Q3 2022 Origin Bancorp Inc Earnings Call

Good day, ladies and gentlemen, and welcome to the origin Bancorp, Inc. Third quarter 2022 earnings Conference call.

Things have been placed on a listen only mode and the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator. Please note. This event is being recorded I would now like to turn the conference over to Chris Regal name head of <unk>.

Best of relations. Please go ahead.

Good morning, and thank you for joining US today, we issued our earnings press release yesterday afternoon, a copy of which is available on our website.

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 use of non-GAAP financial measures.

So those joining by phone. Please note the slide presentation is available on our website at Www Dot origin dot back.

Please also note that our safe Harbor statements are available on page seven of our earnings release filed with the SEC yesterday.

All comments made during today's call are subject to the safe Harbor statement in our slide presentation and earnings release.

I'm joined this morning by origin, Bancorp's, Chairman, President and CEO Drake Mills.

President and CEO of origin Bank Lance Hall.

Chief Accounting Officer, Steve Brolly.

Our chief risk Officer, Jim Crotwell.

Our Chief Financial Officer, Wally Wallace.

And our chief credit and banking Officer Preston Moore.

After the presentation, we'll be happy to address any questions you may have.

Call is now yours Drake.

Okay.

Thank you Chris and good morning. This is an exciting and significant order for origin as we completed the merger with BT Holdings on August 1st into full system conversion at the beginning of October when we publicly announced the partnership I talked about the th be it a unicorn that this is a cultural fit a geographical fit.

The financial fit for both companies.

I'm proud of the Oregon in BCH employees, who made this process goes though slightly the fact that this deal was announced in late February received regulatory approval in <unk> closed in August and finalize the system conversion in early October with flawless execution is a testament to the quality of our people the strength of our relationships with the communities we serve and the.

The ability of our company to capitalize on the right opportunities in our Investor presentation. We provided an update the financial metrics that resulted from the close of the BCH acquisition.

Since our announcement in February the rate environment has changed materially leading to changes in our estimated purchase accounting fair value marks while these purely accounting adjustments resulted in changes to our tangible book value dilution in EPS accretion. The bottom line is that the right environment has improved the fundamental performance of both origin.

And B T H lowering the estimated tangible book value earn back period to 1.6 years.

With the completion of the merger with Dth origin has enhanced is that 'twenty quarter presence with significant opportunity to grow market share in the deposit and loan rich east, Texas footprint, while adding impressive scale to our Dallas Fort worth markets.

Culture can often get overlooked in our industry, particularly of partnerships. This past quarter I was in each of our markets across Texas, Louisiana, Mississippi for our annual culture celebrations. There is a buzz around our company and a deep commitment to our culture of serving our customers communities and shareholders that is stronger than I've seen in my 39 years.

With this company.

I'm optimistic about where we are and what we will accomplish Lance Steve and Jim will get into the details of the quarter later in the presentation as I look at the performance for the quarter and remove all the noise. Our core profitability continue to strengthen and is in line with our long term strategic goals I am, particularly pleased with our adjusted ROA of one.

1.34% and adjusted ROE of 13.14% with the addition of B T. H, we showed impressive loan growth again, this quarter with 14% annualized growth, while applying strict underwriting standards.

Our process and continue to show improvement in our net interest margin, which was up approximately 40 basis points for the second quarter in a row.

We remain focused on building long term value for this company and took major steps this quarter to put us in a position of strength as we move forward and I'm proud of our growth I'm proud of our employees for all they do to make it successful and I'm proud of the discipline, we apply to managing our business with a strategic focus and commitment toward doing what we say we will.

Thanks, Greg.

We have a lot to be proud of as a company and as I analyze the fundamentals of our production I'm very pleased with the performance of our bankers across Texas, Louisiana and Mississippi.

Talk often about our strategy and our relationship based approach to attracting and retaining clients.

I feel strongly that we are executing on this strategy and are capitalizing on opportunities in all of our markets, particularly Dallas Fort worth Houston, and now East Texas.

