Q4 2019 Earnings Call

I would now like to turn the conference over to Chris reigelman head of investor relations, please go ahead good morning, and thank you for being with us earnings. Press release yesterday after a copy of which is available on our website along with a slide presentation that we were referred to during this presentation. Please refer to slide two of our slide presentation which includes our Safe Harbor statement regarding forward-looking statements, and you said non-GAAP Financial measures those joining by phone, please note. The slide presentation is available on our website at ww.w.

Please also note that our Safe Harbor statement.

Available on page five of our earnings release filed with the SEC yesterday all comments made during today's call are subject to the safe harbor statements and our slide presentation and earnings release.

During this morning, but wasn't Bancorp chairman president and CEO Drake Mills our Chief Financial Officer Steve Rowley and Lance all president of Origin bank. After the presentation will be happy to address any questions you may have. I'd like to turn the call to the Drake. Thank you Chris and good morning as I think about what we've accomplished twenty nineteen. I'm proud of hire a team was able to adapt to a changing rate environment row deposits in a in a meaningful way and manage our company to build long-term values have a couple of things I want to touch on before we get into the pool presentation at the end of 2018. We told everyone in our loan growth would be governed by the wage growth internally. We focused a tremendous amount of effort on relationship-based core deposit growth. We've delivered in our deposit growth go between nineteen and a powerful way with 11.8% decrease in deposits while reducing our Reliance on broker deposits. Our deposit growth allowed us to build City Road loans held for investment by 9.3% in 2018. We Lay the foundation for a significant wage.

for hiring teens and multiple

Markets in strategically investing in our employees as we wrapped up 2018 and enter 2019. We were well positioned to reap the rewards of a rising rate environment. Unfortunately, the environment changed we saw a loan real dries and early 2019 followed by contraction in the second half of the year as interest rates decreased. All this continued wild Bankers produce at high levels growing loans and more importantly growing deposits and then straight to move lower in the last two quarters are Bankers have been diligent and managing deposit costs that Focus will continue as we move forward with overall believe we continue to be well positioned to enhance the value of this company. Now, we're turn it over to Steve provide additional details around the financial results for the quarter and the year see, thanks Drake. Let's begin with the financial highlights for the quarter.

When that interested in, forty four point 1 million dollars decreased 1.2% compared to the linked quarter and increased 4.8% year-over-year. Our provision for credit losses was down 1.5 million dollars from the linked quarter and up $650,000 compared to the same quarter of the prior year. The link change was driven by lower charge-offs and Loan balance strength not interested income declined from the prior quarter primarily due to decreases and swap the income and insurance commission and fee income and not inches extents increased for the quarter since the third quarter reflected and FDIC assessment credit net interest. Margin where the quarter was 3.58 per cent on a fully tax equivalent basis, which was a decrease of 11 basis points from the prior month driven by the decrease in Market rates during the second half of the year.

moving to slide for

A full year net income was 53.9 million dollars compared to fifty one point six million dollars in 2018. The primary driver of this increase was the $20 or 13.5% and that interest income but was offset by higher provision expenses and higher non-interest expense our tax equivalent net interest margin for the year or 3.69% down to 3.75% for 2018 our efficiency ratio showed Improvement a 2019 as well.

Moving to slide 5 I want to touch you on our loan yields and deposit cost Trends on the top, right you can see a comparison of our loan yield Trends over the last five quarters. Well, we had declined 22 basis in comparison during the same. The Benchmark interest rates have both lost over forty basis points on average in the bottom-right. You can see our funding cross value of our non-interest bearing deposits has created a 40 basis points reduction in deposit cost in the fourth quarter compared to thirty five basis points of reduction in the prior-year fourth-quarter Thursday. We're really seeing the efforts to manage deposit cost to pay off in the fourth quarter as we have reduced the total cost of deposits by 10% or 12 basis points from the linked quarter.

when slide six

Well or not it Just Revenue was down in the quarter that was due to a third-quarter swap production volume that generated High fees and what point out the positive trend Mortgage Banking Revenue as we have gone from home early revenue of 2.3 million dollars in the prior-year fourth quarter to three point four million dollars in the current quarter with a steady upward Trend driven largely by a successful focus on retail down to production.

