Earnings Call: Q3 2019

Oct 24, 2019

Good day, and welcome to the Origin Bancorp Incorporated 2019 Third Quarter Conference Call and Webcast. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Chris Riegelman, Investor Relations. Mr. Riegelman, the floor is yours, sir. Good morning, and thank you for being with us. 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 today's call. Before we begin, I'd like to remind you this presentation may include information about our management's views of our future performance, business and growth strategy, projected plans and objectives and various other matters that constitute forward looking statements under federal securities laws. Due to various risks and uncertainties, actual results may differ materially from historical results any results implied or indicated by any forward looking statements. For a discussion of these risks and uncertainties, please refer to the forward looking statements section of our earnings release and the risk factors included in our most recent annual report on Form 10 ks filed with the SEC as well as any updates set forth and other documents we periodically file with the SEC. Forward looking statements speak as of the date they are made, and Origin undertakes no obligation to publicly update or revise any forward looking statements. If you're logged on to our webcast, please also refer to slide 2 of the slide presentation, which includes our forward looking statement and Safe Harbor statement. Those joining by phone, please note the slide presentation is available on our website at www.origin.bank. All comments made during today's call are subject to the forward looking statements, Safe Harbors, in our slide presentation and earnings release. Finally, in this presentation, we may discuss certain financial measures that are not calculated in accordance with U. S. GAAP. Please refer to the reconciliations of these non GAAP financial measures to their closest comparable GAAP metrics in our earnings release and slide presentation, which are available on our website at www.origin.bank. We believe that certain non GAAP financial measures can provide meaningful information to investors. However, these non GAAP financial measures are supplemental and should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non GAAP financial measures that may be presented by other companies. I'm joined this morning by Ordinance Bancorp's Chairman, President and CEO, Drake Mills our Chief Financial Officer, Steve Brawley and Lance Hall, President of Origin Bank. After the presentation, we will be happy to address any questions you may have. At this time, I'll turn the call over to Drake. Thanks, Chris, and thanks to everyone for being on the call today. As I consider our goals for the Q3, while taking into consideration strong competition in our current interest rate environment, I'm proud of what we have accomplished and our team is committed to building profitable relationships. Our team believes in and remains focused on our strategies, which is evident to the success we had this quarter, in particular, driving profitable loan and deposit growth. We said in the past that our loan growth will be governed by deposit growth, and I'm very pleased with the momentum we've seen on the deposit side, especially with non interest bearing deposits growing over $200,000,000 year to date, $6,000,000 or $0.62 per share. While interest rates have created a headwind for our company for much of 2019, our bankers have been diligent and disciplined in pricing new and renewed relationships utilizing relationship profitability and our loan growth was over $5 an increase of close to 15% on a year over year basis. As Drake mentioned, we had a record net interest income for the quarter of $44,600,000 up 3.8% from the linked quarter. Our provision expense for the quarter was $4,200,000 an increase from the linked quarter and prior year same quarter. Lance will cover more about this later in our presentation. In the non interest income and expense front, we saw some really positive developments. Non interest income was up 15.2 percent quarter over quarter ending at $12,900,000 This was driven by strong quarter swap fee income with our bankers being able to really create value for our customers and the bank with back to back swaps. Non interest expense was down over 5% on a quarter over quarter basis, ending at just over $35,000,000 There were several factors impacting our non interest expense this quarter, which we will discuss later. Our non interest margin on a tax equivalent basis for the quarter decreased 1 basis point to 3.69%. Our efficiency ratio for the quarter also decreased to 60.98% compared to 68.51% in the linked quarter and the year to date was near 65%. Our results for the quarter also drove linked quarter improvement in the ROA and ROE at 112% and non 85% respectively. Looking at our net interest income and net interest margin trends