Adjusting for BPH, and excluding mortgage warehouse loans grew $215.3 million.

Or three 5% compared to the linked quarter.

As Greg mentioned, we're extremely excited about the partnership with B T H and the opportunities it presents and Dallas Fort worth and East Texas.

Origin, and B T. H have a shared vision for what we can accomplish like origin, they have built and strengthened profitable relationships.

Their focus on C&I and owner occupied commercial real estate have been impressive and we believe we will be able to bolster those relationships through our suite of Treasury management products and services, our larger balance sheet and our targeted marketing efforts.

Our bankers remain focused on driving deposits within our markets and I'm proud of how they delivered particularly with noninterest bearing deposits.

In the third quarter and adjusting for B T. H, we showed an increase of noninterest bearing deposits of $91.2 million or 3.5%.

<unk>, 14% annualized.

Total deposits declined for the quarter. However, this decline was due in large part to one customer moving significant dollars based on a business transaction and.

And our strategic decision to allow some noncore funding to leave the bank.

With an 83% loan to deposit ratio, excluding mortgage warehouse Orange is well positioned to fund continued loan growth.

We know deposit betas are top of mind, but I think it's important to point out that deposit betas arent the only piece of the puzzle as it relates to net interest margin.

We looked back at prioritizing cycles with our deposit beta range from 27% to 37% and our NIM beta range from 22% to 30%.

Steve will provide more detail on our NIM later in the presentation.

Loan growth is up our focus on <unk> remains strong our treasury management team continues to be a differentiator the integration with B T H and how our teams rose to that challenge was remarkable and our culture has never been stronger.

Now I'll turn it over to Jim.

Thanks Lance.

That 14 provides a recap of our credit quality metrics, we continue to be extremely pleased with the strong performance of our loan portfolio as.

As a percentage of total loans held for investment pass through loans held for investment were 0.16% at quarter end, while nonperforming loans held for investment came in at 0.20%.

It's a five loans held for investment to total loans held for investment were stable at one point or 1%, while annualized net charge offs to average loans held for investment came in at point <unk>, 7% for the quarter down from 0.12% for Q2.

As I shared last quarter, our focus on relationship banking, along with sound underwriting and credit structure continues to be the drivers behind the solid performance of our loan portfolio.

For Q3, we increased our allowance for credit losses from 63.1 million to 83.4 million, resulting in a reserve to loans held for investment increasing from 1.25% to 1.29% net of mortgage warehouse.

As a percentage to nonperforming loans held for investment a reserve increased to 594% at the end of Q3 compared to 448% at the end of Q2, and 285% a year ago, which also shows our strong and improving credit profile.

While our portfolio continues to be resilient, we're closely monitoring the impact of inflation and the likelihood of an economic recession on our portfolio and.

In addition headwinds continue to persist as the labor supply wages supply chain disruptions and geopolitical concerns and their impact on the performance of our portfolio.

As stated last quarter, we continue to believe that the markets. We serve will be impacted to a lesser degree by a recession than other areas of the country.

Again, we feel that we are well prepared in this time of continued uncertainty and are extremely pleased with the overall performance and outlook of our portfolio.

I'll turn it over to Steve.

Thanks, Jim Slide 15 is our yields costs in loans held for investment portfolio slide during the third quarter. Our total yield on loans held for investment increased 68 basis points, which includes the impact of $1.4 million were approximately seven basis points from B T. H purchase accounting adjustments recorded during the third quarter.

As an asset sensitive bank increased interest rates will be beneficial for origin.

We expect to generate an incremental $7 $2 million for 2.50% in net interest income from a 100 basis point instantaneous parallel shift in interest rates.

Slide 16 shows our recent net interest income and NIM trends.

Of the total $19 million increase in net interest income during the quarter $11 million was attributable to beat T. H with the majority of the remaining changed from increased yields and volume on loans.

In addition to changes in our NIM quarter over quarter are consistent with the changes in net interest income.

Slide 17 is the investment security slide on a net basis, we ended the third quarter relatively flat compared to June 30.

