Q4 2024 Origin Bancorp Inc Earnings Call
Your line is muted.
Speaker Change: Good morning and welcome to the Origin Bancorp Incorporated fourth quarter earnings conference call.
Speaker Change: The format of the call includes prepared remarks from the company, followed by a question and answer session. Please note that all attendees will be on a listen-only mode until the Q&A portion of the call. Please note this event is being recorded. I would now like to turn the conference call over to Chris Reigelman, Director of Investor Relations.
Please go ahead.
Speaker Change: 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 the slide presentation that we will refer to during this call. Please refer to page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures.
Speaker Change: For those of you joining by phone, please note the slide presentation is available on our website at www.ir.origin.bank. Please also note that our safe harbor statements are also available on page 5 of our earnings release filed with the SEC yesterday.
Speaker Change: All comments made during today's call are subject to the Safe Harbor Statements in our slide presentation and earnings release.
Speaker Change: I'm joined this morning by Origin Bank Corp's Chairman, President and CEO, Drake Mills, President and CEO of Origin Bank, Lance Hall, our Chief Financial Officer, Wally Wallace,
Speaker Change: Chief Risk Officer Jim Crotwell, our Chief Accounting Officer Steve Brawley, and our Chief Credit and Banking Officer Preston Moore. After the presentation, we will be happy to address any questions you may have. Drake, the call is yours.
Thanks, Chris, and thanks for being with us this morning.
Drake: I'm excited about where we are as a company as we enter 2025. I want to start on slide four and talk about what Optimize Origin means to us and to all of our stakeholders. Our entire executive team has worked hard over the past year creating and implementing a strategy that is the basis for the next evolution of our company.
Drake: The goal of Optimize Origin is to deliver sustainable, elite-level financial performance.
Optimizer Origin is built on three primary pillars.
Speaker Change: Productivity, Delivery, and Efficiency, Balance Sheet Optimization, and Culture and Employee Engagement, which Lance and Wally will discuss in more detail later in this presentation.
Speaker Change: The definition of Optimize is to make as perfect, as effective, or as functional as possible. Optimize Origin is more than a project, it's more than a point in time. It is a continual enhancement of an award-winning culture and the drive for elite financial performance.
Speaker Change: We recently rolled out our new performance statement across our company that incorporates this drive for performance into our brand voice.
Speaker Change: It reads, to enhance our dynamic culture and optimize financial performance to be the best bank in America and an extraordinary partner to our stakeholders.
This purpose statement perfectly aligns with Origin's vision and mission.
Speaker Change: Origin has proven to be a dynamic leader of driving a unique corporate culture that emphasizes the employee experience and employee engagement. This philosophy has created a competitive advantage by attracting and retaining best-in-class bankers in some of the best markets in the country to grow our customer base and serve our communities.
But we can do more.
Speaker Change: At a high level, we expect the strategic actions that we have taken and will continue to implement will drive us to an ROA run rate of 1% or greater by the fourth quarter this year.
Speaker Change: Our ultimate target is for our ROA to be in the top quartile of our peers. We believe the actions we've already taken will drive earnings improvement of approximately $21 million annually on a pre-tax, pre-provision basis. Now I'll turn it over to Lance and the team.
Thanks and good morning.
Lance: The evolution into Optimize Origin has been a collective commitment from our leadership to invest in people and systems to create data-driven insights to enhance our alignment and decision-making processes to drive sustainable high performance.
Lance: Through the productivity, delivery, and efficiency pillar of Optimize Origin, we began the process of deeply analyzing branch and banker profitability.
Lance: The merger with BTH created branch efficiency opportunities in DFW. Analyzing branch profitability and return metrics, branch proximity and drive times, as well as client transactions, behaviors, and product mix, led us to announce the closing of eight banking centers.
Lance: These eight closures include five in our DFW market, one in Houston, one in North Louisiana, and one in Mississippi.
Lance: We are confident we can continue to deliver award winning service to our valued clients and to grow communities through this decision while creating a run rate of approximately $4.6 million in annual expense reduction.
Lance: Our team also created a detailed banker profitability report that provides deeper insight into portfolio mix, yields, and performance.
Lance: Growth Capacity, Appropriate Support Levels, Banker NIM, and Banker ROA. This report has allowed our presidents a clearer view past traditional loan growth into detailed and significant production and return metrics.
Lance: This lens has provided the ability to sort and stack rank bankers and portfolios to understand where profitability is being created and where portfolio support was truly needed.
Lance: Using this data in an effort to efficiently enhance our return and growth profile, we have worked through the process of significantly repositioning our production teams and loan portfolios.
Lance: We identified bankers and loan clients that did not optimize our desired portfolio production, mix, or return profile necessary to drive higher ROAs. We eliminated, moved into a different role, or did not replace the lower return profile bankers from our loan production teams.
Lance: We also identified efficiency opportunities in our mortgage team as well as portfolio support areas to drive an annual expense reduction from these production groups of approximately $6.7 million annually.
