Q4 2021 Origin Bancorp Inc Earnings Call
Good morning, everyone and welcome to the origin Bancorp, Inc. Fourth quarter 2021 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Also note todays event is being recorded.
At this time I'd like to turn the conference call over to Chris Riggleman head of Investor Relations. Sir. 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.
The slide presentation that we were referred to during this presentation.
Please refer to slide two of our slide presentation, which includes our safe Harbor statements regarding forward looking statements and the use of non-GAAP financial measures.
For those of you joining by phone. Please note. The slide presentation is available on our website at Www Dot origin Dot bank.
Please also note our safe Harbor statements are available on page six of our earnings press release that we filed with the SEC yesterday.
All comments made during today's call are subject to the 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.
<unk> Financial Officer, Steve Brolly, President and CEO of origin Bank Lance Hall.
Our chief risk Officer, Jim Crotwell.
And our chief credit and banking Officer Preston Moore.
After the presentation, we'll be happy to address any questions you may have.
Now I'll turn the call over to your drug.
Thank you, Chris and good morning, looking back on the past quarter and the full year I am pleased with our results what we have accomplished as a company.
Moving into 2022 we are deliberate and purposeful in how we execute through our planning process that is focused on creating sustainable long term value. Our success places us in a position of strength as we take advantage of positive operating leverage.
You can see that we had an impressive fourth quarter and a full year 'twenty 'twenty. One we ended December with $7.9 billion in total assets $5 $2 billion in loans and $6 $6 billion in deposits.
Last one provide more detail regarding our loan and deposit growth, but I want to steal a little thunder of his and mentioned that we show five 7% growth in loans, excluding PPP in mortgage warehouse quarter over quarter, which is 23% annualized as it began 2021, we felt confident in our ability to deliver our highest.
Single digit low growth.
That's exactly what our bankers deliberate again backing out P. P. P and mortgage warehouse, we saw an increase of $404 million or 9.9% year over year.
I'll say that deposit growth Lance, but I'm pleased with how our bankers continued to deliver strong growth.
Core organic relationships.
Looking at our income statement I'm proud of our results for the quarter and the year. We finished the quarter with record net income of $28 $3 million or $1.20 diluted earnings per share. Our net interest margin was three point O, 6% on a tax equivalent basis, and our efficiency ratio was 56.92%.
For the full year, we had record net income of $108 $5 million or $4.60 diluted earnings per share.
Our pretax pre provision earnings was $122 million for 2021 up 17% year over year, our efficiency ratio improved in 2021 even with slight increases in noninterest expense, which Steve will go through later in the presentation.
Our primary strategy continues to be front and center for our management team is the efficiency of this company as we focus on expense management, we will always be mindful of the investments in people and infrastructure that produce stronger revenue streams. This has been evident in our investment in the Texas market, which you can see on slide nine our Texas bankers grew loans three.
<unk> hundred $73 million and grew deposits $558 million in 2020 world when.
When you look at the last five years, we've grown loans and deposits at a compound annual growth rate of over 21% and 28% respectively. We've had incredible success with DSW Houston with the way our teams to produce this applies to our legacy bankers as well as our lift out teams, we will continue to leverage our infrastructure and aggressively pursue.
The most talented bankers in our market now I'll turn it over to Lance.
Thank you strike.
We had another strong quarter of growth and I'm proud of the meaningful results our bankers have produced.
Origin has always had the philosophy that our success comes directly from having the right people.
We certainly have high quality bankers, who are attracted high quality relationships throughout all of our markets.
We have been purposeful and strategic with client selection.
This has been and will continue to pay off for us as we continue to focus on the client experience and being trusted advisors.
On slide 10, you can see that that make organic loan growth of over 50% and a compound annual growth rate of 10, 8% and our loan portfolio. Excluding P. P. P more in mortgage warehouse over the last five years.
As you dissect the corner about alone business, excluding PPP and look specifically at C&I owner occupied CRE and owner occupied C and D.
We show five year growth of 37% with a compound annual growth rate of eight 2%.
Greg appropriately bragged on our bankers production in the fourth quarter as loans held for investment excluding PPP in warehouse grew $241.5 million or five 7% compared to the linked quarter, which is 23% on an annualized basis.
I'm also pleased that we delivered 9.9% loan growth for the year.
In prior quarters, we've spoken in detail as to how we were able to use the PPP program to deliver for our clients in a time of need during the initial impact of the pandemic.
At the end of 2021 we have $105.8 million of PPP loans outstanding with $3 million of net deferred fees remained weak.
We expect to recognize the balance of those fees in the first half of 2022.
On Slide 12, you can see an overview of our deposit trends.
We have and will continue to place a high level of focus on growing noninterest bearing deposits.
In the fourth quarter average noninterest bearing deposits increased $145 million compared to the linked quarter and now represent over 33% of total average deposits.