As the B T. H investors were recorded at fair value on day, one of the merger. This gave us the opportunity to liquidate most of their portfolio without incurring a realized loss.

We use that liquidity primary to pay down short term borrowings.

Slide 18 is our net revenue distribution.

The top graph shows our net revenue growth since our IPO.

Our revenue has nearly doubled in the last three years driven by strong consistent loan growth and most recently the BCH merger and increased interest rates.

We made a strategic decision to impair of Ginnie Mae MSR portfolio by $2 million, which is part of the bottom right table we.

We believe that there is a current over saturation in the market for these assets. Therefore, it was prudent to reduce the carrying value.

Slide 19, our noninterest expense analysis, we reported total noninterest expense of $56 $2 million, an increase of $12 $1 million.

The increases this quarter were primarily due to $2 $8 million of merger related expense too.

$2.3 million in salaries employee benefits from the additional <unk> th employees.

$1.3 million amortization of intangible assets from the merger.

$2 million from BCH operational expenses other than those I just mentioned above.

$1 million increase in our incentive accruals due to exceeding performance matrix.

Moving to the next slide we show trends in our regulatory capital ratios we.

We continue to be well capitalized and are in a strong position to take advantage of future opportunities to drive value for our shareholders.

Now I'll turn it over to Drake.

Thanks, Steve since I've been leading this organization we've been focused on building a company, which is committed to a unique corporate culture with a drive to create long term profitable growth for the benefit of all stakeholders.

There is a slide in our presentation. It demonstrates long term growth in total assets total stockholders equity and total shareholder return and have increased substantially over the past three decades.

Oregon is built for long term success and the additions of Bta's This quarter strengthens our company even more throughout our history, we've been committed to our culture and hiring the best employees within our markets as Steve mentioned earlier, we made a decision last quarter to implement inflationary raises for a large segment of our employees while this.

Our expenses it was the right thing to do our mission is to pashley pursue ways to make banking and insurance more rewarding for our employees customers communities and shareholders and we remain focused on that mission every day.

I am very pleased with where we are as a company looking at the fourth quarter. We anticipate additional net interest margin expansion loan and deposit growth further improvement in our efficiency ratio and continues to ability and our credit metrics. Our current capital liquidity levels put us in a strong position we have the right people in dynamic growth markets.

And we have shown our ability to drive long term value. Thank you to our employees, who are committed to our culture and to our shareholders for their confidence in the vision of origin. Thank you for being on the call today now we'll open the call up for questions.

Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time.

Speaker phone, we asked that while posing your question, maybe just pick up your handset to provide favorable sound quality once again, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time, please hold as we poll for questions.

And we'll take our first question from Michael Rose from Raymond James Please state your question.

Hey, good morning, guys. Thanks for taking my question Michael.

Good morning.

Maybe just if we could start.

With the updated thoughts around the acquisition. So I think clearly the what you show in the slides is the EPS accretion is less.

And you know you foreshadow that in the 8-K that was put out a couple of weeks ago, but the tangible book dilution and earn back or less as well. So you can kind of just walk us through kind.

The changes in the marks and what kind of transpired.

Start to finish would be a would be helpful. Thanks.

Yeah, I'll I'll start Michael It's you know really when you look at where we announced.

Versus where we close and I think if you put up the metrics you would say.

The deal looks better after we close but obviously the interest rate environment changed significantly and I think that the bulk of what we're dealing with from the standpoint.

A V P S accretion or the decline in EPS accretion has the most to do with the CDI and the amortization at C. D. I mean, we start we announced the deal interest rates at U.

Let's say 50 bank whatever a half and then.

All of sudden Rostov 330, Steve or somewhere in that range.

So you've moved from $6 million accretion of $38 million creation.

And that's that I would say that's the majority of the impact of.

The change in in metrics as we looked at this deal overall, but.

For me.

That's a county and when you look at the deal overall from loans deposits. The people in the markets our opportunity to really leverage East, Texas, which I am so excited about.