157 we show some non interest expense Trends in the prior quarters. We had discussed and adjusted nine inches expense rate for Q2 and Q3 and a fourth-quarter results came in line with our expectations thirty six point five million dollars in the bottom-right. You could see the efficiency ratio for the current quarter is in line with our prior year fourth quarter 50 ratio that I want to suck on the nie average asset ratio your trending downward during the year due to our focus on expenses to efficiently grow earning assets using our investments and teams employees Drake mentioned at the beginning of the call.

Last one. I'll give us a number.

view of a loan-to-deposit results in credit quality

Thanks Dave. That's right mentioned in his opening remarks. We continue to be really pleased with how productive our Bankers have been in that building relationships and driving deposit alone grow throughout the year at Bankers have not only focus on asset growth, but I'm really pleased with the c generation we have seen in the last year because the deposit growth during the year or so meaningful. I want to take a minimum and touch on that on slide eight. I'm extremely proud of the way our Bankers responded to the challenge of growing deposits. It's such a high level. We increase deposits by $446 during 2019, which is net of $170,000 reduction in broker deposit balances.

Let me go bankrupt were able to grow core deposits by $625 or 18.1% in 2019. Not only that Steve previously touched on deposit in front of the deposit is 1.04% compared to the prior-year fourth quarter cost at 96 basis points.

And the bottom right of the slide you can see the deposit changes by state. I want to highlight the growth that caused all of our states and markets during the year.

Taken from Mississippi showed impressive growth while Louisiana continues to show steady deposit growth and remains a key funding source for a loan growth throughout the markets where the 2019 positive deposit off of 87 basis points.

On Friday 9 you can see a snapshot of our loan portfolio at your end loans held for investment in is the year of $354 or 9.3% Barber quarter average loan help for investment increased 14.2% over the prior-year fourth-quarter average.

Loan relationships are Bankers have added during the year continue to be in line with our historical loan mix of roughly 50% commercial related lending including cni owner of commercial real estate and mortgage Warehouse lines of credit.

Francois p.m. I just want to touch on a couple of points about asset quality Trends in the fourth quarter. We saw our net charge-offs coming in at 26 basis points and realized down slightly from a recorder level of 29 basis points and lower than our prior-year forequarter of 37 basis points for the full year. We realize fifteen basis points of net charge-offs off.

I think quality Trends continually improve over the last five quarters with the ending non-performing loan ratio at 75 basis points and our past due loan ratio at 72 basis points off.

While the credit Trends has improved we continue to remain diligent during our underwriting process and focus on relationship based learning now. I'll turn it back over to Drake Graceland. I want to change a few things about our capital of 11:00 during the year. We increased our quarterly dividend 2 9 and 1/4 cents per share which gives us roughly a 1% dividend yield. We also authorize a forty million dollar stock buyback program and repurchased 10.1 million under the program with a dividend increase in stock repurchase. We returned over $16 to our shareholders during the year. We certainly have a lot to be proud of in 29th in our team is making a lot of progress executing on our long-term strategic goals. We are aware of the work ahead of us as we continue to build a high-performing institution. The strength of our management team has been a continued focus of this organization. I feel confident about the management team and the succession plan in place to lead us through a period of dynamic growth and strategic Focus internet new decade. We recently bought

Stay off the addition of Stacey golf trip.

For Stacey currently serves as general counsel and chief administrative officer CenturyLink and will add tremendous value and insight to our company. We feel very fortunate to have a dynamic board with a strategic Focus to build long-term shareholder value in recent years. We've invested in our people in new markets and a 2019. We saw those Investments begin to generate returns for us Lance mentioned deposit growth of their wages markets and the growth in Texas at 33% speaks to the quality of Bankers. We have and their commitment to driving growth through relationships as it's all this past year business Cycles can and will change. Our team was focused on adapting to those changes while always being mindful of the commitment to our culture our people and providing shareholder value. Thank you, and we'll now open the line for questions.