over the next slide, you can see that our net interest income has increased steadily over the past 5 quarters. Given the loan growth and increasing yields shown over the same periods, our income trends are in line with our expectations. As I mentioned, our margin declined 1 basis point from the prior quarter on a tax equivalent basis. In a pre tax equivalent basis, margin was flat at 3.65 percent quarter over quarter. During the Q3, increased loan fees driven by prepayments had a positive impact of 2.5 basis points when compared to the linked quarter. As we look into the 4th quarter, we will have a full quarter impact of the 2 most recent settled reserve interest rate cuts as well as whatever impact we see from any potential rate cut that comes on the Fed meeting later next week or later this quarter. However, we remain focused on optimizing our funding mix and the rates we pay on that mix to help offset the potential negative impact falling rates will have on our asset yields. Now Lance will cover more about loans, deposits and credit quality. Thanks, Dave. As Drake and Steve mentioned previously, we've seen fantastic loan growth this quarter. We were up over 5% quarter over quarter and over 10.5% year to date. As we look at the composition of our portfolio as shown in the presentation, we continue to be focused on C and I relationships with approximately 50% of the total loan portfolio at quarter end focused on C and I, owner occupied CRE and mortgage warehouse. We ended the quarter with 30% of our total loan mix concentrated in non owner occupied CRE. A significant portion of this loan growth continues to come from the Texas market. While I'm proud of the loan growth throughout the markets, I continue to be impressed with the deep relationships our bankers are building, which is evidenced by the deposit growth we have experienced. Our total deposits have grown $501,000,000 or 13.2 percent year to date. And as Drake mentioned, our NIBs have grown $203,000,000 or 21% year to date. With this outstanding performance by our bankers, our NIBs ended the quarter at 27% of total deposits. As Steve mentioned earlier, our provision for the quarter was $4,200,000 due to net charge offs of $3,000,000 with the remainder due to loan growth. Charge offs for the quarter were primarily driven by the cleanup of 3 credits, the most significant being in the restaurant industry with the other 2 in healthcare. Aside from the restaurant credit mentioned, we have exposure to the restaurant industry totaling $73,000,000 which is 1.7% of our total loans at quarter end. We do not view these charge offs as indicative of any trends in the portfolio. Pass through loans remained at positive levels with 72 basis points atquarterend and the level of non performing loans remained stable. While the quarter's net charge offs were higher compared to net charge offs for Q1 and Q2, our year to date annualized net charge off ratio of 11 basis points is right in line with our expected annual net charge offs in the 12 to 14 basis point range. I'm very pleased with the production we have seen from the markets as our bankers have continued to focus on building meaningful relationships that are very profitable. I'm going to turn it back over to Steve now to cover a little bit more on expenses. Thanks, Lance. I just wanted to cover our non interest expense and operating efficiency a little bit. When you look at the non interest expense for the quarter, we ended up with $35,100,000 There were a couple of things in there that we needed to unpack, so we adjusted those to create clarity in the presentation. In Q3, we were able to utilize all the FDIC assessment credit we have been awarded previously, which was a one time benefit of just over $1,000,000 We also had a benefit of $570,000 from self insured metal expense reserves that were released during the quarter that were accrued during the Q2. This created a quarter over quarter swing of nearly $1,200,000 We talked last quarter about the transition of our telecom providers and we recorded an expense reduction in Q3 of $150,000 due to this transition. Going forward, we don't expect to have any further significant impacts from this transition. We also had an additional true up of 200 and $13,000 in franchise tax expense associated with the filing of our 2018 tax returns, which we recorded in Q3 and we don't expect this to impact our run rate of franchise tax expense in any significant way. We also had $441,000 of additional loan related expenses due to legal costs associated with the loan workouts, one being the bad debt Lance touched on earlier. With that, I'll turn it back over to Drake for closing remarks. Thanks, Steve. Steve, Lance, thank you for walking the call through the results of the quarter. And I'm very pleased with our company's recent decisions affecting our shareholders. We repurchased 300,000 shares of stock during the Q3 and we increased our quarterly dividend $0.325 per share to $0.0925 per share. Through dividends and share repurchase, we have returned $13,800,000 to our shareholders in 2019 with $12,300,000 of that in the 3rd quarter alone. Earlier I mentioned the challenging environment we face, which is requiring our team to be efficient with growth moving forward. Overall, I'm pleased with the direction of our company and the way our bankers are executing on our strategic plan. As we move through the Q4 2019, we will remain focused on continuing to drive deposit growth with meaningful and profitable relationships. Thank you, sir. We will now begin the question and answer session. And the first question we have will come from Matt Olney of Stephens. Please go ahead. Hey, thanks. Good morning, guys. Good morning, Matt. So I want to start on expenses. And it sounds like the $35,000,000 was a little bit light. And if I take into account some of those items that Steve mentioned, the FDIC assessment and the lower healthcare expense, And if I think about a 4Q run rate, it is about $37,000,000 in the 4th quarter. Is that about the right place to start for a 4th quarter run rate? Matt, looking, we've done a lot of work on this since our Q2 call to try to create clarity, especially for the analysts. And we believe at this point that 36.7%, 36.8% number is probably reasonable for the Q4. Got it. Okay. That's helpful. And then on the credit side, it sounds like there was the write off of the restaurant loan created, I guess, most higher charge offs in the quarter. What else can you tell us about that loan? Did you write it all off? Is there any remaining exposure there? Or is there still some amount of that in non accrual? Yes. No, we have we wrote off the exposure of that credit and I want to talk about that just for a few seconds if I could. But we have a $3,000,000 balance remaining, which is the bid that we have in hand for that business. And we feel pretty confident that will hold up at this point. But we have and I want to make sure that I clarify this that we have $71,000,000 remaining in our restaurant portfolio and have really scrubbed that portfolio pretty did real deep dive on that portfolio and feel extremely comfortable. And I know that we've heard a lot of the term used one off. For us, this loan is truly a one off. It's not it does not look like any other restaurant loan that we have. We're very comfortable with the portfolio. And I've been I've said that in most of our calls with our investors that I'm extremely comfortable with our investment I mean our loan portfolio overall. We estimated between 12 14 basis points of loss on our portfolio for 2019. We're at 11 right now and feel like we're going to come in with that range. Nothing else out there that we currently know of is should impact that significantly. But very comfortable with the remaining part of our portfolio. I think it's 1.3% of our portfolio at this point. So truly one off, we worked with it. This is a relationship that we've that we began dealing with in 2013, 2016 we expanded it. They expanded pretty quickly into some of the southern states. And at this point, we are where we are with it. Okay. Thank you for that, Drake. And then just generally on credit quality, any discussion or any views as far as the overall past due list or classifieds criticized, any migrations or any themes that you saw during the Q3? Absolutely not. Past dues continue to inch down well under 1%. Substanders continue to move south and we just feel very good about our credit quality. Just finished up an external loan review. They went through about 54% of the portfolio, very, very tough review, came out with just a minor downgrade, very complementary on the credit quality, especially when we look at the industries that we wanted to concentrate on. So as I've been saying in the last couple of quarters, as we took a deep dive in some of our industries and concerns, I think we're in very good shape. Like I said, we projected 12 basis points, 14 basis points where we'll come in within that at this point. Okay, great. All right, guys. Nice quarter. I'll step back in the queue. Thank you, Matt. And next we will have William Wallace with Raymond James. Thanks. Good morning, guys. Good morning, Lalik. How are you today? Very good. Thank you. Maybe a quick follow-up on the restaurant loan and the exposure there. Did you say did I hear you say that you already have a bid of $3,000,000 for the entire business? Yes. Okay. What kind of restaurant was it? Is it like a fast casual? Yes, it was a fast casual in the Southern states. Okay. And then and you said you've done a deep dive into the remaining portfolio. I'm curious if you happen to have information on hand as to maybe some of the breakout of types of restaurants in your portfolio and anything like that that you can share with us? Yes. We actually out of the $71,000,000 we have I'm actually looking at the list at this point. The most of it