I understand the accounting is a big part of it but the metrics around the deal the markets the people and the opportunities did not change and we're so excited about it so.

Wally I don't know if you want to add anything to.

The deal metrics, the only thing I'd add hey, Michael it's kind of funny talking to be first.

The only thing I'd add is like Jay said, the the change in the rates drove meaningful changes in all of the purchase accounting marks it adds a ton of noise at the end of the day.

A lower tangible book value payback period is where we ended up with which we think is positive and that doesn't take into account. The fact that also what changed in that period was that our asset sensitivity made our earnings power stronger and Dth is earnings power stronger. So ultimately we think the earn back is he is even less than what was on that slide out.

I'll just stop there and Michael I'm, sorry, I said accretion M&A amortization on C. D I apologize.

Hi.

Third and really appreciate all the non-GAAP adjustments in the on the slides, especially our expected accretion as we think about the next.

A couple of years, but if I strip that out which will have a major impact or at least as big as I would have we would have thought at the beginning.

What your Magic you given what you just mentioned how should we kind of think about.

Margin expansion before peaking in the context of what's still looks to be like a pretty good loan growth positive, earning asset mix shift as we move forward just any sort of near term call. It would be great. Thanks.

And for US one thing that I saw in the last.

Two months for B T. H is as we announced.

They they had hit a wall from the standpoint of production there people work.

Were so overwhelmed by volumes and customers that they were taken care of what they had with that far hardly any outreach well what we saw was a pickup in growth in the last two months and so are our intuitions tell us that you support these people do do the things they need to do and certainly we're in the midst of that we have to provide.

These people with portfolio managers are really the systems that we use and it'll take some time, but we're seeing some early growth opportunities.

And I do think that what those growth opportunities in their markets, especially Texas would they will help continue NIM expansion, but you know from anemic state expansion.

<unk> are where we are today.

We certainly have not peaked I think we're going to see good NIM expansion in the fourth quarter and we will continue to focus on starting the process of growing out are doing the things we need to do in east, Texas, which keeps talk about east, Texas. They have a significant impact and I talked about on the introduction.

In our Dallas Fort worth markets and.

Jay and ROI bardwell, working well together with those teams but.

I'm just excited about our operator to go in and do some marketing in east, Texas and really start to to bear.

Benefit from the growth in those markets, so and I hope I'm answering your question, but I'm really bullish about NIM next quarter are we.

We have some good opportunities as we continue to see I think fair pricing in the new credits that were bringing on.

Very helpful. And then maybe just finally for me I know the deal just recently.

Close, but there clearly is going to be there is and will continue to be dislocations kind of in your in your core markets. I mean would you would you be open to doing another deal should an opportunity arise in the near term or is it kind of take a pause and.

Get the cost savings and realize all the benefits from the deal before you look at the next one.

You know we're focused on integrating V T H, that's what I'm focused on it.

Not going to say that there couldn't be a another great deal work in but theres not going to be a V. T H walks and yet I feel like we need to do the things necessary to make sure that look weak.

And I've used the term flawless execution in the B T H deal to for the most part that is exactly on point, but it but we can't stop in making these people feel comfortable in this organization. This is all about culture and when we're not tell you that these two organizations breathe culture. The same way that that is accurate and so forth.

For me spending time in East, Texas, making sure that Jay and his team drove board, we still have to integrate products and services from the standpoint of making sure that customers are online that's where we're focused in and if if if if I I think if we let up at all we get to a full back we've been fortunate we had 79 open positions and desperate for quality people.

In our call stays as waste as we built this out there were 40, some odd people B T. H that historically would not have moved forward.

Holly of their people and what they brought to the table field 40 of those positions that we had in a big way what that allowed us to do and you might say hey, those should've been cost saves, but what it allowed US do is keep a very strong presence in east, Texas, where I think that benefits when the community looks at how we integrate and how we use our people and the quality of that market.

Those are all positives for us so we're going to stay focused on that certainly.

If if another unicorn I don't think that's the right way you describe unicorn pop up we would certainly take advantage of that.

