Earnings Call: Q4 2018

Jan 24, 2019

Good morning, and welcome to the Origin Bancorp, Inc. 4th Quarter and 2018 Full Year Earnings Conference Call. All participants will be in listen only mode. Mode. Please note this event is being recorded. I would now like to turn the conference over to Chris Rieglman, Investor Relations Officer. Please go ahead, sir. Good morning. 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 a slide presentation that we will refer to during this presentation. Before we begin, I'd like to remind you that this presentation may include information about our management's view of our future performance, business and growth strategy, projected plans and objectives and various other matters that constitute forward looking statements under the federal securities laws. Actual results may differ materially from historical results or those implied or indicated by these forward looking statements due to various risks and uncertainties. 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 prospectus filed with the SEC on May 9, 2018, pursuant to Section 424B of the Securities Act, our most recent quarterly reports on Form 10 Q as well as 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 are logged into our webcast, please also refer to slide 2 of our slide presentation, which includes our forward looking statement Safe Harbor statement. For 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 safe harbor statements on our slide presentation and the 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 these reconciliations of these non GAAP financial measures to their closest comparable GAAP metrics in our earnings release and slide presentation, both of 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 measures that may be presented by other companies. I'm joined this morning by Origin 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'll be happy to address any questions you may have. At this time, I'd like to turn the call over to Drake. Thank you, Chris, and good morning. And as we've done in our previous calls, I'll start off with a few highlights. Steve will discuss financial results and Lance will report on loans, deposits, credit quality. I will close with a few remarks and then open it up for questions. I am very excited about today's presentation and what we report for the Q4 and the full year of 2018, and I'm proud of what our team was able to accomplish this past year. 2018 was a strong year for Origin Bancorp. In the Q4 of 2018, we reported net income of $13,200,000 and diluted earnings of $0.55 per share. For the year, we reported $51,600,000 of net income and $2.20 diluted earnings per share. We ended the year with loans held for investments of $3,800,000,000 that was an increase of $188,000,000 for the quarter and $548,000,000 over the previous year. As we talked about last quarter, our team of bankers is very focused on building relationships throughout our markets and I have been very pleased with the increase in loan volume, particularly over the past 2 quarters. We ended the year with deposits totaling $3,800,000,000 which is an increase of $56,000,000 from the previous quarter and an increase of $271,000,000 for the previous year. Our bankers continue to remain focused on maximizing opportunity with our customers and prospects to drive core deposit growth as we move into the next year. Our growth in non interest bearing deposits in 2018 speak to this focus, which Lance will elaborate on later in the presentation. Now I'll turn it over to Steve to provide additional details around the financial results for the quarter and for the year. Thanks, Drake. Let's begin on Slide 4, financial highlights for the quarter. Our net interest income of $42,100,000 increased 6.5% compared to the linked quarter and almost 23% year over year. Our provision for credit losses was higher in the 4th quarter compared to the prior quarter and largely driven by our loan growth. Non interest income and non interest expense had slight increases for the quarter and we improved our efficiency ratio to 66.52% for the 4th quarter. Net interest margin for the quarter was 3.82 percent on a fully tax equivalent basis, which was an increase of 6 basis points from the prior quarter. During the Q4, we saw yields earned on total loans held for investments increased by 17 basis points, while our cost of total deposits increased 11 basis points. Moving to Slide 5, our net income was 51,600,000 in 20 18 compared to 14,700,000 in 2017. The primary driver was $35,000,000 or 22% increase in net revenue, dollars 23,000,000 increase in net interest income and $12,000,000 increase in non interest income. We continue to benefit from our asset sensitive balance sheet and benefited from our significant loan growth that Greg spoke to earlier. Our fully tax equivalent net interest margin for the year was 3.75% compared to 3.52% for 2017. Our efficiency ratio, return on average assets and return on equity all showed improvement in 2018 as well. Moving to Slide 7, you can see we remain asset sensitive, which will create value if interest rates increase, we are mindful of the potential impact of declining interest rates on our net interest income and margin. Lance will now give an overview of our loan and deposit results and credit quality. Thanks, Steve. As Drake mentioned in his opening remarks, we continue to see strong loan growth in the 4th quarter. We've consistently emphasized building core relationships throughout our markets and our growth in commercial and industrial loans