Origin Bancorp Inc. Q1 2023 Earnings Call
Your line is muted.
Good morning, and welcome to the origin Bancorp, Inc. First quarter earnings Conference call. My name is David and I will be your ever call coordinator.
The format of this call includes prepared remarks from the company followed by a question and answer session.
Please note that all participants will be in a listen only mode until the Q&A portion of the call also note. This event is being recorded.
I would now like to turn the conference over to Chris Rifleman head of Investor Relations.
Thanks, Chris go ahead.
Good morning, and thank you for joining US today, we issued our earnings press release yesterday afternoon, a copy of which is available on our website along with a slide presentation that we were referred to during this call.
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 for those joining by phone. Please note. The slide presentation is available on our website at Www Dot origin Bank. 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 statements in our slide presentation and earnings release.
I'm joined this morning by origin, Bancorp's, Chairman, President and CEO Drake mill.
Your origin bank clients Hull.
Our Chief Financial Officer, Wally Wallace Chief.
Chief Risk Officer, Jim Crotwell.
Chief Accounting Officer, Steve Brolly.
And our chief credit and banking Officer Preston Moore.
The presentation, we'll be happy to address any questions you may have.
The call's yours.
Thank you, Chris Oregon has consistently focused on long term strategies that have guided us through multiple cycles throughout our 111 year history, and unfortunately I've been here a third that are we.
We manage this company for long term success and we are confident in both the strength of this company and the experience of our management team to continue to deliver meaningful value to our employees customers communities and shareholders.
As we have in the past we are positioned to take advantage of the opportunities presented during these times as.
As we enter 2023 it was clear that we were facing an environment where deposit competition from sources outside the industry were intense.
Primary strategic focus was to protect our deposit franchise, while adding deposit growth as with most strategies they come with a cost, but generally pay long term dividends. The events that occurred in early March only amplified the situation I feel that the deposits lost in this cycle will not return to our industry in the near future considering these issues.
And working through our Conservative management model, we made a decision to take on excess liquidity support possible deposit outflows I am proud of the actions we took as a team to serve as trusted advisers to our customers and as a result, our deposit trends in March are stable and we increased total deposits for the quarter.
The origin. It always comes back to relationships and I believe that the strength of our relationships will continue to drive long term success for our company.
There were many positives we put took place this quarter, our tangible common equity ratio ended the quarter at 8%. Despite the excess liquidity on our balance sheet tangible book value grew nearly 6% during the quarter to $26.53.
Our loan portfolio, excluding mortgage warehouse grew three 4%.
Our credit quality remains pristine with net charge offs in the single digits and nonperforming assets of just 22 basis points noninterest income and noninterest expense both beat our expectations.
Look I continue to be bullish on the Oregon.
This experienced management team and this company had been through multiple cycles and while each cycle is different we have come out stronger at the unit. We are a proven organic grower with a franchise that expands across some of the most dynamic growth markets in the country.
Additionally, we have rule deposit base throughout North, Louisiana, Mississippi, and now East, Texas All of these markets have customers, whose loyalty stretches generations and I'm. So proud of both our disciplined credit culture and experienced management team around all of this gives me great confidence in the value that origin will provide to all our stakeholders.
Now I'll turn it over to Lance.
Thanks strike being.
Being a trusted advisor is one of the central components of our vision statement and our teams have done a really good job of being advisors to our clients during the first quarter.
Our bankers were proactive and responsive to our clients in providing guidance and be in a resource.
My primary areas of focus for our teams as we started 2023 was centered around our calling efforts and emphasis on deposit growth and this showed in the first quarter as we grew deposits in almost all of our markets. In fact in Q1, our account openings were up 46% compared to Q1 2022.
As we've talked about since our IPO a key differentiator for origin is the strength and diversity of our deposit franchise.
It's the granule granularity of our customer base and their industries as well as the geographic mix.
Since the events of early March deposit portfolio granularity has come into focus I'm proud of the relationships. Our bankers have built as they continue to enhance our strong community bank deposit franchise.
While we will provide more detail about our deposit mix later in the presentation.
In the first quarter, we continued our disciplined approach to building relationships growing loans, three 4% excluding mortgage warehouse.
Our pipeline remains strong and our bankers remain disciplined on pricing and structure.
Our bankers I also understand that our ability to grow deposits is critical to continued loan growth.
As we've done in previous cycles of disruption, we have the team in place to capitalize on the right opportunities within our markets. We are laser focused on loan and deposit growth.
Pricing credit quality liquidity and capital.