Lance: We were then able to use these cost saves of less profitable portfolios to reinvest into production by adding approximately 10 new production bankers in Texas and our new Southeast team throughout 2024.
Lance: This reallocation into bankers with higher production and return opportunities, along with Origin's footprint, talent, and capacity, have created a strong confidence in our ability to drive high single-digit loan growth in 2025.
Lance: On top of these actions that have already been taken, we feel we have more opportunity for productivity, delivery, and efficiency.
Lance: First, we are working with a reputable consulting firm on a benchmarking project driven by data analytics that we expect to complete in February, which we believe will reveal significant opportunities to improve processes, identify additional efficiencies, and further enhance Origin's return profile.
Lance: Secondly, we continue to invest in Origin Financial with the goal of getting over 20% ownership, which will change our accounting methodology on this investment. Origin purchased additional shares in 2024 to increase our ownership to approximately 19%.
Lance: We hope to identify and purchase additional shares in 2025 to achieve our goal. We remain very bullish on Argent's footprint, growth opportunities, and EBITDA expansion. We are honored and appreciative to have such a strong wealth and trust partner.
Lance: Third, we clearly understand we have an ROA lever in improving mortgage profitability. We are currently studying a mortgage delivery reimagination for our community banking model with the goal of significantly improving our returns on this business.
Lance: We will provide additional details on this and other optimized origin production opportunities throughout 2025.
Lance: Wally will provide more detail on the balance sheet optimization pillar, so I want to touch on culture and employee engagement. I have a deep belief that we have a unique opportunity to be great at both culture and performance.
Lance: Our investment and commitment to employee engagement, our geographic management model, and our systems to deliver an elite customer experience have created a strong foundation that allows us to hire best-in-class banking teams across our footprint.
Lance: We are incredibly proud to be identified by American Banker as the number one best bank to work for of the bank's two billion in asset size and greater.
Lance: Combined with our extraordinary Client Net Promoter Scores and Employee Engagement Survey results, we truly believe Origin is unique in how our tangible corporate culture creates competitive advantages for us.
Jim Crotwell: When you combine this culture with our footprint from Texas to the southeast, the strategy of rural deposits in North Louisiana, East Texas, and Mississippi to support funding of dynamic loan growth in Dallas, Fort Worth, Houston, and in our new southeast market, as well as our geographic management model, we feel Origin is well positioned to drive sustainable elite financial performance. Now, I'll turn it over to Jim.
Thanks Lance.
Jim Crotwell: We take a great deal of pride in the credit culture we have created at Origin. We have talked often about client selection, which is paramount to our process in optimizing our loan portfolio. While we experience continued normalization within our loan portfolio, we are pleased with our level of charge-offs, the positive results of our client selection initiative, and the provision release for the quarter.
Jim Crotwell: We reported a net recovery for the quarter driven by actual recoveries of 2.6 million dollars.
Jim Crotwell: On a year-to-date basis, net charge-offs came in at 0.18%, a metric we are pleased with.
Jim Crotwell: Our continued focus on client selection resulted in an additional $55 million in desired reductions, $19.6 million of which were classified loans.
Jim Crotwell: Since we began this initiative in Q2 of this year, we have achieved desired reductions of approximately $149 million, of which $100 million were non-criticized loans. We will continue this focus on enhancing the quality of our portfolio.
Jim Crotwell: Past due loans held for investment came in at 0.56% a year in, up from 0.49% as of 9-30, and remained within acceptable levels.
Jim Crotwell: Classified loans increased $11 million to 1.57% of loans as of December 31st, up from 1.35% as of the prior quarter end, while non-performing loans also increased $11 million for the quarter to 0.99% from 0.81%.
Jim Crotwell: The increase in classified loans was primarily driven by the downgrade in eight relationships, partially offset by the upgrade of one relationship, and the exit of six relationships.
Jim Crotwell: As to non-accruals, the increase was primarily driven by five relationships offset by the exit of two.
Jim Crotwell: As we mentioned in our earnings release, the levels of both classified loans and non-accruals were positively impacted as a result of the establishment of contingency reserves related to the question banker activity.
Jim Crotwell: For the fourth quarter, we reported a provision released for outstanding loans of $5.5 million, driven by a $1.7 million decrease in the collectively evaluated portion of the reserve and a $3.2 million decrease in the individually evaluated portion of the reserve.
Jim Crotwell: The provision was also positively impacted by the $560,000 net recovery mentioned earlier.
Jim Crotwell: The decline in the collectively evaluated portion of the reserve was primarily driven by the $3.1 million reduction in previously required reserves associated with loans that paid off during the quarter.
Jim Crotwell: As to the decrease in the individually evaluated portion of the reserve, $2.1 million was attributed to the establishment of contingency reserves related to the question banker activity.
$846,000 related to charge-offs, with $642,000 related to paid-off loans.
Jim Crotwell: We did not make any material changes to the underlying assumptions in our ACL model during the quarter.