You know every year, we saw an increase of average noninterest bearing deposits of $425 million or 25, 2%.
Core deposits remain at the center of how we truly value our loyal relationship.
Regardless of the environment origin, clearly understands the significance of a core deposit relationships and will continue to emphasize that philosophy with our bankers.
In 2020 , one our bankers responded by growing average core deposits, a $1.37 billion or 33%.
This growth took place while our cost of total deposits decreased 12 basis points year over year.
In other words, when we place a high level of focus on leveraging technology to drive value for our company.
During the past year, along with other initiatives, we launched a new website increased our partnerships with Fintech and integrated robotics into many of our processes. This focus on technology is a major component of our vision statement and what we believe is critical to enhancing the client experience and creating long term long term sustainability.
Now I'll turn it over to Jim to go through our credit quality metrics.
Thanks, Lance if you can see on slide 14, our overall credit quality continues to improve as evidenced by our continued reduction in classified loans classified loans held for investment as a percentage of total loans held for investment at a P. P. P loans reduced the 1.35% as of year end, reflecting a 35.
[noise] percent reduction from the level a year ago.
Past due loans held for investment to total loans held for investment net of P. P. P loans ended the quarter at 0.5%, which is consistent with the levels reported throughout the year nonperforming loans held for investment to loans held for investments net of P. P. P. Also remained stable at 0.49%.
Lastly, annualized net charge offs for the quarter to average loans held for investment came in at 0.22% down two basis points from Q3 and has also been stable throughout 2021.
Based on these metrics as well as our ongoing review of our portfolio. We continue to be extremely pleased with the stability and resiliency of our portfolio, which continues to be driven by our focus on relationship banking.
We decreased our allowance for credit losses to $64 6 million, a $5.4 million reduction from quarter in Q3 as.
As of year end 2021 our reserve represented 1.23% of loans held for investment and 1.43% of loans held for investment net of P. P. P in mortgage warehouse loans.
The decrease in the reserve was driven by the improving credit quality as well as continued improving economic forecast with that said, we continue to keep a close eye on the omicron variant and its potential impact on economic conditions as well as inflationary pressures continue supply chain disruptions and labor shortages and their potential impact.
All in all we are very pleased with the overall performance and stability of our portfolio.
Now I'll turn it over to Steve.
Thanks, Jim I'll start on slide 15.
Our total yields on loans held for investment increased six basis points in Q4, which includes the impact of PPP loan forgiveness.
Excluding the impact of PPP loans, our yield on loans held for investment decreased four basis points in the quarter.
Top right graph shows the continued decrease in our cost of funds as our total cost of deposits was 19 basis points for the quarter, representing a 39% decrease from the fourth quarter 2020.
On the bottom right graph, you'll see our fixed and variable loan composition.
As an asset sensitive bank with approximately 60% of our loans floating increased interest rates will be beneficial for Oregon.
We expect to generate an approximate incremental $20 million or nine 1% and net interest income from a 100 basis point parallel shift in interest rates.
At December 31, 2021, 51% of our Prime and one month LIBOR index loans.
Interest rate below their floor interest rate.
With an increase of 50 basis points, only 20% of our prime and one month LIBOR index loans will have a note interest rate below the floor interest rate.
With a total of a 100 basis point increase that percentage decreased to seven 2%.
Slide 16 shows our recent net interest income and NIM trends.
The graph on the left shows our five quarter trends of income and NIM.
Our net interest income increased $1 $6 million, representing a 3% quarter over quarter increase.
Excluding P b P and mortgage warehouse, our net interest income increased from $42 9 million to $45 million or 5% quarter over quarter.
We believe that our net interest income will continue to improve in 2022.
The graph on the top right shows the change in net interest income excluding P. P P and mortgage warehouse loans of $2 $2 million from the third to the fourth quarter.
Every balance sheet component improved compared to the prior quarter with interest from investment securities, increasing $1 $2 million in real estate and C&I loan income contributing $673000.
The bottom graph shows our NIM quarterly changes with lower yielding securities contributing to our largest negative impact due to the fourth quarter, having a full quarter impact on the investment securities purchased that was made in the latter part of the third quarter.
Slide 17 is our net revenue distribution.
The top left shows our net revenue growth since our IPO.
And the <unk> 'twenty, one over Q3, Q2 1 increase of $2 $4 million.
The bottom left graph details our noninterest income lines.
Mortgage banking revenues increased 5% from the third quarter to the fourth quarter.
Insurance Commission and fee income, which is the seasonal revenue producer increased three 5% compared to the fourth quarter of 2020.
We added a new table this quarter to give clarity to the components of other noninterest income which is on the top right.
During the fourth quarter, we completed the acquisition of the remaining 62% of like an insurance agency.