We will never lose sight of what makes origin unique.
Our culture.
Our employees' commitment to our culture into relationships is what has made origin standout.
We will continue to execute on our long term strategy and provide value to our employees customers communities and shareholders.
Now I'll turn it over to Jim.
Thanks, Lance the striking Lance both mentioned, we continue to focus on relationship banking to drop credit quality as we adhere to sound and consistent underwriting throughout all phases of the economic cycle. This approach has positioned our portfolio well as evidenced by the continued diversification of our portfolio as reflected.
On slide 13, and by the strong credit metrics as reflected on slide 14.
Past due loans held for investment remained stable at only 0.16% as of March 31st.
Classified loans ended the quarter at 1.17% of total loans held for investment while nonperforming loans ended the quarter at 0.23% of total loans held for investment.
While we did experience an increase in these metrics during the quarter both reflect levels below those reported in Q1 of 2022.
For the quarter, the $7 $1 million increase in nonperforming loans held for investment primarily consisted of six relationships five of which were acquired.
The review of the underlying collateral of these relationship resulted in our current allowance of $1.3 million Lastly, net charge offs for the quarter came in at 0.07% on an annualized basis.
During the quarter, we increased our allowance for credit losses for $8 million to $92 million, increasing from one point to 8% to 1.30% as a percentage of loans held for investment net of mortgage warehouse.
While our portfolio continues to reflect strength and resiliency, we felt an incremental increase in our reserve was appropriate given the current economic headwinds the.
The strength of our portfolio continues to be evidenced by the level of our allowance to nonperforming loans at 539% for Q1, 2023 compared to 294% for Q1 2022.
As we have indicated on previous calls 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.
With that said, we will continue to closely monitor the impact of rising rates and the likelihood of an economic recession on our portfolio.
Lastly, we felt it would be beneficial to share insight into our CRE office portfolio, which represents only 5% of our portfolio.
As reflected on slide 15, our CRE office portfolio is well positioned as evidenced by an average loan size $2.2 million and a weighted average loan to value of 53%.
As to credit performance. This sector reflects no past dues only 0.22% in classifieds, no nonperforming and no charge offs.
The performance of this sector is again evidenced of our relationship focused approach.
In summary, we continue to be very pleased with the performance and position of our portfolio.
I'll now turn it over to Wally.
Thanks, Jim and good morning, everyone.
Turning to the financial highlights in Q1, we reported diluted earnings per share of <unk> 79, one.
On an adjusted basis Q1, EPS was <unk> 78, after excluding 144000 in gallon gain on sale of securities.
Jumping straight to deposits, our deposits grew 5.1% or over 20% annualized. During Q1. These numbers include $284 million and brokered deposits. We added brokered deposits in February to pay down borrowings due to favorable pricing.
Excluding these deposits growth was still a strong 1.5% or about 6% annualized.
As you can see in our presentation on slide 17, we have provided some new disclosures around our deposits.
Note the granularity of our commercial deposit base, where no industry composite comprises more than 7% of our total deposit portfolio.
Furthermore, note the geographic dispersion of our deposits across our commercial consumer and public funds deposit portfolios.
Notably at the end of 2022, our uninsured and uncollateralized deposits comprised 44% of our total deposits. However, following the events of early March we have seen an unsurprising shift of uninsured customer deposits into the intra five cash service program.
And uninsured and uncollateralized deposits comprised 38% of total deposits at the end of Q1.
So far in April this shift has continued though at a slower pace.
A trend we have noted across the industry has been a clear shift of noninterest bearing deposits into interest bearing accounts, whether at banks or outside of the system.
Oregon has not been immune to these industry pressures and our noninterest bearing deposits declined to 27% of total deposits in Q1 from 32% in Q4 and 34% last Q1.
This shift in deposit mix combined with the need to increase deposit pricing has led to an acceleration in deposit betas over the past two quarters.
As of Q1, our cumulative total deposit beta now stands at 36% and we anticipate data will continue to increase at least for the next quarter or two.
As a result of these pressures our net interest margin contracted 37 basis points during the quarter to $3 four 4%.
Excluding $1 $7 million and net accounting accretion our adjusted net interest margin also contracted 37 basis points to 3.36% from 373% in Q4.
As Drake mentioned following the events of early March we prudently decided to add $700 million and excess liquidity to our balance sheet.
Negative carry of this liquidity cost us roughly $160000 and net interest expense during Q1 and pressed pressured net interest margin by six basis points.