I would say that it's pretty much fifty-fifty it appears between fast casual I mean, casual fast casual and then fast food. We have a couple of real strong Sonic operators. We have a Burger King operator that's really strong with Popeyes also and just I think well positioned. And the other thing about our restaurant portfolio, we have significant sponsorship behind that portfolio and strong operators. So and these are like this one that we talked about on a loss, this was a 2013, this wasn't a new relationship we just brought in, had significant investors behind this restaurant and there was a lot more money lost in the investment side than there was on the bank side. But I feel very good and I would as you know, I'm extremely transparent. If we had issues around the restaurant portfolio, I would tell you. But again, it's 1.3% of our portfolio and we feel very good where we are at this point. Thanks. And one last question on that before we move on. Do you know the average loan size or relationship size in that portfolio? Looking at this list, I'm going to say it's probably in the $3,000,000 to $5,000,000 range. Okay. Great. Thanks. You talked about an expense of $36,700,000 to $36,800,000 in the 4th quarter. Last quarter, we spoke about some changes that you've made in the mortgage business around servicing. I'm wondering if you could help us think about what we might look at on the expense side, maybe in the Q1 of 2020 once we start see the impact of changes that you've made on mortgages? And I guess, what we're just talking about is we are finishing our conversion to subservicing our mortgage servicing portfolio. That will end that will be on November 1. We expect that to reduce expenses around $1,000,000 for 2020 from a subservicing perspective. We continue to look at servicing strategically the direction we're headed. As you know, we have focused on reducing the size of our mortgage operation to a retail footprint operation that you'd expect in a community bank. Subservicing, I believe is the first step in us addressing the volatility in servicing. We believe that at some point we could potentially even exit the servicing business and just focus on mortgage production and that's something that we've had some success here recently on attracting and continuing to add what we think are very strong mortgage bankers. We had real success here recently in our core market and with an individual that we think is going to be a game changer for us. So really focused, Wally, on mortgage production and starting to diminish the impact that servicing will have in the future. We just I like thinking about not having that compliance risk, not having the volatility. And so from a run rate perspective, to answer your question, I think you can reduce that run rate over 4 quarters by $1,000,000 in 2020 and we're going to work hard to I mean we have for instance going through a health insurance rebid right now that's a big issue for us to try to understand where the costs are. But overall, from an infrastructure standpoint, we feel very good that we have a pretty good cost structure moving forward. And just to clarify, when you say it could be $1,000,000 lower, do you mean it could be $1,000,000 per quarter or 2 100 $50,000 No, no, no, dollars 1,000,000 for the year. Okay. Okay. I think to put this in perspective, we at this point, we're projecting about a 3% to 5% expense increase for 2020. Okay. And we're in the midst of working on that as we speak. Okay, great. And then my last question is on the net interest margin. We had to cut in September. You guys have a lot of floating rate loans, but you've had pretty strong deposit growth. I'm wondering if you could just kind of help us think about how we might model net interest margin compression with Fed moves? Yes, doing a lot of work around that. At this point, we think with the Fed moving, we're baking in a Fed move for this quarter and really feel that we're going to be pretty comfortable in that with the move 10 to 12 basis points impact to NIM. One upside to that, we've seen somewhat of a decline in the percentage of our floating rate loans from 62% to 59% and feel that that trend could continue. And it's again something that we're working on. Not to really position ourselves more neutral necessarily because we're not going to be in this environment forever, but we are working to lessen the impact of that. But our deposit growth has been strong. We feel in the Q4 that we're going to see not deposit growth, the level we saw in the Q3, but we're going to see strong deposit growth. So again, we're going to stay focused on that, I'm going to say 7% to 8% loan growth and that 8% to 10% deposit growth moving forward. Okay, great. And to clarify, you said we could see 10 to 12 basis points of pressure in the 4th quarter, that assumes that the Fed cuts next week, Is that included? Yes. We baked in a cut. I mean, we're not I thought about giving it