We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster off. The first question comes from Matt only of Stevens, please go ahead. Hey, thanks morning guys. I want to start on the the deposit side and we saw some nice growth on the the average 9 for sparing and we saw some good Improvement on the interest. Deposit cost around fifteen basis points. I'm curious what the Outlook is here going forward how much more room for improvement. Is there as far as bringing down deposit cost?

Hey Matt, this is Lance. I think we have a lot of opportunity. We still you know, Drake said and this earlier we felt last year that really loan growth was governed by deposit growth month. We feel like we did an excellent job in executing on that this year specifically when you look at the way that we reduced our grocery deposits and the the core deposit growth almost 18% was extraordinary and it was a reflection on the Investments that we made a Texas you saw tremendous deposit growth in in both Dallas-Fort Worth as well as Houston. We've gone through three patients now of exercises since the FED stopped and started dropping interest rates from working with our presidents to reduce our deposit cost and we still think there's live for us there and then in a really good opportunity.

Okay, that's great. Thanks Lance. And then on the loan balances, can you talk more about what you saw in the fourth quarter and I guess off of your peers are talking about higher pay downs. I'm curious kind of what you saw in this world q and and what the expectations are for loan growth in in twenty-twenty. Thanks am at this is Jake. Yeah, if somewhat of a surprise for us because we've not had the the pay down activity that we saw in the fourth quarter, but but I want to at least break that down we had about $558 million dollars to pay down outside of our normal activity 95 millionaire. That was c r e sold. So those are our customers, you know, we congratulate them. They did a good job there a sixty sixty-five million of that was c r e that went to perm again a process. It just seems to be a timing situation for us, but it was Heavy. We will see some wage.

activity in the first

Order but I but for the outlook for 2020 pipelines looking at the markets everybody feeding into that process and what we're budgeting, you know, somewhere around a 10% growth. I still feel very strongly that's going to be the outcome for twenty twenty and that that 10% Drake what that commentary is the implied assumption that pay Downs will return to two more normalized levels in 2020, or does that commentary assume that these pay Downs just remain elevated for a while? Yeah, we don't see an elevated pay down situation. We do have some slated for the first quarter that's going to slow down if you've analyzed annualized first-quarter growth. You certainly not going to get 10% off but as historical we see between mortgage Warehouse the C and the CRA pipelines are look this kids are some Runway from the cre standpoint ATC now 79 basis points and wage.

Tre the 270 so

Not run away a lot of pipeline growth. Our our teams have significant capacity. So, uh first quarter going to be a little bit slow start because of a couple of pay Downs that are continuing through CRA process, but we we feel pretty comfortable at this point that the that the growth picks up pretty pretty well in in the second quarter and we'll see that 10% through the year.

Okay, and then I'm also curious within you're within your Market. There's been some I guess upcoming we think disruption via m&a some some larger black Bank transactions. I'm curious just how you think Origins positioned and and if you expect to be opportunistic with with hiring of producers from these types of transactions,

Yeah, I think there's a lot of opportunity here for us, you know with Texas with just our organic growth in Texas at 33% The momentum we have from a deposit perspective 33% the month and we have in Texas and the teams we we have had contact and we are talking with with some opportunity but we are looking at that from the perspective of how that fits in our portfolio. Some of that activity doesn't quite or opportunity doesn't quite fit us. We are going to stay true to our to our loan mix at this point. We think that with the runway we have on c r e 9 a.m. I mean owner-occupied CRA. We got a program coming out in the first quarter, but but if some if they fit into that mix and can bring the deposits to the table, we will expand.

Yeah.

I would tell you from the president's point of going to be that there's a lot of strategy conversation that we're having inside of our markets, you know, we spend a lot of time on the culture that we Bill and our track record. I think we proved that our ability to lift out talented teams has been a key driver for us and we see that going forward. Okay, great. And then I guess last question for me. I think Lance, you know, the the elevated charge-offs in in the fourth quarter from a handful of credits any more details, you can give us behind that as far as loan type or geography or anything Broadway.