Jim Crotwell: The above reductions exceeded the amount of reserve required on downgrades mentioned previously, resulting in the provision decrease.
Jim Crotwell: On a percentage basis, our allowance decreased from 1.21% to 1.20% as percentage of total loans held for investments, and from 1.28% to 1.25% net of mortgage warehouse.
Jim Crotwell: With the market's continued focus on non-owner-occupied CRE office, we continue to provide added detail on slide 15, which shows the resiliency and performance of this sector within our portfolio. As of quarter end, this segment totaled $351 million, average loan size of only $2.2 million, a weighted average debt service coverage of 1.43 times, and a weighted average loan-to-value of 58 percent.
Jim Crotwell: We continue to have no past dues, no classifieds, no non-performing loans, and no charge-offs within this sector.
Jim Crotwell: Lastly, total funded ADC and CRE to total risk-based capital at quarter end was 63% and 225%, which puts us in a great position to support our customers and provide strategic growth. I'll now turn it over to Wally.
Wally: Thanks, Jim. And good morning, everyone. Turning to the financial highlights, in Q4, we reported diluted earnings per share of 46 cents.
Speaker Change: As you can see on slide 26, the combined financial impact of notable items during the quarter equated to a net expense of $14.7 million, equivalent to 37 cents in EPS pressure.
Speaker Change: On the balance sheet side, deposits were down 3.1% during the quarter. However, excluding brokered, deposits grew 1.1% linked quarter.
Speaker Change: Furthermore, non-interest bearing deposits grew for the second consecutive quarter up 0.4%. On an average basis, deposits ex-brokered increased 2.8% linked quarter, and average non-interest bearing deposits grew 4.9% linked quarter. Non-interest bearing deposits, as a percent of total deposits ex-brokered, were relatively flat at 23.3%, compared to 23.5% last quarter.
Speaker Change: elevated pay downs rings, and lower new loan production – which was driven in part by our strategic decision to stay under $10 billion in assets.
Speaker Change: Our loan-to-deposit ratio, ex-mortgage warehouse, remains below our 90% target at 87.9%, and our deposit and liquidity trends remain strong.
Speaker Change: We were able to use excess liquidity to allow brokered deposits to roll off of our balance sheet during the quarter, with brokered deposits declining 81%.
Speaker Change: Given the strong deposit trends we have experienced in the latter part of 2024, our bankers across our markets are laser-focused on growth. We are excited to broaden our focus in 2025 to re-accelerate our loan growth with an expectation of mid to high single-digit loan growth in 2025.
Speaker Change: We anticipate this growth will be funded by new deposit growth and existing on-balance sheet liquidity.
Speaker Change: Turning to the income statement, net interest margin expanded 15 basis points during the quarter to 3.33%, well above our expectations for roughly 10 basis points of margin compression.
Speaker Change: While slightly elevated interest recapture on a non-accrual loan payoff and the partial impact of our securities optimization trade both benefited margin during the quarter, the primary drivers of upside relative to our expectations were better than expected loan yields and deposit costs.
Speaker Change: Loan yields benefited from a combination of our continued focus on disciplined pricing and a steeper yield curve during the quarter, while deposit costs trended in line with our historical beta trends compared to our conservatively estimated zero beta on non-indexed deposits.
Speaker Change: Moving forward, as you can see in our outlook, we expect margin expansion to 3.45% in 4Q25 and 3.40% for the full year, plus or minus 10 basis points.
Speaker Change: In this outlook, we assume two 25-basis point Fed rate cuts with a relatively stable shape of the yield curve and a deposit beta in line with our historical trends.
Speaker Change: We also expect benefit to the margin from our optimized origin efforts from the remaining benefit of the fourth quarter securities optimization trade, the planned repurchase of our $70 million in bank-level sub-debt during the first quarter of 2025, and the more efficient liquidity management practices that were implemented in the fourth quarter.
Speaker Change: Combined with our loan growth outlook discussed earlier, these expectations help drive our net interest income outlook of mid- to high-single-digit growth for the year.
Speaker Change: Shifting to non-interest income, we reported negative $330,000 in Q4. As highlighted in our notable items slide, the quarter included a $14.6 million loss on sale of securities that was only partially offset by gains of $198,000 on asset sales and valuation adjustments.
Speaker Change: excluding these notable items and the $221,000 net benefit of notable items in Q3, non-interest income declined to $14.1 million from $15.8 million in Q3 due primarily to normal seasonality in our insurance business.
Speaker Change: Our non-interest expense increased to $65.4 million in Q4 from $62.5 million in Q3. Excluding $3.5 million of notable items in Q4 and $0.8 million in Q3, non-interest expense was up just slightly to $61.9 million from $61.7 million.
Q4 expense was better than we had anticipated.
Speaker Change: However, it did include the partial benefit of branch consolidation and banker profitability decisions that were made as part of Optimize Origin during the quarter. Importantly, these decisions are anticipated to drive additional expense benefits in both 1Q25 and 2Q25. Moving forward, our current outlook calls for 4Q25 non-interest expense to be flat to down slightly when compared to 4Q24, and 2025 expense to be up low single digits compared
2024 after excluding notable items as discussed above.