Perfect. Thanks for taking my question.

Thank you and our next question comes from Matt Olney from Stephens, Inc. Please go ahead, Matt Hey, Thanks, Good morning, everybody.

Good morning, Matt.

I wanted to ask about the deposit growth.

Looks like in the third quarter that the legacy end of period deposit balances contracted but I think Lance mentioned in the prepared remarks that the deposit growth was really strong at X X to the B T H.

Any color on the pipeline of deposit growth from here and thinking about the fourth quarter. It is something similar to where we could see continued strength of niv.

Both.

But run off of some higher cost deposits or are we now at the point, where the deposit balance at 930.

Looks pretty sticky and we could see total deposit balances start to grow again.

Yeah, Hey, Maggie Morris My apps I mean look there's no question that.

Liquidity has sort of been pulled out of a lot of the banking system Siri treasuries or brokerage firms.

We're sort of balancing near term at the same time, we're balancing.

Our asset size to make sure we stay under 10 B. This year. So I think we've tried to be strategic and smart about how we focus on core deposits.

You know our story in a way that we've built our company around geographic management models around incentive plans that pay an equal amount for deposits and they do alone for the way that we have used lift outs to attract deposits specialists in treasury management. So.

I feel confident as the banks begin to compete more fiercely on deposit pricing.

That we're going to be able to do a really good job of staying in our.

In the window that we want to which is going to be you know mid to high 80% loan to deposit ratio.

We continue to grow in our babies, which is critical for us that's been a strategic focus for the last three or four years.

Super excited about the opportunity to grow deposits and east, Texas specifically.

And then there's also kind of don't forget the but I must say the luxury we have in north Louisiana as we look at where deposit growth and deposit run off has been for US. This year, we still had strong growth in Louisiana, Mississippians and while some of our more rural markets, it's allowed us to be strategic in.

Not fighting as harshly for some of the noncore stuff and if you remember we talked about last quarter.

250 million go in Q2.

So I think I think you'll see us manage the 10, B and then become much more competitive on the rate side.

But very confident in our ability to manage through.

Okay I appreciate that Lance and then on on the loan growth front.

Nice results ex PTH.

And now that you've folded in <unk>.

She considered a pipeline and that the current economic environment. We're in.

The updated thoughts around organic loan growth for the fourth quarter and looking into next year.

Yeah. It matters continues to surprise us when we look at pipelines and current pipeline is looks extremely good going into the fourth quarter through the first month in and so.

At this point because of the pullback and usually we talk about loan growth less mortgage warehouse.

And miles will go ahead and dresses now mortgage warehouse.

We ended up last quarter 461, without obviously brought over about 40 million from B T. H and those were our relationships that we were going to exit we've gone through that process. We're.

We're going to end up I think at the end of the fourth quarter somewhere around 300 million in mortgage warehouse, but what is exciting about that is that we are focused on high quality clients that are managing the expense structure and people and relationships. We feel will continue to be here, we actually found out that in several of our relationships are.

Our <unk>.

Slowing or are reducing their number of banks were not feeling that reduction from those high quality clients and that's a positive. So I think you're going to see mortgage warehouse about five or 6% of outstandings in our like that where we are right now going into it the uncertainty of the buy rent so as long as as far as loan growth ex mortgage warehouse I think we are.

Gonna see.

Let's say a low double digit growth through the fourth quarter, which is is is steel surprising but quality. We continue to apply very strict underwriting guidelines that we had to set the last several years. So we feel good about the quality of bringing home Bill went through 'twenty three if we start looking at pipelines talking to our markets and.

Everything I still think we can maintain.

High single digit growth through 'twenty three on the loan side.

Yeah, Hey, Matt. This is Lance I'm I would add would just continue to be excited about where the loans are coming from if you go back over the last four quarters I mean Houston has grown.

Had loan growth of 44% DFW, 29% and that's reflective of what we're continuing to see in our pipelines and.

We continue to be excited about our lift out strategy.

We have added another seven producers.

Q3.

That stayed right in line in the last 12 months has been 28 and that continues to be a combination of.