Yeah, Matt this Drake when you look at our our charge is for the fourth quarter. We still we we finished a year in the range that we expect from from an average over the last several years really what hit it what hit in the fourth quarter were was the balance of the restaurant situation that we had in the third quarter, which is about $620,000. We are one of our last energy credits. We had an appraisal on the equipment. We're exiting that credit. There was a million-dollar right down in the appraisal that we've got about a three million dollar balance. We expect that we have we will not see any additional loss of potential recovery. They're down the road as we exit that credit. Then the last piece was the the memory care of credit that we've continued to struggle with but see that resolving itself and that was about 650,000 there. So again, these are three or four years.

We're dealing with that have been.

And with us for a number of years, we haven't seen any deterioration outside that matter of fact, if you look at past dues compared to four quarter of 18, we are at 90 basis points and eighteen today. We're steady 28.9 performing loans 85 basis points in the fourth quarter 1875 basis points in the fourth quarter of 9:00 a net charge-off 12 basis points last year 14.8 this year a little little higher than our average but I just explained that classified lungs a total loans 2.09 and a quarter 18 1.574 nineteen. So we are seeing improving credit Trends. We think that credit is stable to improve and going through 20 28 and think that are charged off range is somewhere in that twelve or fourteen basis points for for our 20 20

Okay, that's great. That's all for me. Thank you guys. The next question comes from William Wallace of Raymond James, please go ahead. Thank you morning guys morning. I'd like to Circle back on one of the questions that Matt asked around deposit calls from you guys had some some pretty impressive reduction in your deposit, the 4th quarter help us understand what what we might expect on how that tracks tune em, and the first quarter of 20 and then and then progressing Thursday the rest of the year.

Hey Wally, it's Steve.

On the name basis as we said three months ago. We still expect the first quarter to have a 224 basis points decrease overall in the name the second quarter. We think anywhere from Flat to one basis points higher or lower and after that we're pretty much relatively the same on the deposit side specifically we could go about 10 basis points lower in the second quarter. I'm sorry in the first quarter and then after that it really depends we have model and our numbers just a couple of basis points coming down 1 to 2 the rest of the quarter. So the first quarter December 31st, we had some guaranteed that we we had we reduced and a couple of other depositors that we reduced with the third. Well, 3.5 plan on know if you heard that before we talked about that that's where all the presidents went through Thursday.

looked at all the rates and

We really feel that we have a handle on that so that answer your question ten basis points first quarter total deposit decrease in while I will say that a credible focus on this going through the second and third quarter. I just feel like we have to have some additional room there and you know with the deposit growth in the momentum we have that that's going to be the focus off of perspective and from you know, a cost perspective. Hey Wally, this is Lance. I might have one other thing if you're thinking about modeling if you thinking about at the end of the third quarter and second quarter, we had you know, approximately three hundred million and broker deposits at the end of the third quarter the rate on that money like 2:13 today, we're down to you know about half of that in broker deposits off the wait on that money is $153. So that that's a big lift for us. Okay, and while I'm going to come back, I'm sorry. We're ganging up on you here, but you know in that we had 18% off.

core deposit growth

The back out the reduction from 8.6% of total deposits and brokered but deposits to now, I think it's 3.1% We were able to reduce significant cost and broker deposits and you know end up with 11.8% total growth and deposit. So strong strong core deposit growth with you know, a big lift and off and I'd be growth during that period. Yeah, I mean, I I agree it looks it looks strong and and it looks very favorable. I'm not surprised. I'm surprised that you're not expecting that your margin could expand and the the third and fourth quarters just on the benefits of the funding costs, are are the new our new loan yields for new production still a relatively sizable premature relative to the portfolio yield.

Yeah, I think we're seeing you know, and we're trying to be as conservative as possible as we continue to formulate our strategy. We're we're seeing some some pricing in the market. It's still with the unknown aspect of Libor in the impact of Libor with our model. So heavily weighted on the high side and and floating. We we do have some concerns. There's we bake those concerns in we we lost a $17 credit that here recently on on a live more plus I think 150-160 basis without teased from from a from a larger player. But that that pressure we just can't ignore at this point. I do agree with what you're saying about potential expansion pack, but I think at this point with what we're seeing from right pressure and and the Libor situation we are concerned and that's why we're modeling it this way.

Okay. All right.

Fair to other questions on the on the C Income side that other income line is has been really lumpy how how might we think about that. Is that is that choice of a 7 million seven eight million dollar a year type type lineup for you guys, or would it be less than that? Just because of some of the noise we saw in the first and third quarter.