We are currently carrying roughly $525 million in excess liquidity on balance sheet and will likely keep it over the near term at least if held for a full quarter and assuming the current roughly 20 basis point negative carry we estimate net interest expense of roughly 200000 to $300000, which would pressure.
Net interest margin by approximately 20 basis points.
Lastly on liquidity through our various sources of liquidity, including the F. H L. B, the Feds Bank term funding program and discount window and various lines of credit we have approximately $4.4 billion in available liquidity on top of the nearly $900 million in S. H L. B advances already on.
Our balance sheet at the end of Q1.
Moving on to fee income, we reported $16 $4 million in Q1, excluding $144000 in gains on sales securities. Our adjusted fee income was $16 2 million up from $13 $4 million in Q4.
Seasonal strength in our insurance business increased production in our mortgage segment and a slight loss in our limited partnership investments in Q4 were all drivers of Q1's increase relative to Q4.
Our noninterest expense decreased to $56 $8 million from $57 $3 million in Q4, however, excluding our merger related expense in Q4, noninterest expense increased slightly to $56 $8 million from $56 $1 million.
Of note occupancy and equipment expense increased roughly 11% to $6 $5 million from $5 $9 million in Q4 due to the planned addition of one new banking center and a mortgage production office.
Turning to capital it is worth noting that our TCE ratio remained above 8%. Despite the pressures of the excess liquidity. We added in early March excluding $525 million and excess liquidity, we calculate our TCE ratio would've been eight 5%.
Additionally, our regulatory capital ratios all improved during the quarter. Despite this excess liquidity and we continue to remain well capitalized.
Lastly, given the events of early March we feel it is prudent to note that our $11 $2 million in held to maturity securities are immaterial and unrealized losses in the securities would have no impact to our capital ratios, where they are classified as available for sale with that I will now turn it back to Drake.
Thanks, Wally as I said last quarter, we have proven throughout our history that we can capitalize on opportunities in uncertain times.
Our foundation is strong and we will continue to grow relationships that pay off in the long term the economy in our footprint continues to provide opportunity for profitable growth to enhance our franchise value. We are uniquely positioned with the right teams in place to take advantage of growth in Dallas Fort Worth and Houston. The addition of east, Texas to our footprint through the <unk>.
T H acquisition combined with strong teams in Louisiana, Mississippi provide a continuing opportunity to drive value for our organization.
During this month of March considering what took place with two of the largest bank failures in U S. History I was proud to work for our employees not only respond to our customer needs, but remain engaged in our communities with meaningful conversations about banking in the industry. We didn't shy away from the tough conversations matter of fact, we initiated the conversations.
And this episode didn't change it will not change our long term strategy. Our team will not be distracted by short term strategies that would amplify our short term results, but compromise our long term value instead, the strategic moves we made in March were designed to position us to continue to execute our strategy.
I'm equally proud of how our team celebrate our culture. This month each year, we dedicated time for us to reflect on our accomplishments celebrate our well defined culture recommit ourselves to our vision values and I'm thankful for our employees and their unwavering loyalty to our customers and our brand we will never lose sight of our commitment to our culture and building long term relationships.
We will continue to make the right decisions to ensure our success and drive shareholder value. Thank.
Thank you for being on the call today, we will now open the call for questions.
Thank you.
Ladies and gentlemen at this time, we will conduct a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad in order to enter the queue now where if you have joined via web pressed the raise hand icon on the right side of your deal Roadshow screen.
Again press Star one on your telephone keypad to enter the queue or the raise hand icon on the right side of your deal Roadshow screen.
Pause here briefly to allow any questions to generate.
Our first question comes from Matt from Stephens, Inc.
Your line is open Matt you May proceed.
Hey, Thanks, good morning, everybody.
Morning, Matt.
I want to start with the NIM discussion and wallow you provided some good detail.
On the excess liquidity and the impact on that side.
On the other side the broker deposits.
The rate on that $275 million of brokered and do you still hold these today and I guess just lastly on this topic just trying to get a better idea of what the incremental funding cost is today for just incremental.
New deposits.
Good morning, Matt the broker and the initial broker deposit trade that we put on came in or it came on at 490.
Incremental deposits or wholesale funding now is coming in around five.
And I think our point that we want to make around brokered deposits as well.
We we made that decision to move those ever one it was a it was a positive carry to pay off the FH L. B and we are now going to find wholesale using brokered.
At least for the time being.
Assuming that the debt the tradeoff is positive on costs.
Yes.
Got it.
Okay.
That's helpful Wally and then.