Speaker Change: Lastly, our financial outlet for 4Q25 and 2025 includes the roughly $21 million in pre-tax pre-provision benefits that we highlight on slide 5 as part of our Optimize Origin efforts.
Speaker Change: which started earlier in 2024 but began in earnest during 4Q24 combined with the benefits to net interest income from our loan growth target discussed earlier. Importantly, our ultimate target is to deliver an ROA in the top quartile of our peer group.
Speaker Change: To this end, we are currently working actively on other initiatives as part of Optimize Origin around both revenue and expense optimization that, while likely launched during 2025, are not considered in our 2025 financial outlook.
Speaker Change: Furthermore, as Lance mentioned, we are looking forward to the third-party benchmarking study to help management identify additional areas of opportunity towards achievement of our ultimate target, and we anticipate delivery of those results in the coming weeks.
Speaker Change: We are excited about the opportunities in front of us and will look forward to reporting on our progress as 2025 unfolds. With that, I will now turn it back to Drake. Thanks Wally.
Speaker Change: I'm bullish on Origin as we enter 2025. I feel that way because I know what we are capable of and how committed we are to delivering results.
Speaker Change: For my 40 years at Origin, we have been a growth machine. That mentality is what led us into Dallas and Houston, it's what led us to sustained growth in Louisiana and Mississippi, and it's what drove our expansion into East Texas and the Southeast.
Speaker Change: I acknowledge that it was a challenge to stay under $10 billion in assets the past two years, but it was the proper strategy.
Speaker Change: Origin has proven throughout our history that we have come out of challenges as a stronger and better company, and that is the case today.
Speaker Change: We have strengthened our team and refocused our strategy to drive elite-level financial performance as we accelerate into the next evolution of our company. I am passionate about our future as we optimize Origin.
Speaker Change: Thank you for being on the call. We'll open it up for questions.
Speaker Change: Thank you. At this time we will now conduct the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to enter the queue. And if you have joined ViewWeb, please press the raise hand icon on the right side of your Deal Roadshow screen.
Speaker Change: Again, press star 1 on your telephone keypad to enter the queue, or the raise hand icon on the right side of your Dealroacher screen.
Speaker Change: We will pause here briefly to allow any questions to generate.
Speaker Change: Our first question comes from Matt at Stevens. Matt, your line is now open.
Hey, thanks. Good morning, everybody.
Good morning, Matt.
Speaker Change: I appreciate all the good disclosures around this optimization plan. Want to dig in on a few of the items. Maybe first off on the loan growth front.
Speaker Change: I think we're now talking about this long growth in 2025 in the mid to high single-digit range. That's quite the inflection from what we saw in 2024. What else can you tell us about just how cautious you were about growing the balance sheet?
Speaker Change: last year, and why you expect to grow the loan balance more meaningfully in 2025.
Speaker Change: I think it goes back to, you know, kudos to Lance and his team at the bank, because we
Speaker Change: We talked about what it took to keep us under 10 billion and certainly isn't a strategy that I'm used to
Speaker Change: working through, but through that process, we really focused on limiting CRE. We looked at the client selection process, and I can't tell you how hard we worked.
Speaker Change: to take loans, because if you look at the $149 million loans that we pushed out, a hundred million plus of those.
Speaker Change: were performing loans, but they just didn't fit. We didn't have the confidence in those loans or relationships moving forward, or they just weren't creating what we expected from a relationship. So you take that impact and the process of preparing for 10-B.
Speaker Change: loan categories as a whole. It was a tough process to go but we were able to look at each one of the markets and look at
Speaker Change: and determine exactly what it was that we're going to focus on moving in 25 so through the fourth quarter
Speaker Change: We really got busy with the market to look at what pipelines were doing and the direction we were going and feel extremely confident about
Speaker Change: our ability to prove and return to what is typical growth for us.
I don't think there's going to be any major changes.
Speaker Change: the categories of loans. We're still going to focus on C&I. We're going to focus heavily on
owner-occupied CRE.
Speaker Change: and projects that that we have relationships with now so if you put all that together
Speaker Change: We feel pretty confident that the growth, it's certainly going to accelerate in the third and fourth quarter, or the back end of the year more so, but we feel like we've got a very good start going into this year.
OK, I appreciate that, Drake, and then.
Speaker Change: I guess within that optimization plan on page five, you give us those five components that give us the $21 million of the pre-tax savings. So if I'm interpreting that right, it sounds like the implementation of those five specific items can get the bank...
Speaker Change: back to that 1% ROA, give or take, that were called out. And you think you can get there by the fourth quarter of 2025.
and then those two remaining items on page 5.
Speaker Change: the Argent, and the third-party benchmarking, it sounds like those two items have not been implemented, but if and when they are implemented, it would be further improvement beyond that 1% ROI. Is that the right interpretation?