with out the cut, but we're pretty sure the cut is going to be there. So we're giving you one number. And that's probably, if you want to know, 2 to 4 basis points added with a cut. Okay, great. All right. Thanks a million. On a lighter note, I know you spent a lot of time in Houston, but I just want to say go, Nats. Thanks, guys. That's okay. The next question we have will come from Brad Milsaps of Sandler O'Neill. Hey, good morning guys. It's actually Peter Ruiz on for Brad. Hey, Peter. How are you doing? Good, good. Most of the questions have been answered, but just maybe following up on the margin, really appreciate the color there that you gave on the expectations there, especially including an October cut. But kind of just taking a spot rates were sort of for deposit costs maybe near the quarter end? Okay. Steve, do you have that? The spot rate for the quarter, for the month of September was 1.56 for total interest bearing deposits. Okay, that's great. That does not include the non interest bearing. So the spot rate is $156,000,000 total interest bearing deposits. In July, that number was 162. Okay. And again, we're going to focus a little bit here on significant growth in NIBs. We're very pleased with our continued incentives and the teams that we built around treasure management, around deposit gathering teams in both the DFW and Houston markets and just seeing sound, sound noninterest bearing deposit growth. This is Lance. I might add also from a broker perspective obviously the majority of what we do there is we talked a lot with everyone here about our relationship with Arjun Financial. That has come down from the 220 something range to 189 at the end of the quarter and we'll continue to see that money market rate go down. Okay, great. I appreciate all that color. And maybe I think, Drake, if I heard you correctly, you kind of guided 8% to 10% loan growth here in the near term. Maybe just give a little bit of color on what you're seeing in your markets right now. Obviously, I'm sure Texas is a strength, but anything else you can provide? Yes. I want to go back to that because I said 7% to 8% loan growth and then 8% to 10% deposit growth moving forward. And obviously, we're in such dynamic markets in Texas and seeing a lot of success there, starting see some decent growth in Mississippi where it's been flat last year. Still surprised that Louisiana at 5.3% annualized growth year to date. So having decent growth in the markets, but when you look at DFW in Houston, they certainly are the shine to start. Houston 32.7% annualized loan growth. So those teams that we were fortunate to lift out and get inside of that performed as expected, maybe even stronger than expected. Okay. That's great. That's it for me. Thank you. And next we will have Brady Gailey of KBW. Hey, thanks. Good morning, guys. Good morning, Brady. How are you today? Good. So a nice loan growth quarter from you all. It sounds like a lot of it was Texas. Was any of it energy based loan growth? We had one credit that was energy based that was around, I want to say $8,000,000 to $10,000,000 Not E and P. Yes, it's not. And again, let me stress, when we talk about energy, it doesn't have a dollar of E and P in it, it's services and midstream. All right. It's a service credit action. Yes. So, Brady, from a funded perspective, we're about 1.5% of our portfolio in total energy. Okay. And this credit I just mentioned was a long term strong relationship out of our Houston team. Okay. So Drake, you got active with the buyback, you repurchased about 1%, a little over 1% of the company. Will that continue from here? Yes. I think it's an option for us and we'll continue to look at those tools depending on market and where we are. We're having what we think is very strong organic growth and each month we look at where we are, what options we have and certainly that's going to be an option and a tool that we'll use if necessary. Okay. Maybe an update on M and A, how conversations are going? Are you closer or further away from announcing a deal? It's staying active, very active. It's we're trying to find the right partner and I don't want to say I'm picky, but but it's going to be the right deal for us and we still have the same number of active opportunities. And so it's tough to say I'm closer, I'm farther away. And the other side of it is we're certainly trying to understand the CECL impact of acquisitions moving forward and really how you adjust price based on that and does it impact that from that standpoint. Okay. Then you added a little more FHLB in the quarter. I know you did some last quarter and Q2. But can you just talk about if you plan to continue to do that and what the strategy is behind this kind of balance sheet remix? Hey, Brady, this is Steve. This past quarter, we did do $100,000,000 in a photo, which they have the option that was at 35 basis points. They have the option to call that in later November. Last