What about just broadly just rate sensitivity.
And obviously these higher rates are putting pressure on the deposit cost but.
But I guess I'm kind of curious if and when we see a cut from the fed I'm curious about the expectations on on the margin I know that's something that we've been talking about for a while I didn't know if there's more clarity there as far as planned for the balance sheet or theres still more work to be done there.
Sure.
Okay. So Matt.
Matt we remain asset sensitive.
I'm going to I'm going to answer your question, but I'm going to answer a different question first.
If we assume that we get another 25 basis point hike from the fed I would tell you that we are less asset sensitive today than we were a year ago. We've we've used up a significant portion of our asset sensitivity, but we do remain asset sensitive. So should we see a cut from the fed we don't think the impact would be.
That meaningful.
On for the first say three or four cuts our models assume that down 100, that'd be a one one to one 5% hit to NII, which equates to about four basis points to NIM.
Okay.
Okay. That's that's that's helpful. Huawei and then just lastly for me.
Yeah, Matt I would like to add to the broker deposit conversation because I think this is meaningful we took those broker deposit last group down in February because we paid that off to replace some higher cost debt.
Impacting loan deposit ratio, but that was not taking on broker deposits because of what happened in March.
Yep, Okay fair point, thanks for that.
Hum.
That's going to shift over to the credit discussion and I think you mentioned that Oh six non performers that were added five that were acquired.
Any more color on these that were added to non.
Nonperformer any theme theme by loan type.
And of the five that were acquired.
These were downgraded.
Is it because it was a newer relationship that you guys. Maybe you don't know the borrower or as much or is there something incremental that deteriorated in recent months from the borrower gene any kind of color on those specific five that were downgraded from the that were acquired.
Yes, Matt I will let Jim go through some numbers on this because they do an excellent job in first off be mindful of how aggressive we are on credit secondly.
Through the BCH relationship we feel like we did a very good job from a due diligence standpoint, and they are good in underwriting, but we went through not only internal loan review, but external loan review on the entire port well majority of the portfolio I can't remember the penetration I don't think it was 60% or so but ER through that with.
How aggressive we are we saw some weaknesses in these credits and as we always do took them into a substandard classification as we worked through it I think out of that $10 million and what's frustrating to me is to raise some of the headlines that republished our when you look at our overall credit quality.
It gives us room to be able to be aggressive with days and I think we might see about one to $1 $4 million in potential loss in this $10 million worth of credit. So I think we did the right thing in a in addressing.
This relationship and in love with B, T H and bringing them into the fold.
This is opportunities for us to make sure that we don't have any deterioration portfolio, but theres no. There wasn't anything that was consistent with these credits there were longer term relationships for those folks and I feel good about where we are so Jim anything you want to add to that yeah, Matt I would just add that in some of these.
Narrative that we've discussed we tried to quantify how much we reserve we have on these to kind of give folks some comfort of all of these particular relationships Theres no theres no comment from an industry perspective from that.
Front.
One of the things I would say theres a lot of positives happening in these very credits and some of which were looking to reduce our overall exposure some might be perhaps even exit there are some positive things going on with family you know coming in and working toward taking over some of the debt and also looking towards some reduction so.
As we've kind of work these relationships.
To drive point, we went ahead and we're very conservative and put them on non accrual but.
I would say.
Positive as to the outlook and what we're going to accomplish on these credits and they really don't give me any pause if you will from an overall deterioration in credit quality in our portfolio.
And I would add to that Matt that when you look at our numbers through the quarter end and where we are with 22 basis points and non performing with total loans.
Compared to our peers, we're still in very good shape.
Yep.
I would agree.
Okay I'll step back in the queue. Thank you.
Okay.
Thank you Matt.
Our next question comes from Michael <unk> from Raymond James Your line is open you May proceed.
Hey, good morning, everyone. Thanks for taking my questions.
Just wanted to go back for a while your comment on the liquidity impact I know you said that you expect that to stick around kind of in the <unk>.
The nearer term and I think I heard a 20 basis point impact is that incremental or is that just a full quarter impact and then if you can just kind of walk through outside of that.
Some of the drivers on both the loan repricing side, and then kind of expectations for betas here in the near term on the deposit side. Thanks.
And I will stand on this and my 39 year history with this institution, we've never had the asset quality, we have today and it's not sitting here looking at deteriorating credit it's us doing what we do every quarter and it's been nice to bring our partners in nice that we feel good about their.
Palio and this is just a normal process that we go through.
Earlier, you mentioned that.