Speaker Change: Exactly right. I mean we're extremely confident in our ability to to deliver that one plus ROA at the fourth quarter run rate.
Speaker Change: I'm really pleased with the team of how much work and effort went into this in a very short period of time to not only create the plan, but to implement and execute, keep morale and culture intact.
Speaker Change: and be highly successful. So we, as you can tell, have a tremendous amount of confidence in our ability to deliver, but one percent
Speaker Change: is just the first step. We understand that we have to be peer to even continue to stay in the game, but for us, moving above peer and get back to where we were at the fourth quarter, 22, when we had about a 130 run rate ROA, is what the focus is.
Speaker Change: Hey Matt, this is Lance. I might want to add a little color to Drake's point. Clearly a challenge staying under 10b, but if we think about the economics of pushing Durbin back to 2026, I think it was a really smart strategy.
Speaker Change: So, for the back half of the year, I mean, our whole thought was around...
Speaker Change: What do we want our balance sheet to be positioned at on January 1st to be able to launch forward?
Speaker Change: And so as Drake talked about that came in through client selection that came through.
Speaker Change: a really good push of our bankers on increasing core liquidity. We had really nice core deposit growth of about four percent for the year. It's a little covered up because we then took that those core deposits and paid down about $360 million in broker deposits. So where we're positioned now.
is in a really strong place.
Speaker Change: We also have, we feel we have a tremendous amount of runway now with our liquidity, with our loan to deposit ratio, with our low percentage of brokered.
Speaker Change: but then also the way that we've managed our portfolio with a 63% ADC ratio and a 225% CRE ratio.
Speaker Change: I mean, we really can take the shackles off of the bankers that we've arbitrarily held on. So, when you look at the opportunity in the markets, when I look at what our pipeline looks at, which is solid but really building, for us, we see clearly the opportunity to do, you know,
Speaker Change: 7-8% loan growth this year as we think through it now.
Speaker Change: Because of one of the places that we had sort of put a slowdown on was on construction lending, you know, that takes a little bit of time to sort of get that ramp back up. We're presently doing that. We're seeing that that pipeline build, but some of that obviously the funding doesn't kick into the third or fourth quarter.
Speaker Change: Also want to kind of go back to your comment about the levers we feel like we've pulled. I mean this is for us clearly not a project. This is the evolution of this company to be a top quartile performer.
Speaker Change: And so, you said it exactly right. I mean, those things get us to the one.
Speaker Change: But then with the benchmarking project with Argent, but also as we really dive into enhanced profitability in a mortgage business and how we're going to
Speaker Change: deliver on that. But then just the continued natural evolution of East Texas and the Southeast. I mean we expect really strong growth out of the Southeast this year. Couldn't be more pleased with that team. That is going to turn out to be a home run hire for us.
So we feel like we've got a
Speaker Change: A tremendous amount of tailwinds here, new administration, hopefully better economy, more growth opportunities, and then the luxury of Texas.
Speaker Change: Okay, appreciate that Lance and I guess I guess one of the things that struck me I guess on this discussion is that many of these initiatives that we've highlighted on the optimization these are these are already underway and in some cases already made
Speaker Change: Good progress on a number of these so help us just appreciate I guess the timing of that 21 million dollars
Speaker Change: of annualized benefit that was called out. Is this something that's going to be even throughout the year or kind of more back half loaded? Just how do you think about the timing of when you could see the benefit of many of these savings?
Thank you.
Speaker Change: Hey Matt, it's Wally. So the, on slide 5, the items that have numbers with them, with the annualized benefit, I'll go through each one of those. The branch and the branch consolidation.
Speaker Change: is going to occur in the middle of the first quarter. So we'll see about half of that benefit in the first quarter, and you should see the full run rate benefit in the second quarter.
Speaker Change: The banker optimization, profitability optimization, those numbers that you see were a result of actions that were taken during the fourth quarter. So some of that's already in the run rate, but you'll see the full impact of that in the first quarter.
Speaker Change: We did the securities optimization trade right about the middle of the fourth quarter, so we got a little bit less than half of that benefit in the fourth quarter, and the rest we'll get in the first quarter.
Speaker Change: The bank level sub-debt, we will redeem that in the middle of February.
Speaker Change: So we'll get, we'll avoid half of that excess expense in the first quarter, but then, you know, it's already in the run rate. So really, that's an avoidance of what we were anticipating was an increased cost.
Speaker Change: And then the cash and liquidity management opportunities that we quantify, those occurred late, the latter half of the fourth quarter. So you'll see the full benefit of that. And there's some ongoing efforts there. So hopefully we can exceed that benefit as well.
Hopefully that helps.
Speaker Change: Yep, that's perfect. Appreciate the color though, Wally. I'll step back now, but appreciate all the good details, guys.
Thank you, Matt.
Speaker Change: Our next question comes from Michael at Raymond James Financial Incorporated. Michael, your line is now open.