The accounting rules require us to fair value, our original 38% investment and that produced a $5 $2 million fair value gain.
Slide 18, our noninterest expense analysis, we reported total noninterest expense of $44 million, an increase of $1.2 million compared to the third quarter.
The main driver of this increase was an additional $900000 incentive accrual primary due to the growth and loan production.
We continue to focus on efficiencies support our growth in the bottom graph represents our quarterly operating leverage and efficiency ratio trends now.
Now I'll turn it over to Drake.
Thanks, Dave or.
Our capital position has supported our strong organic growth, while allowing us to continue building value of partnerships I mentioned on our last call that we would close to in market insurance acquisitions in the fourth quarter. Those partnerships were successfully finalized in December having a slight impact on capital we're in a strong position and as I have consist.
Gently stated we will continue to take an opportunistic and disciplined approach in deploying our capital in ways that we believe will be beneficial to our shareholders and drive long term value.
2021 was a great year for our company, we executed on our strategic plan and delivered on what we told the market. We would do we produced strong organic growth took advantage of dislocation in the market attracted highly talented bankers effectively managed our expense structure maintain strong credit quality and significantly grew our Texas franchise.
I am proud of the employees of origin and what they accomplished in 2021, they remain committed to our culture, which is unique and separates us from others in our market and continues to be a competitive advantage. This was reinforced this year by being recognized by American banker magazine as the third best Bank to work for in America.
The origin vision is to combine the buyer of trusted advisors with innovative technology to build unwavering loyalty by connecting people to their dreams.
Our vision is clearly in focus we are strategic and intentional about following the vision to drive us to attract highly talented bankers, who want to be a part of an award winning culture and continue to build a best in class growth story.
Thank you for being on the call today, and we'll open it up for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session to ask a question you May Press Star and then one using a touchtone telephone to withdraw your question you May Press Star two.
At this time, we will be we will pause momentarily to assemble the roster.
Our first question today comes from Matt Olney from Stephens. Please go ahead with your question.
Yeah.
Thanks, Good morning, everybody.
Good morning, Matt.
I want to start with the loan growth and it's great to see the robust loan growth when I take out PPP mortgage warehouse any more colors on the driver of the loan growth in the fourth quarter and if you could speak to.
Utilization rates are or paydowns or anything else that you think it's more notable as far as the driver and then as you look into 2022, what type of growth do you expect ex PPP in mortgage warehouse.
Yeah, Hey, Matt Good morning, this is lance.
We started last year I was very confident that we were going to get high single digit loan growth. So I was really pleased in the third and fourth quarter to see that come to fruition. We felt very confident all year on our pipelines and the conversations with our presidents and we kind of walked into Q4 with about a 300 million dollar pipeline at the time.
And that came out great.
Texas continues to be the huge driver for us.
Almost 100% of the loan growth came in the Texas markets as those investments in Dallas, and Fort worth and Houston continue to pay off.
You know on a going forward basis.
We just feel like we're an organization that is built to grow from our geographic management model to the way that we can send to the culture that we've built that allows us to lift out teams.
So if you look at slides nine and 10 of the slide deck, where traditionally growing about 20% in Texas, which is equating to <unk>.
Double digit loan growth for the company and we think that's going to continue and to continue next year.
So lance if I layer in that 20% plus growth in Texas, along with the other markets do we get back to the high single digit level on a on a combined basis is that a fair way to look at it.
Yeah, Matt I would tell you from a budget perspective, we're budgeting, 10% loan growth. We think we can drive double digit loan growth. It was also great to see in Q4, our line utilization to get back to historic levels, We went from 42% to 48% and in utilization, which equated about 113 million in C&I growth.
It area.
Hum.
Fact that the vast majority of this was C&I, which is where we like to drive this business.
It was overall just a.
A really really good quarter for us and we see that continuing into next year.
Okay, that's great Lance and then on the deposit side also some really strong growth in the fourth quarter, we would love to hear your thoughts on.
How sticky that deposit growth is just trying to appreciate if anything.
Seasonal could be in the fourth quarter numbers, and then same thing expectations for deposit growth as you roll into 2022.
No.
We we have.
Continue to Incent, our bankers on core deposit growth specifically in our base and you've seen we've got our N b and that was our stated goal of the last few years, we've had to get over 30% and I'll be on a portfolio and I think we've gotten up to 33% now from a seasonal perspective, you know we do have public bonds here in our core markets in North Louisiana.
Through some of the tax dollars you will see a 100 $150 million ramp up there at the end of the quarter that'll work itself back out through the year as those dollars get distributed.
But then we also chart that year over year, and we always continue to see.
<unk> growth in that in that portfolio book of business. So.
Something that we're continuing to strive to do and you know we're now at this point down to 79% loan to deposit ratio and we feel like we've got a great opportunity to.