Commercial bankers as well as private banking with Treasury management deposit gathers business development. So it's it's very heavy deposit focused on who we're hiring.

I went back and looked at sort of the producers hired over the last 12 months.

They've grown loans 339 million deposits almost 140 million. So these people are producing at a really high level.

We love the credit quality that we're seeing from these long term relationships that they're dragging over.

So.

Just the strategy of the lift outs and the focus on Texas continues to pay dividends.

Okay. Thanks, guys I'll hop back in the queue.

Thank you. Thank you.

Next we'll go to Brad Millsaps from Piper Sandler. Please go ahead Brad.

Yes.

Hey, good morning.

Good morning, Brad glad to welcome you back after being.

Absent for a while.

Exiled I suppose.

I wanted to kind of follow up just on maybe the size of the balance sheet. I know you guys were making a lot of adjustments to stay.

To make sure you stayed under 10 billion just wanted to make sure I kind of had the right starting point for for average, earning assets are you pretty much through kind of all the adjustments you wanted to make you know notwithstanding what you just said about mortgage warehouse just want to get a sense of the balance sheet kind of stabilize from here or does it.

<unk> turned down further just kind of curious want to make sure I have the right sort of jumping off point.

To drive NII et cetera.

As I'm always going to be.

As transparent.

As as needed it.

I felt like after we sold $450 million in in our securities and B T H and reduce debt that we had a very good runway to to say right under 10 B.

For a 12 31, where we're pushing that a little bit at this point with pipeline growth we.

We still have opportunities with a couple of triggers a pool to ensure that we stay below 10 billion, but I suspect we're going to end up the year somewhere around 9.8.

<unk> billion and then at that point, we're off to the races continue into <unk> to grow the balance sheet as we have in the past.

Great and then thanks, Jake and then maybe.

A similar question around expenses maybe.

A touch higher than than I was looking for but obviously you've got cost savings still to come can you just kind of speak to maybe the expense.

Trajectory a little bit as we think about another month of B T. H in the fourth quarter and then it may be.

You start to see some cost savings in Q into 2023.

Hey, Brad it's Steve.

There was a lot of noise in the in this past quarter, we ended up with 56 point too.

When we look at the merger costs will be taken out, but you have to add in the salary expense that we talked about where we increased.

Wages during the third quarter, the fourth quarter will be the entire quarter.

We also have one month of operating expenses that you said for PTH. So.

When you run your models and if you end up between $57 million and $58 million.

For the fourth quarter, we would say that's very reasonable.

And then going forward to next year.

Mid single sing.

Single digit increases from that number one the fourth quarter again, we've gotten ahead of the inflationary rates wage pressures because we had the extra.

Salary increases during the third quarter and so we really think and we haven't finalized the budget, but we think mid single digits from that 50 758 million fourth quarter Mark.

Okay.

Very helpful.

Go ahead, gentlemen, I'm excited because I think this is very important we have in our plan for budget significant opportunities to grow and we're going to continue to look at this.

Even as we've fleche face an inflationary period, we think that our footprint will lag.

The recession and you know as we go through that we see significant opportunities to enhance this organization.

From a growth perspective, but profitable growth and that's what we're focused on is NIM growth, but yet at the same time doing the things and taken advantage of dislocation market. So that's what's built into some of this budget.

On top of the cost saves that we see in the next 12 to 14 months as we finalize systems and do the things as necessary. So I feel really good about where we are to continued positive operating leverage and do the things we need to do but not forget about the growth in the taken advantage of the market dislocation is currently in.

And tracked.

Got it makes sense and that would that would include that that step up in net and net CDI number correct that 57% to $58 million.

Yes, it does.

And then maybe final question for me, if I strip out the Cecil double count the provision this quarter it looks like maybe the core provisions around $2 million.

Maybe about 1% of loan growth may be less if I take out charge offs.

It doesn't look like there was really any change for you know sort of a weaker economic outlook can you just guys talk about how you think about sort of.

You know kind of core provisioning.