Michael: Hey, thanks everyone. Thanks for taking my my questions. Just a couple follow-ups to the the outlook that was
Michael: rolled out with all the efforts. You know, obviously a pretty big range on the margin. Wally, if you can just help us appreciate the confidence in betas, which I think you mentioned, expected to perform in line with
Michael: with history, you know, on the way up, I think, if I recall correctly, you were a little surprised by
Michael: how strong things were on the way up, what gives you confidence that they'll perform the same on the on the way down, and then if you could just give some
Michael: Some color around the incentive program and the ability to drive core deposit growth as we as we move forward. Thanks
So,
Mike, the
We feel like we have a
significantly better understanding of how our deposit betas trend.
Michael: In 2023, we invested in a new system when we brought our ALM efforts in-house. Prior to that, we outsourced it, and betas that were used for NII modeling were based on industry trends.
Michael: On the software that we brought in, we included an investment in a deposit module which included basically a study of our historical deposit betas by product type.
Michael: conservatively in my guidance all last year, I was estimating essentially a zero deposit beta on the first couple of Fed moves.
Michael: We felt like the pricing on deposits lagged on the way up, so we thought it was a conservative expectation to assume that the pricing on deposits would lag on the way down.
Michael: In the fourth quarter following the September cut, and kudos to our retail staff and our market presidents, we were very conscious of how our customer deposits were priced.
Michael: and we underwent a very specific strategy product by product to try to manage those those costs in line with the industry.
Michael: and the outcome in the fourth quarter was that our deposit betas instead of being zero were right in line with what our historical trends were which is about a 50% beta on non-maturity deposits.
Michael: So, I would tell you that the experience we have with these first hundred basis points of cuts from the Fed give us confidence that we can continue to have the same experience.
if the feds should continue to cut.
Michael: Obviously, that's going to be dictated by what we see in market trends and what liquidity trends we're seeing on our balance sheet. And I think if you just look at also the fact that not only were we
Michael: Not only were we able to manage our deposit costs appropriately, we also were growing our deposits if you exclude brokered. So I think that combined, that gives us confidence in our model for 2025.
Speaker Change: and I'll let Lance. Yeah, hey, I'll jump in. That was a really good question about the incentive plan because
Lance: That is the way that we drive behaviors. And I'll kind of give you some...
Lance: some detail around the way the banker incentive plan is created so you can kind of see the how strategy is implemented throughout but
Lance: Bankers are really paid out for us in three areas. One is corporate bank ROA, so we want to make sure we align our bankers with the top-of-the-house driver. That's critically important, especially as we move forward into this top quartile performance.
Lance: Secondly, there's a market piece from which they work. There were not growth metrics associated with the markets this year. Those payouts were around market ROAs,
Lance: and then a loan-to-deposit ratio for that market. It was, as we built it out this year, that it was critical for us for the markets to self-fund.
Lance: because, again, we were so focused on the positioning of where we were going to be in 2025.
Lance: And then as we got into individual production per banker, we actually paid more for deposits than we paid for loans in 2024. We use those weights, we use caps inside of those to emphasize
Lance: the specific areas of production where we desire. So, you know, the bankers were aligned with us and pushing out credits that we felt like didn't have the appropriate structure or the appropriate secondary payment source. Certain industries
Lance: So for 2025, we actually spent a lot of time on that the last week.
Lance: You know, the shift there will be back to sort of a 50-50 payout on loans and deposits, making sure, opening up some caps on growth, getting back aggressive, sort of taking the shackles off the bankers, again, create the runway, but then also create the behaviors through the incentive plans, and we feel like we've got the right structure to do that.
Lance: It's a very thorough response. Thanks for that. You know, one thing I, just switching gears, one thing I picked up on in the prepared comments was just, you know, potential restructure of the mortgage.
Speaker Change: business. I know you guys have a warehouse and I know we've seen a lot of banks actually get out of that business. Is that in the cards and then if you can give us some maybe some greater detail on what you'd be looking to do to enhance performance there. Thanks.
Speaker Change: Michael, first off, we love Warehouse and we will continue to. I mean, the customer base we have in our warehouse, the relationships, even shareholders in that business.
Speaker Change: something that we will continue to focus on and we see slight growth in that for 25. You know from the mortgage business I don't think I could look at a shareholder and say today that that mortgage business is the same as it was
Speaker Change: you know, five years ago, 10 years ago, so we are.
Speaker Change: looking very closely at how do we deliver those products in the right way.
Speaker Change: respond to our responsibilities in these markets but yet return to shareholders what expectation would be so
Speaker Change: running through several different models. It's early for us to commit to exactly how we manage that, but the mortgage business and making mortgages, provide mortgages for our clients, is very important to us. We just have to do it in a much more efficient way.
Speaker Change: Very helpful and then maybe just last one for me just on on capital still really strong here.
Speaker Change: I don't think you guys have used the buyback recently, but even with the sub-debt, I mean, it looks like capital will still be strong. Any reason that you wouldn't use the buyback? And then, Drake, now that the...