With that liquidity to work in our loan portfolio.
Okay. Thanks plants and then just lastly on the fee side there were a few moving pieces in the fourth quarter I think you called out the fair value gain but I'm guessing as we look into the first quarter, we should get some more benefit from insurance income from the.
The closing of those two deals in December can you point us to a range or a landing spot for us to think about for the first quarter as you integrate all these different items.
And you're talking about total piece, you're not just talking about insurance correct.
So let's see.
Going to start with a subset for insurance just so you can see because that's going to be a little bit larger than everything else insurance is about $13 million. This year, we expect it to be about $20 million.
In 2022 other than that we expect mortgage to increase about six 6% and all the other fees to increase low single digit number now swap fees, we really don't think that if rates increase swap fees probably won't increase.
Then the last piece really limited partnership income.
We normally budget that kind of flat, but thinking maybe maybe a million dollars a year, but that is very volatile.
Got it.
Okay. Thank you guys.
Thank you Matt.
Jamie do you have the next question for Us.
Jamie are you still on.
Okay.
Okay.
Okay.
And ladies and gentlemen, this is the conference operator, I believe I am on mute it I do apologize, we're having technical difficulties on our end.
Attempting to try to reestablish connection for the Q&A session. I just wanted to make you aware that we are having technical difficulties and I am unable to see the question queue at this time.
Ladies and gentlemen in the speaker and were you able to hear me.
And ladies and gentlemen. This is the conference operator are you able to hear me.
We can hear you loud and clear now how us or I can hear you loud and clear I apologize for that we are having a technical issue I do have control of the Q&A. So our next question today comes from Brad Millsaps from Piper Sandler Surpluses go ahead.
Hey, good morning, guys.
Good morning, Brian .
Thanks for thanks for taking my questions.
Maybe wanted to start with the expenses you got done really nice job last couple of years, keeping a pretty tight lid on costs you a lot of discussion about expense inflation you guys are a growth company.
I know you've got expenses coming in from.
The consolidation of those insurance companies as well so Steve just curious if you could give us a good kind of jumping off point for expenses in 2022 and.
Maybe kind of how that relates to your hiring plans as well.
Yeah Brad.
To make it simple luscious.
You the starting point coming out of the fourth quarter of $43 million a quarter.
And I'm very pleased with the fact, let's say that's 161.2 million dollar run rate and pleased with the fact that we're looking at about a 3.1% increase in expense for the core bank and.
We've spent a tremendous amount of time.
There is wage inflation and wage pressure in a number of things that we're dealing with but after we get through the budget came back in as a team look at what our opportunities more as a growth company and paying for production and the majority of that is production, we're going to see about a 3.1% increase in the core bank if you add one.
The increase for the insurance agency, that's another 3.4%.
That $1.35 million a quarter. So we feel pretty good that even though you might look at that as a six 7% a 6.76% increase.
At the core banks at three one going into highly productive year and al and I would say a good bit of that 3.1% expense was put on with the NAND producers in the third and fourth quarter. That's just starting to come into effect. So we're getting that production.
We're seeing some good things were being the whole day on operating expenses and are very pleased with where we're going to come in.
Thanks, Jacob I understand if I kind of annualize the fourth quarter, maybe add another 3% that plus.
The that the insurance companies that should get me pretty close.
Yes.
I'll help out a little bit in my math.
It's probably I'm going to say a $43 million run what right with everything baked in.
Got it very helpful and Steve I think you said last quarter that your interest rate sensitivity table assumed about a 60, 60% deposit beta, but you thought you could do better.
You still have that 60% assumption.
In that table or have you guys alter that at all.
Hey, Brad we did ultra that a little bit that 6% is really <unk>.
After a 100 basis point increase with all the liquidity in the system right now the first 25, we really have zero and we did it by 25 basis point increment. So under 100 basis points. It is averaging about 20%.
And that's on an average then over 100 basis points to our normal 60%, so theres going to be a little bit of a lag in the the first one basis point increase.
Okay. Thank you that's very helpful and then a final question.
That's really why I'm modeling it and you know my model is a little different from their model.
About 50% with a zero.
Beda.
50 basis points I'm sorry.
Okay, Okay great.
And then maybe final question just kind of a bigger picture one I think it was you know.
On this call about a year ago, you talked about you know your Mississippi, and Louisiana regions, you know kind of being double the profitability of Texas and your goal over time, which Ted.
Get kind of that sub one row, a Texas bank up closer to you know.
Where your other other regions are closer to two just kind of curious could.
Could you update us on the progress there you made in 2021 and kind of where you might be able to be you know a year from now in terms of.
Bringing the profitability of Texas up in line with the rest of the organization.
Yep.
And about this a minute ago. When we were prayer for this call 13 years ago, We went into Texas a de novo in the Dallas year later Fort worth in 2012 actually 2013 midpoint.