Chance for where that.
Yeah.
Keep in mind, we are also growing right. So we were working double time to fund that growth with deposits.
Yeah, Hey, this is lance.
Had a little bit of the opportunity that our.
You know historically, where the dollar deposits was equal to one dollar loans when let's say in 2023 deposits is the focus it's more valuable.
So you know.
Overtaking the N b run off.
We were still able to grow deposits, we were able to grow deposits in our rural markets.
And then one data point that we looked at was because of the calling efforts based on the incentive plans and the way that we've structured our company.
Our new account openings were actually up 46% Q.
Q1, 2023 of our 2022, so that <unk>.
You know both from an <unk> perspective, but also for the money markets time deposits. So super proud of the effort and are continue to be very positive and bullish on our rural deposit franchise.
Great. Thanks, Thanks Lance.
Quick one on the loan growth slowing in the back half of the year I mean, that's consistent with what we've heard from others I'm just curious.
If you can ballpark like.
Or stack rank the drivers in terms of you know the economy slowing in demand.
Turning.
As opposed to you guys, maybe directly pulling back either from <unk>.
Credit.
Just scrutinizing more on credit and door, it becoming less profitable.
Unclear how profitable to put alone on the balance sheet, given what we've discussed unfunded. Thanks, Yeah. Yeah, I mean, I think that's the right question and that's where a lot of our conversation is at the moment.
Our stack ranking them I would actually base it on.
Our ability to grow deposits and the incremental cost of those deposits.
We we have healthy pipelines.
Still have bankers that are dragging over clients from their old organizations, which we feel really good about the credit.
So for us and we've talked about this last quarter.
Our our deposit growth is going to be the governor on our loan growth and that's why I think that way now but at the same time are we mindful of potential pending recession in the economy and what that can do 100% we are.
From a credit perspective, we're being very conservative, but I'll tell you what our bankers are doing a good job. So I would say when I'm talking about slowing growth, it's more about making sure that we're being appropriate with our pricing and mindful of our deposit franchise.
Great. Thank you Lance.
Thank you Ken.
Thank you Kevin Our next question is a follow up from Matt from Stephens.
Your line is open you May proceed.
Hey, guys just following up on the discussion around capital levels.
And the appetite for buyback I think there's still an authorization out there from from.
From last year, our stock trading at a pretty big discount now and with growth slowing in the back half of the year I would anticipate capital building would love to get your thoughts on becoming more active on the buyback this year. Thanks.
Yeah, Matt Thanks, Yeah, as I've always said, it's a tool in our tool chest, we have $50 million available at this point certainly.
I do think that as we continue to see a pullback in our stock and the confidence we have in it.
From our executive team to our boardroom.
That is an option for us a very strong option at this point I do want to get through this earnings season that I do want to see what's going to happen to a potential bank failure and I do want to see what is going to happen around.
Probably in the first and the first part of the second quarter to give us a little bit more confidence because ultimately and this is the way I think and I'm sorry.
I think about a thousand families that I support I think about a number of different things and when you do that you make sure that you are the most conservative in the use of capital in tough times. So we have worked hard to put ourselves in a very good position with capital strength.
Okay I appreciate the commentary Drake and then also just one more just more of a housekeeping question.
For Wally that that tax rate has been a little bit volatile recently any color on the effective tax rate, we should be looking at this year.
Yeah, you know that.
The tax rate is going to be a function of the.
The earnings level that we are making.
We're going to stick with that kind of 19% to 20% range for now and I think that gets you pretty close.
Okay got it thanks guys.
Thank you.
Okay.
Thank you Matt.
Once again, ladies and gentlemen.
Can I ask a question. Please press star one on your telephone keypad to enter the queue or the raise hand icon on the right side of your deal Roadshow screen.
Handing it back to Drake with origin for any finalizing remarks.
Thank you and I appreciate everyone attending today and I would wrap up today with two primary thoughts in this around really the current condition of the industry, but more so origin bank. When you think about quality of an organization. When you think about deposit franchise and the fact that in a period of time when there's outflows.
Deposits in the industry, we grew deposits, we enhanced our number of customers.
From a loan standpoint, and credit quality best credit quality. This this this institution has ever seen with what I think is very good overall quality as we look at the existing or new credits that are coming on the books. So as I put all those things together high quality organization unbelievably good footprint excellent partners now in the east.
The picture so very bullish on this organization. Thank you for being a partner. Thank you for being on the call and we look forward to seeing each of you soon.
This concludes today's evercore.
And have a great day.