Speaker Change: The new administration is in, and you guys are on this profitability enhancement program, which I hope you'll be successful with. Does M&A become part of the conversation again at some point? Would you look to maybe just retain capital for that purpose? Thanks.
Speaker Change: Obviously, we do have a buyback plan in place, I think it's $50 million.
Speaker Change: That is a tool for me personally, and I would say this, I hope, for the team. Capital, where we are today, is a runway. We see significant growth opportunities in the Southeast, East Texas.
Speaker Change: We love East Texas. I mean, it's just, it's been a great opportunity for us. What Nate has in the southeast, an opportunity to grow that through lift-outs, I believe we have a path for capital utilization between sub-debt.
Speaker Change: opportunities and we'll have another opportunity in November and where capital is today. Also crossing the 10b mark, capital is a focus. We want our regulators to feel very comfortable that we're not only prepared to be a 10b,
Speaker Change: organization but we have the capital to do to to go forward so I would say if I hadn't lined it up
Speaker Change: execution from an organic growth strategy that that's that's that's how we apply the runway of capital I think for the next 12 to 18 months. We also have the redemption of sub debt that I think from a
EPS standpoint drives more value.
Speaker Change: And then from there, we are going to continue to maximize organic growth opportunities, but continue to build relationships also in these markets with M&A opportunities. But I think for this institution, how we are positioned
Speaker Change: If the M&A opportunities, if M&A really heats up and dislocation creates, we win either way.
Speaker Change: Whether we're successful with an M&A opportunity or we're successful continuing our organic lift-out strategy.
Speaker Change: I am so bullish on our opportunities to expand and grow, whether it's through M&A or lift-out strategy. So, pretty excited about how we utilize excess capital today, but I look at capital as a runway for us.
Very helpful guys. Thanks for taking all my questions
Thank you, Michael.
Speaker Change: Our next question comes from Woody at KBW. Your line is now open.
Hey, good morning, guys.
Speaker Change: I did want to follow up real quick on on that hiring comment. I mean, you know, you've been very successful in the past on the team lift-out strategy. Is there a hiring opportunity in 2025 and is that baked into the expense guide?
It's not baked into the expense guidance.
Speaker Change: But I will tell you that there is significant opportunity for us. We're going to
Speaker Change: allow our market leaders to grow their business the way they see fit based on
Speaker Change: our focus on what we want our loan portfolio to look like. So what that means to me is we're going to be heavily focused. If there's a C&I team that comes along that fits our culture, we are going to jump on that opportunity. I mean, that's how we've grown through years. That's where our real values increase. So we think that's the true opportunity for us as dislocation starts to heat up.
Speaker Change: Got it. And then I wanted to touch on, Arjun, it sounds like that investment will go over the 20% ownership mark in 2025. Can you just remind us how that changes the accounting treatment and how it could impact the income statement?
Speaker Change: Woody, I don't think that we're prepared to answer the latter part of that question, but when we get to 20% ownership,
Speaker Change: we would essentially trip an accounting standard that would require the equity method of accounting where we would represent our owned portion of their earnings.
Speaker Change: The way we're looking at it is an opportunity to help offset the ultimate impact of the Durbin Amendment when that kicks in. So that kind of might help you get a general sense of the earnings impact.
Speaker Change: I was going to say I might jump in a little bit on the timing of that too, I mean obviously
Speaker Change: We've made a lot of progress to get to about 19% ownership. Management of Origin has been incredibly helpful in helping us identify shares when they become available.
Speaker Change: I would love to do it as quick as possible. The reality is at this point, any seller on the argent side at this point will probably want to wait until they get their current valuation back, which would probably be about April. So I would think that would probably be a Q2 event.
Speaker Change: Okay, that's that's helpful. And then yeah, well, you you sort of touched on my last question, but it was going to be on
Speaker Change: Durbin and just any update on how you're thinking about the Durbin impact, which I guess will be a back half at 2026 event.
Speaker Change: Correct, yeah. Assuming we cross 10 billion this year, which we do assume it would it would kick in in the third quarter of 2026, and our current estimates that that'd be roughly five and a half to six million dollar pre-tax impact.
annually.
Alright, thanks for taking my questions.
Thank you, Woody.
Speaker Change: Once again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad to enter the queue.
Speaker Change: And if you have joined via web, please press the raise hand icon on the right side of your GeoRoadshow screen.
Speaker Change: Again, press star 1 on your telephone keypad to enter the queue, or the raise hand icon on the right side of your dealer roadshow screen.
Speaker Change: Our next question comes from Manuel at DA Davidson. Your line is now open.
Manuel: Hey, good morning. I appreciate the commentary this morning. Just wanted to follow up on Argent a little bit.
Speaker Change: I understand that a lot is up in the air, but if we assume it replaces Durban, is there also an assumption that...
Speaker Change: it could potentially grow faster than what your fees were growing previously. Is there any other color you can add to
Argent Potential.
Hey Manuel, just to clarify, I said partially upset.
Durbin and then I mean Argent has been
An extraordinary growth story.