In Houston, we have been in Texas for 13 years and today.
We're significantly large in Texas, and where our Louisiana and Mississippi. So.
That ROA is ramping up very nicely, we're starting to see as I've talked about many times.
And we're extremely focused on positive operating leverage.
Hello am started to spend a little time here, but.
Going back to the IPO.
So this institution that would be we'd be able to overlay $2 billion of additional assets on top of the infrastructure, where we basically.
Eight $4 billion over the top that infrastructure very little investment.
And so what we're starting to see is this is a pretty strong ramp up in NRO ways.
In the.
DFW and Houston markets. So.
If if I'll give you a little bit and I, probably shouldn't do this but if you look at.
Houston, where where we were kind of looking at that.
One 150 to $1 70 range by the end of the year.
And then if you look at Dallas.
Back then to be approaching 2% at the end of this year.
If not there.
Okay.
Okay, great. Thank you very much.
And ladies and gentlemen, our next question comes from Brady Gailey from K B W. Please go ahead with your question.
Hey, Thanks, good morning, guys.
Good morning Brady.
When I look at period in balances linked quarter, the bond book kind of was flat.
At one 5 billion I know average balances kind of caught up in the quarter, but how are you thinking about any potential bond book growth in 'twenty two.
As the long end of the curve gets gets a little higher.
So Brady we have modeled.
Less than 10% with the loan growth model that 10% deposits if they come in a little bit less than 10%, we should be able to do to just grow the investments may be 5%, but it really has to do with the timing.
We did have a little bit excess cash at the end of the first at the end of the December with that as a <unk>.
Lance had mentioned is public funds and we know that comes out now with it the rates are a little bit higher.
The end of the fourth quarter, we were seeing about a $1 $41 50 yield and right now we're looking at about 175 180, So we will start to.
Add a little bit more our normal runoff is about 20.
Between 15 and $18 million a month, so we need to at least add that on each month and then we may add more just depends on the flow of the cash and where we project loan growth.
Okay.
Alright, and then okay.
Yeah, Brian This is Drake I want to add.
To that I think we're in a very good position from a liquidity standpoint to be able to truly manage expands on the deposit side and look at our relationships and continue to grow core.
Deposits at is what I think is a slower clip as far as any kind of rate increases. So as we look at the portfolio. We're gonna be mindful that we might run down deposits slightly that our higher cost debt that we don't see as long term relationships. While we have this luxury we also have changed our model somewhat.
To run a lower loan to deposit ratio overall compared to what we've done in the past. So these are all factors I think that that we're going to be able to to deploy to maybe put some liquidity to work in the right way and make sure that we are very focused on margin as we do that.
Okay.
Alright, and then moving to the mortgage warehouse that continued to normalize lower in the fourth quarter now at about $580 million. How are you thinking about the warehouse and the 22 is that $5 80 kind of a good.
Washed out base to grow from or do you think we continue to possibly see some shrinkage of ITI <unk> is a seasonally weak quarter, but how do you think about it next year.
Well I want to remind.
Everyone on the call and our investors that.
It's our strategy to run and it was two years ago to grow mortgage warehouse, 10% to 10% to 12% of Outstandings. So if you looked at average balance year over year growth that was 31% between 2020 and 2021 and so we're we think that that number is close to 600 and the <unk>.
Would that will run that 10% to 12% and that we're going to be able to have slight increases in that we're still onboard and clients and we will continue to do that but we're going to manage this in that 10% to 12% range. So I'm pleased where we are pleased where we ended up in and even looking at.
Overall, we've we've hit the plan exactly on target. So we're going to probably see that 600 million slight increase potentially but I'd say flat at that.
Okay.
The 10% to 12% drag beds as a percent of loans or assets.
Loans.
Uh huh.
And then finally, it's great to see the couple of insurance acquisitions are there any other fee income base businesses that you think you would be interested in yard are you, where you want to be with insurance or would you like to add the insurance side. It feels like with the growth you're putting on bank M&A could be less likely.
So I'm just wondering if the fee income based M&A is still in the cards for you all.
Absolutely.
It's a there is some opportunity I liked this insurance business, we are creating some relationships as we speak that I think our field and our footprint and I think that I'd say, that's an important aspect because as we look at Texas and some of the relationships that we're growing there. It is a I think prime opportunity for us to continue lay over Utica, where we're going to drive this.
And where it's a 70 30 split between spread income and fee income and feel like that's going to create the valuation that we need.
Alright, great. Thanks, guys.
And our next question comes from Kevin Fitzsimmons from D. A Davidson. Please go ahead with your question.
Hey, good morning, everyone.
Good morning, Kevin.
Hey, just Drake just to follow on on Brady's last question. So.
I was going to ask something similar in terms of that you are.
With your organic growth you have sitting in front of you that that why.