The income for 2020 we expect to grow between six and seven percent. Now there is some lumpiness from historic. We had those swaps he's and that's when the yield Curve will win and verdict and we put in about an extra million dollars in that third quarter. We don't see that going for them. So that that million dollars that's in there. You have to really take out however with that being said we still believe overall will have a 67% growth in total income and see how much this coming for mortgage.

Mortgage we're going to probably have a bout a a ten to twelve percent increase our service charges fees about the same percentage off Insurance commissions. We've had a couple couple of incidences past year. So instead of having a normal five to six percent increase in that package. We're budgeting somewhere about 4% or so when the insurance it's the and they're the three larges. It's a limited partnership income that for keeping Flats wage freeze again, we're budgeting about a million dollars less than we had last year and everything else is about the same.

While I want to go back to a comedy made around insurance and and investment we did see we'll see an impact in first quarter first quarter in early Second Life Insurance side from profit-sharing because of the tornado that that went through this area and we had some pretty significant losses in that market. So profit-sharing will be down and that's that's the hit to to to insurance and then LP investment where we saw some pretty significant swings in those the outlook for 2020 seems to be slightly better. And you know, I'm reducing the balances on those Investments. I'll be glad when I don't have that volatility.

Okay. Yeah, okay.

Thanks. I'll I'll step out and let somebody else ask about expenses. Thanks. The next question comes from Woody, please go ahead. Hello, Woody Hayes. So I'm with the higher prepayments on on loans this border. Did you have any loan prepayment fees for through em and Fork you

We did however, it was about normal and so a couple of quarters ago. We mentioned that we had three or four basis points higher than normal. We had a couple larger pre pay off in that quarter. But this past quarter of the fourth quarter, I would say that the pre-payment that are in the name is a normal amount. Nothing extraordinary got it. I wouldn't expect that to take a step back even with lower payments and twenty twenty. No, we do not we we always had some prepayments and we always model in a couple of basis points for those fees to go through. However, if there's one or two particular loans that are prepaying very early and they had three or four percent prepayment see in there, you know with two large loans can really increase that rate.

That's helpful. And then yeah looking at

Vince's does that three to five percent expense Chris and 20/20 still feel like the right growth number it does this is dead because of the situation when you look at efficiency and realize that and let's like 2019 based on where we started the year from a margin perspective and we ended up that was a twelve million dollars in Revenue almost a nine million dollar decline in net profit. So we're going to have to win on the expense side heavy focus on the teams and fill that that between three to five in a reasonable Frost with some of the Investments that we made in 2019 with a new branches that are coming online and the full expense being loaded in 2020. Also, we had $1000000 basically refund from the FDIC that is added back in for in in that three to 5%

Got it. And then last for me just you know, we excess Capital continue to take up and four Q. How are you thinking about the buy back from here? I know the poem The Stock's price is sort of gone up since the last time you read purchase stock. Does that playing a part in it?

it

I think the way we have to consider from a capital perspective. Now, you know, we we have to look at total Capital because of our loan deposit rates show our assets weighted heavily to 100% risk-weighted. So I think there's opportunity here for us to look at how we manage total Capital. We are still active from an image perspective and and you know think that there's there's Partnerships that we can form through that out to to Really look in and put tier-one to work but from a total Capital perspective, I think juice opportunity for us to add potentially some tier 2 capital and some some form and and put us in a in a position to where we can still stay active and not have any pressure from regulator. So it's it's for us now. It's it's it's a focus on m&a.

Got it. Thanks guys.

The next question comes from Kevin Fitzsimmons of d a Davidson, please. Go ahead.

Hey, good morning. Everyone warned casket what you just mentioned on just going a little deeper there. How is that process going? I know on one hand. You've you've been looking but you're being very disciplined and what you would take on and at the same time you alluded to earlier in the call that you have this more organic opportunity to maybe take some new team members on from some of the market structure and that's going on. So is the is the thing that are the things that are you're getting to see or the opportunities you're getting two months meet with or are there more they're lesser you're getting more optimistic or less based on the the potential opportunities that are out there. Thanks for returning perspective. I would have to say I'm more optimistic. I'll be frank. It's it's been difficult to find Partnerships that that truly from a cultural perspective that fit in our portfolio that we think God.

