mills: Good morning.

MichaelRose: Good Morning, the third quarter, may be the trough for the NIM, I just wanted to get a sense if that was inclusive or exclusive of the, of all the restructuring 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 the thinking and kind of what are your expectations for kind of NIB mix as we move forward? Thanks.

Wally Wallace: Yes, good morning, 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 non-interest-bearing deposit mix will continue to decline. We’re going to stick around the same level that we said last quarter, which is low 20’s. That, that on a standalone 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 expanded 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.

MichaelRose: Very clear. Thanks Wally. And then just maybe as a separate, I know Matt asked about loan growth, but just wondering you talked about the warehouse. Specifically, and what the expectation might be as we move forward.

Drake Mills: Yes, this is Drake, Mike, how are you doing? We are ended up at the quarter I think around $286 million and, and we’re – 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, I think 43 relationships with clients, now we have 35. So our team has done an excellent job. It’s one of our better ROE earns in our organization. So they’ve recently – like I said, it’s 35 clients, I’d say the bottom was $225 million and maybe the upside is $250 million.