Even even look for traditional bank deals, but I believe in the past you've mentioned.
The prospect of getting into a new market in taxes, as possibly being something you might be interested in so I didn't want to.
Jumped so fast rule that out were to give you the chance to rule it out and how you feel about traditional bank M&A.
Well first off I wouldn't rule that out, but you know our organic growth.
It is allowing us to be in a position of luxury let's say it allows us to stay disciplined and focus on creating partnerships that I think fill in gaps in our markets, but staying within the same footprint that we're in.
This is all for me and after.
38 years of build an institution culture and everything else truly hopefully we could find partnerships that allow us to continue doing what we're doing bring in very good markets and <unk> and production and that's that's what we're looking for so.
I wouldn't rule that out, but it's going to be a disciplined approach and it's going to be something that's truly going to benefit our shareholders. A week, if we pull the trigger on something.
Okay, great. Thank you and then just one follow on on the.
The margin I appreciate all the the you know the asset sensitivity position, but as we look at all the moving parts between.
P P P fees running off and then.
Positive tailwind from mix shift and in rising rates is it fair to say that.
Maybe the margin.
Might actually bottom in first quarter, if that's going to be a heavier quarter for P. P. P fees running off and then we are there.
The mix shift and then the effective rates start to more than.
Offset in the second quarter, and then over the balance of the year is that a way to think of.
As a percentage margin trajectory.
I think that's fair.
And I think the important point here is that we feel that we bought them from a margin standpoint.
And.
There's there's upside I love our asset sensitive position we're in.
The fact that that are onboard with our new production people are bringing their own relationships that aren't as price sensitive as if you were out there just coleman fresh.
Fresh dairy toy, so I'm pretty bullish that we've we bought them then and.
Well, we'll see a somewhat of a flat environment.
Without them.
Yeah.
And just one thing you mentioned earlier about deposits because we don't hear a lot about that because the industry. So flush.
With cash and your focus on your focus on staying.
You know keeping that as a priority I find interesting because do you think from an industry standpoint.
So used to these big increases in deposits and having this excess cash but could we wake up a few quarters from now and have done.
<unk> for the industry actually declining and so then maybe we pivot and NII has been driven by earning asset growth from liquid assets.
The percentage margin is getting killed.
Killed, where it pivots to the opposite where maybe we're getting.
Lift and the percentage margin.
But some banks that don't have the loan growth that you have might be pressured on an average earning asset base. So I'm just curious about your strongest in our industry.
Yes and for me.
Been here 38 years and again in my opening comments I mentioned twice long term value never have a let up off of building long term deposit relationships and core deposits and that is something that I preach something that we incent here, we are going to build value core deposits.
I don't care how much.
Liquidity, we have because that would look.
Liquidity will flush and then all of a sudden we will have the same loan growth a positive loan growth and we will have to get that engine going this engine to go on all the time and I think it's really what creates long term value for organizations like us.
That's great to hear thanks, Rick.
Yeah.
And ladies and gentlemen, once again, if he would like to ask a question. Please press star and then one so withdraw your questions you May press star and two.
Our next question comes from William Wallace from Raymond James. Please go ahead with your question.
Thanks, Good morning, guys.
Good morning, Wally is following up on Kevin's questions.
Your.
I believe it was 9%.
Expected NII increase in an up 100 environment and I think what I heard Steve, saying wise, you're modeling loan growth to be matched by deposit growth. So is that to assume that there's no assumption of liquidity deployment.
It looks like you still have some excess liquidity, even with the funds that are running off.
So if you have excess cash.
And you decided to deploy it I'm, assuming that that would be upside to the 9%.
NII in an up 100 environment am I am I, saying that correctly am I hearing that correctly.
Yeah.
For the most part other than you know.
We're going to take a little bit of a bump.
The stance on deposit growth, we don't see deposit growth matching loan growth. This year, because we were in a position that we think we can maximize margin and yield and are focused solely owned because if you go back several years ago, you remember that we had.
<unk>.
Broker deposits, we had a number of different things for where we are in a position of where you have focused on in and hats off to our Houston team and our D. F. David team for the for funding them sales basically and that's a position we haven't been in before with DFW. So now we can truly focus on creating a deposit franchise that has.
Has like I said, our Lora kit with Kevin a tremendous amount of value. We don't have to pinned on the on broker deposits like we did before so we can we can pair that Dan and you might see three 5% growth in deposits this year versus the double digit loan growth.
Okay, Alright, that's very helpful. So so the 9% assumes.
<unk> assumed here.
Having less deposit growth and deploying all liquidity into the loan portfolio, yes, absolutely okay. Okay.
<unk>.
The.
Lance you mentioned, a pretty significant increase in line utilization in the fourth quarter from 42% to 48%.
To hit your 10% budgeted targeted 2022 do you need continued.