Those individuals will do well in our system. It's it's it's more difficult because

You said the right word we're going to stay disciplined and what you feel a little bit of pressure to to kind of relieved some of those disciplines, but we're just not going to do that. But I do feel that there's there's better opportunity for us going into twenty-twenty as we've continued to cultivate these opportunities.

Okay, great. That's all I had. Thanks guys. Thank you.

Again, if you have a question, please press * then 1 on a touch-tone phone.

And we have a follow-up from Matt only of Stevens, please go ahead. Yeah. Thanks taking the follow-up. Just wanted to update on the Houston Market. I know this Thursday market for used provide some really great growth. But but the RO and the profitability has been lacking for the other markets like he's remind us where we are on profitability Nappers previously and and with full-scale how much more opportunity is there to improve

Yeah.

No, nothing bad it it was interesting because of the interest rate environment and where we were with Houston and where we are now, you know, when when you look at the market growth Easton at 24% and loans and 39% and deposits from an RO a perspective now, we are approaching Thursday. I'm sorry. I'm grabbing the numbers around sixty basis points, which is which is actually good strong performance considering the reduction in yields almost lunged in that process, but we are extremely pleased with where we are. We we will see some very strong growth in Houston in 2020. And I expect that are away to to to to be in that price range at that point without any interest rate cuts of those type of things. So really have been positioned well have some opportunities for some ads in Houston. I I just dead

think that he says going to be

a big win for us

I will say that Matt that we're pretty proud of the fact that as 12/31 we have we're larger into place where we have more deposits in Texas, and we're doing the Louisiana and from a funding perspective and cost. They're doing a very good job DFW made a big big move this year.

Okay, that's a good update. And then I guess the other same with talked about for for improvement or opportunities for improvement is on the mortgage front. I heard Steve, terrible Margaret expectations in in 2020, but just more broadly, where are we as far as profitability and and and break even on on mortgage and and and what's the expectation for profit off that segment in in 2020? Yeah, we in. I'm going to take out a pitcher for the time being servicing because we are working on servicing with conversions wage like to see some significant expense reductions in on the service side production. We we have basically approached and got to the point to where we are break even and expect to see profitability and we'll have a clearer picture on that after the first quarter because we surprised really had had a better winter with volumes this year than we budgeted and we've continued to add.

producers, you know to

The winter so we're we're still I think 5227 producers away from from having the volume that we need, but from a profitability standpoint, we expect to see profitability on the production side. We we will put in together a plan for for the future of of mortgage servicing which I think is certainly long as we continue to reduce our portfolio. It was two point five billion dollars in servicing rights to begin the year. It's 2 billion now, you can tell that's where the impairment came for the impact which was about two and half million dollars in 2019. We expect that to be a lesser number in 2020, but that number was 6.7 and 19. So we're still making progress. I'm pleased where we are on the production side. It's just the unknown for for the direction. We're going mortgage servicing.

Okay, great update. Thank you. Thank you, man. This concludes our question-and-answer session. I would like to turn the conference for any closing remarks.

Thank you. I appreciate everyone's time this morning. I want to close by saying the beginning of 2019. We had several strategies that we put in place and I think the thing for 29 a strong execution. We had to grow deposits that was going to be the governor for for loan growth with with 18% core deposit growth 33% growth in Texas where we see the future this organization value continue to grow Dynamic markets that continue to produce for us managing expenses was the wind Forest because of the change in the interest rate on a moment. We think that in 2020 manage expenses going to be a big win for us strong Management in place. I think this this company is positioned to create value the next two to three years, you know, we are dealing with unfortunate headwinds in in the interest rate environment aspect of our business, but outside of that we are so positive from where we position with. Yep.

The opportunity that we will take advantage.

A job. I think the company is well-positioned. I have a better Outlook and better and more, That's about 20 20 than I've had in a year in my career. So appreciate your time. Thank you for your investment. Thank you for the opportunity to to partner with you.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.

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