Speaker Change: We're not, we don't run the company and I couldn't tell you what their future growth expectations are but if past is precedent then I think you could say that there could be a meaningful growth opportunity from that investment.
Speaker Change: Okay, I appreciate that. I appreciate the color around the timing with April and evaluation. There's a lot of moving parts there.
the on a separate
direction.
Speaker Change: You're breaking out the Southeast and Alabama and Florida on your slide deck. Can you talk about the growth potential there this year? How do you expect that ramp this year after kind of getting everyone in last year? Just kind of talk about the opportunity there, especially near term.
Yeah, couldn't be more excited about.
Nate and the team that he has built.
when they came on.
Speaker Change: We were very clear in our expectations for them to lead with deposits, which they did. We ended the year, I think,
Speaker Change: about $60-ish million in deposits and about $35 million in loan growth. We're projecting loans and deposits to be close to $115 million.
Speaker Change: at the end of this year. So you see pretty significant growth in both loans and deposits.
that could be enhanced with continued hires.
Speaker Change: We were a little bit slower in getting their permanent locations in Mobile and Fort Walton, so we were slightly behind our schedule and where we thought from that from a run rate perspective, but the client
Acquisition has been outstanding.
Speaker Change: At this point, you know, the loan book they're building is exactly what we thought it would be. It's about 77% C&I, nice private, and only about 10-15% CRE. We knew that's what they were going to be when we grew them.
Speaker Change: Their portfolio looks really strong, pipeline looks really strong, so that's what I want to make sure that we talked about when we talk about levers to pull on going past the 1% ROA. I think the southeast is a giant key there.
Speaker Change: I appreciate that. Shifting a little bit over to the NIM.
Speaker Change: I think the answer here is going to be deposits, but there's a pretty wide range of NIM outcomes by fourth quarter of next year.
Speaker Change: Can you kind of walk through the biggest wildcards, positively and negatively, for that NIN outcome? I believe it's the positive, but...
Speaker Change: Just kind of thinking, could you describe that a bit for me?
Speaker Change: Sure, Manuel, and we do recognize that's a that's definitely a wide range which which is why we also gave you some some guidance around our dollar NII growth expectations.
Speaker Change: On the NIM itself, liquidity impacts that pretty significantly. As you see in the fourth quarter, the deposit beta has a very meaningful impact on end-quarters following Fed rate cuts.
Speaker Change: We saw roughly a 20 basis points swing in them from the deposit beta expectation versus reality.
Speaker Change: So, liquidity mix, loan growth, and deposit betas, I think, would be the three biggest impacts to where that actually settles out.
Speaker Change: So hopefully you'll look at that NII guidance to help kind of triangulate in your models where you think we end up based on your growth expectation.
I appreciate that.
Thank you.
Thank you, Manuel.
Speaker Change: Our next question is a follow-up from Matt at Stevens. Matt, your line is now open.
Matt Stevens: Thanks. Wally, back to you and kind of similar to the last question around the NII guidance for 2025.
Speaker Change: I think that assumes you said two Fed cuts during the year. Just want to appreciate the sensitivity around that. And if we didn't get two cuts, whether it's zero or one, how impactful that would be to the...
Speaker Change: NII Outlook and then I guess the second part of that is that around the yield curve steeping in recent in recent months a few banks have called us out within their outlook just trying to appreciate how impactful the steeping yield curve is to the outlook for the banks NII.
Thanks, Matt. It's a good question.
Speaker Change: So, I'll take the second part first. The shape of the curve definitely impacts our guidance.
Speaker Change: We assume that the shape of the curve remains stable. So we've seen volatility in that three to ten year portion of the curve, and that impacts the pricing on our loans as they reprice out of our CRE portfolio.
Speaker Change: So, continued volatility there could absolutely impact the ultimate performance on the loan pricing side.
Speaker Change: As far as fed cuts, we layer in two in the first half of the year.
and we remain asset sensitive. So.
Speaker Change: In all honesty, I think the message that we've had pretty consistently for the past year or so is that the best environment for us, and honestly I think for the system, would be a period of time where we have stability in rates.
So that would be the wished-for outcome.
But we are asset sensitive.
Okay. Appreciate that, Wally. Thanks again.
Thank you, Matt.
Speaker Change: This concludes the Q&A. Handing it back to Drake Mills for any final remarks.
Drake Mills: I want to thank everyone for being on the call today. I'm extremely pleased and proud of this team to be able to not only build a plan but to execute
Drake Mills: and to make tough decisions in a very short period of time.
Drake Mills: while on the other hand maintaining what I think is strong morale and our strong culture so
Drake Mills: I'm optimistic and very focused on what 25 looks like. I'm very pleased with the overall confidence in our organization to grow loans and to get back to a growth story that we traditionally are.
Drake Mills: But I'm even more pleased that our decisions are coming through focused analytics that will continue to drive other opportunities. So again, thank you for your confidence in Origin Bank. Thank you for your partnerships and thank you for being on the call today.