Increase in line utilization and if so where do you need to go and where where we pre COVID-19 .
Yeah, No I don't think that we do so we're at 48%. Our historic number is like 49, we were at 49 pre COVID-19 . So this quarter got back to historic levels.
If we got continued lift that would be a benefit but we feel like we could do 10% based on product producers in production levels.
They're just kind of going back and looking year over year.
We had new loan in line production up 36% year over year fee income up 23% Treasury management up 11, So we feel like the growth engine that can do that without additional line utilization, but that would be a nice benefit.
Okay great.
And then maybe just along the lines on the lending side. I know you guys are always going to be opportunistic as it relates to new hires are you actively.
And aggressively continuing to try to build a production side or are you now going to now at a point, where you feel like opportunistic is truly the.
The best word.
No I think that you're always going to see us looking for good talent now now at the same time, we felt like we have a lot of capacity in the group that we have now from a lift outs we've done in the previous years to the producers we added last year.
You know from the.
Seven producer last year, we produced about 122 million in loans, which turned into a 112 million in growth and 636000 fees. I mean, we have much higher expectations as that begins to normalize.
So we're going to be able to get the benefit of those producers versus our existing teams now at the same time.
We are closely watching dislocation we're closely monitoring talented people were closer to these communities.
And as we built the bank we've done it through lift outs and so that strategy is not going to stop and Wally I want to throw something in here.
R R.
The talent that we attract is in line with our portfolio mix and our desire to grow with C&I excitation. So we've passed on a number of opportunities for lift outs and additional teams that are let's say real estate focused or have.
Relationship that just don't fit so.
Who were lifted out who were bringing one we think our longtime producers that produce the portfolio mix that we desire moving forward.
Great.
Thank you for that color and then I believe I heard Steve that you said that you guys think.
You can do a 6% increase in mortgage theres a lot of headwinds expected I think we're talking 25%, 30% expected declines in volumes.
Probably pressures on gain on sale margins can you remind us I believe I know <unk> talked in a couple of quarters past about production hires on the mortgage side can you talk a little bit about how you ramped up that team.
That would give you confidence in the 6% growth.
Yeah.
And where we're at.
Especially in Texas continue to ramp up the hiring M. L. O's and respect expect at this time based on what we know in our pipelines that mortgage volume will increase by 6%, but we understand that.
Competition in market is going to impact that gain on sale margin, but.
But we intend to use our MSR hedge more.
Much more officially in the past to manage that impact and I think.
They the normalization in the markets and the traditional flows are going to allow that MSR hedge to work more effectively than it has in the past week, we see a big upside this year in mortgage.
Okay great.
And last question just kind of more philosophical Lynch, we've talked about technology and how important technology is to the organization for over a year now.
You guys have invested in some systems that help on the lending side and the efficiency side.
Are you also.
When you were talking about how important technology and partnerships are are you guys also.
Looking to partner with Fintech companies, Kennametal, and our banking as a service.
<unk> type relationship or is it truly is it all just right. How can you better utilize offerings from Fintech companies to help you all bank more efficiently and operate more efficiently.
Yeah, Hi, Thanks, I think it's a little bit of both I mean, if you look at kind.
The budget for the year and in the investments that we continue to make hits in.
Continuing to invest invested encino, we know we've been in it we've been in Encino commercial bank for a while where we're adding on the consumer piece this year, which creates more automation more efficiency inside of our operations groups more of a streamlined view for the client experience, we continued to invest in their robot.
<unk> process automation.
Saw some interesting data around that the other day, where.
From going through and working through the departments and manual processes, we've reduced 4000 man hours on an annual basis. So far that have been put over into the process automation group.
No. That's a savings of 2.25 FTE. So we continue to work through that through our mortgage groups of our operations.
There were some things this year with some fraud detection software some data management.
Some real time text based client surveys, we know if we're going to drive our company based on delivery and service that we want to be able to measure that and so we've partnered with a group called podium that's going to provide instantaneous feedback and net promoter scores.
We've also invested now into Fintech equity funds and we're trying to have a seat at the table to understand.
What good benefit us. The most is we continue to push this company both from a client experience and then automation perspective.
So where were taken out by.
Our holistic look at ways that we can improve our company and as we've talked about in the past, it's about driving efficiency driving automation and so therefore that we can focus on production.
Thanks for that Lance I appreciate that's all I had I'll step out.
Hey, Wally Thank you for allowed US some of your time. This this quarter we appreciate it.
And our next question is a follow up from Brad Millsaps from Piper Sandler. Please go with your fall.
Thank you.
Greg just wanted to maybe touch quickly on that credit.
Obviously M. P. A's are at low levels, but the last couple of years I guess your charge offs.
Kind of run.