year, we mentioned $250,000,000 at $165,000,000 that was callable at their option in the summer and they did not call based on the rates. What we do is we'll look at the Federal Home Loan Bank borrowings, we'll look at broker deposits, we'll look at a warehouse that are the lines of credits that we fund and it's a daily look where we are, where we're going to be and it's not a will we do this continuously, It's a total mix. The other thing we have to look at is the Federal Home Loan Bank and we'll not do these LIBOR based lending as of a couple of days ago after Q1 of next year. So we'll continue to look at the home loan bank. They'll be coming out with other products. And I hope that gives you comfort. Hey, Brad, this is Drake. I will say that with such a strong focus and drive on growing core deposits, we're starting to see less reliance on brokered deposits and less reliance on borrowing. So as I said earlier, we were successful to lift our team. The asset growth has been strong. I feel the momentum is catching and loan deposit ratio is slowly inching down as we expected it to. Yes, that makes sense. Thanks for the color, guys. Next we have a follow-up from Matt Olney of Stephens. Hey, thanks for taking the follow-up. I just want to revisit the discussion around the margin. And it sounds like you're expecting 10 bps to 12 bps of compression in the 4th quarter. I'm trying to reconcile why the Q3 margin held up so well and why you're expecting more compression in 4Q. It seems like the LIBOR headwinds could be similar, maybe a little bit more in the 4th quarter. It sounds like the fees were good in Q3. Maybe you're assuming less fees in the 4th quarter. Anything else you can share that would help us understand why the margin would be down a lot more in the 4Q than we saw in the Q3? Matt, this is Steve. I agree with what you said. We had 2 to 3 basis points of extra prepayment fees. We do expect a normal prepayment, but this last quarter had a large amount of prepayment fees, which we do not expect going forward. So that's going to be 2 to 3 basis points there. Also during the Q2, we had those 2 rate cuts, but it was only doing partial. We will have the full impact during the Q4. And then we expect another rate cut next week. So when you add all those together, that gives you the 10 basis points to 12 basis points. And on the deposit side and specifically the non interest bearing deposits, that growth was very strong in the Q3. Can you talk about the pipeline for non interest bearing deposit growth? And I guess some banks talk about seasonality of that business. Do you guys have any seasonality to speak of in that business? Yes, this is Lance. Yes, we will have some seasonality. We feel like we'll see some pullback in that. However, at the same time, we have about $300,000,000 in public funds. We bank a lot of the municipalities across North Louisiana. Some of those are tax dollars. So we actually get a lift there in public funds in the 4th quarter from a seasonality perspective. So we feel like those will offset a little bit. Okay. Okay. That clears that up. And then I think that the effective tax rate was a little bit higher in the Q3. I think you alluded to that in the prepared remarks. Any color you can give us as far as what kind of tax rate we should be assuming for 4Q and then 2020? 19.5% to 20% effective going forward for this quarter, and then probably the same amount for 2020. Okay. Okay, guys. That's all for me. Thank you. Thank you. Well, showing no further questions at this time. We'll go ahead and conclude our question and answer session. I would now like to turn the conference call back over to Mr. Drake Mills for any closing remarks. Sir? Thank you. And I appreciate everyone that's on the call. But I want to, I guess, make the point that we have continued to run this institution as we sold in the IPO. We think we are in the most dynamic markets. We're having significant success in Texas, especially on the Houston market. And I say that really some momentum moving in DFW with deposit team. So feel very comfortable that we can continue to perform within the strategy that we laid out. We feel extremely good about the team, the people, the quality of the loans that we're bringing on and just think that we're well positioned. I had a question the other day about where's our next market, where's our next move. And my response was I have 1 third of 1% market share in DFW in Houston. I'm in the greatest markets. I have a lot of market to grow and we have the infrastructure there and we just think that we have to continue to leverage be successful in those Texas markets. So appreciate everyone on the call. Thank you for your time. And we're always available for additional calls or questions if you need. Thank you. And we thank you, sir, also and to the rest of the management team for your time. The conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a wonderful day.