Mid high 2020 basis points, which I think through a cycle I think that's a pretty good level, but at a time when maybe binney banks are having maybe zero or even net recoveries just kind of curious is that related to some of the cleanup you've done.
Over the last couple of years in some areas you wanted to push out of the bank or any anything else going on there just kind of want to think about.
Kind of kind of charge offs and how you might treat.
The remainder of your excess reserves going forward.
And no it and a little bit reluctant site necessary cleanup.
As I've said before Covid allowed us to do a lot of things to really focus on what we wanted this institution and portfolio look like moving forward and understood. Some of the stresses. So we did take the opportunities.
The opportunity to do some things and pushed some credits out and that's why I'm. So proud of bad on the latter point now I'm, saying growth, we had because we had almost $60 million in credits that we pushed out it did not fit the profile.
And there were some some cleanup and some areas, especially when you look at the.
Assisted living arena and some of those those type of deals, but there were just some legacy deals that we cleaned up but I wont, Jim Crotwell to talk about or just second if you don't mind credit because I couldnt be prouder of Jim and Preston and their teams and what David and the position. They put this institution because youre going to see charge off levels that are going to be.
Continue to be lower but if you look at it.
These are two great trends, our classified assets are down 41% past watch credits are down 38%. So we've had some significant changes or Jim.
Thanks, Eddie Thank you drag yes.
The one metric that I'm just been extremely pleased Dan is the movement that we've had in overall classified assets coming in at 1.35.
End of the year, you look back to where we were you know a year ago at 2.08%. So that that's a dramatic improvement and decline in that metric while all the other credit metrics have been very very stable very proud of our bankers and what they do on ongoing basis and our past dues have been very stable throughout the year.
0.5, Boe a nonperforming as had been very stable as whale and.
Compare to peers, that's a very very positive metric force. So you know.
As I see it from a reserve standpoint, we've done the heavy lifting if you will as we brought that reserve down as we continue to see the resiliency and the stability in our portfolio I think we will see some continued decline over this year dependent upon the economic forecast it will not be at the rate that we've seen this last year.
But I think we do have a little bit of room to go there and I see the same decline.
Decline.
Throughout towards the end of 2022 as we get back to the more historical levels from a charge off perspective, so all in all I can't say how.
Off about how I'm pleased with how our portfolio has performed over the last two years and again as I mentioned in her comments earlier I think it's a direct result of being focused on relationship banking.
And Brad and I'll add just a just another note to that this client selection process that we've talked about has been a very serious matter within this organization and and and and if you look back at our issues in the past, it's always been surrounded by poor client selection and that even goes a little deeper into poor relationship man.
A selection is something that we changed four years ago and if you look at the credits that we are charging off today in this cleanup process. It relates back to that client selection process and also that relationship manager process I'm very pleased with where we are.
That's helpful. Thanks, Thanks, Reagan and just to follow up on your comments around Houston, and Dallas, you know pushing towards you know.
1.5% to 2% ROA by the end of this year.
If I look at the consensus expectation folks who are kind of looking for you do a one ROA and both years. It would seem if you've got you know all.
All three states pushing north of one and a half.
You know that that would need to come up but there may be other aspects of the organization about thinking about that.
At the holding company etcetera that thats dragging that down just kind of want to square those comments on those two regions.
Achieving those levels of returns kind of vis vis the consolidated ROE a for the for the entire company.
Yes.
And.
For Us. This is about if you look at our metrics. If you look at our incredible growth in E. P. S. If you look at our incredible revenue growth and all the things that matter from a metrics perspective, there's one area that we have to continue to focus on and that's pre pre pre pre are away and that's what we're doing we understand where we have to be so we.
We have done the things you know mortgage was a drag of forest. It certainly was to a degree this year, we have ourselves in a very good position there not to be.
Less so less a drag us down we have what I think has done an unbelievable job in last three years of reducing overhead from executive management standpoint, now we just recently hired Derrick.
Derek Mcgee on the legal side is going to do an incredible job for us as we get ready to cross 10, B and some other things, but we have what I think is an efficient holding company then efficient executive team.
And so those numbers put those markets pushing those numbers are going to equate to higher always as we go to 'twenty three 'twenty four.
Okay, great. Thanks for taking my questions.
Okay, Brad Thank you.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to Drake mills for any closing remarks.
Well, we finished up what I think is is an incredible year, a tremendous amount of obstacles that we had to deal with but on the same side. Our teams our people our culture intact and we are in a position I think an undervalued company, that's creating a tremendous amount of value I hope investors recognize that.
I appreciate our investors I appreciate our stakeholders and thank you for the involved in your company to the sport and all the things that you do for us, but on the other and we're producing at a high level create a tremendous amount of value and we're doing it in a laser focused way that does things that I think are going to long term with this company to bear.
Strong position. So thank you for your support and we hope to see you in the future pretty quick.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.