speak to that emphasis. C and I loans increased $80,000,000 during the quarter and $283,000,000 overall in 2018. We also saw growth in our commercial real estate balances with an increase of $66,000,000 for the quarter and $145,000,000 for the year. While we had a lot of success in growing loans during the year, we remain strategically focused on deposit growth and keeping our deposit betas as low as possible. We had $271,000,000 in deposit growth during the year and of that 44% was non interest bearing deposits. We're extremely proud of our non interest deposit growth. This was a major emphasis for our team this year and I believe speaks to the core relationships that our bankers are building. As we continue into 2019, we have a strong loan pipeline and driving efficient deposit growth will continue to be a focus for us. I want to briefly cover credit quality trends on Slide 13. As you can see on the bottom of the page, we had an uptick in charge offs during the Q4. This was driven by a charge off of 1 commercial real estate relationship in the healthcare sector that we previously mentioned in our 10 Q for the quarter ended June 30, 2018. You can also see we had an increase in non performing loans as a percentage of total loans held for investment during the quarter, which is due to a small number of downgrades in commercial lending relationships. We continue to be very comfortable with our overall credit quality moving into 2019. From a production standpoint, we're very pleased on how our markets performed in 2018. Our bankers' commitment to relationship development is evident, and we are as focused as ever in maximizing our client relationships and opportunities to continue our strong loan growth as well as generating core deposit growth. Now, I'll turn it back over to Drake. Thanks, Lance. 2018 was historic for our company as we completed a successful IPO in May, involving hard work from many people within our organization. This year, we've added new employees who've embraced our culture and the Origin vision. We've also added new investors who support, we are grateful. We remain committed to the strategy that we've communicated throughout the year and we do not see significant change in that strategy. There are times when organizations experience growth and add new people and the identity of the organization can become less defined. In Origin's case, we have become more united and our culture is stronger than ever. For the 6th consecutive year, Origin Bank was named as one of the best banks to work for by American Banker. While some may overlook these types of recognitions, we believe it serves as an indicator that our employees are committed to making Origin a unique and dynamic organization. Moving into 2019, we celebrate our successes, but we are also aware of our challenges. Growing deposits to fund our loan growth is a top priority. We will also continue to identify areas where we can improve efficiency. Our company has shown that we will be able to meet these challenges. Our management team and our bankers have a clear understanding of what we need to do to continue to provide value to all of our stakeholders. I am proud of what was accomplished last year and I'm optimistic about what we can achieve as we move forward into 2019. Thank you. And now we'll open up the line for questions. Thank you, Mr. Mills. We will now begin the question and answer session. And your first question will be from Matt Olney of Stephens. Please go ahead. Hey, thanks. Good morning, guys. Good morning, Matt. Got a few questions here, but Thank you. Thanks, Mark. On the loan growth front, pretty strong growth that we saw in the 4th quarter. Can you just talk about any trends that are worth noting, whether it's any change in C and I utilizations or any particular market that was stronger for you? And then can you talk about the pipeline going into the Q1? Yes, Matt, I'll turn it over to Lance. Yes, yes. Hi, Matt. No real difference in the mix of business for us. I would say line utilization was consistent with what it's been over the past few quarters. We had I would say our Mississippi business was relatively flat, tremendous continued growth in our North Louisiana franchise and obviously at Dallas Fort Worth really drove a lot of the growth. Interesting, I would tell you that while maybe not exactly as high as the Q4, our pipeline right now going into the Q1 is incredibly robust. We continue to see exactly what we thought would happen. When we launched the IPO, we said we thought we could do double digit loan growth without the lift out things. That's exactly what we accomplished and we continue to see that going forward with a strong Q1. Okay, great. Thanks for that Lance. And then on the credit front, what else can you tell us about the 3 downgrades that were mentioned in prepared remarks? Did those credits go through an impairment process? And were there any charge offs on those 3 downgrades? Yes, Matt, each one of those credits did go through the impairment process. There were no charge offs related to those 3. We are highly confident in those 3 credits. And I also want to make a point that each one of these situations range from relationships of the shortest of 5 years, the longest of over 10 years. These have been relationships we've had quite some time. Matter of fact, I went back to see if there had been any downgrades or impairment we're at addressing issues and we're comfortable to say that I think credit quality will continue to move in the right direction. For instance, if you look at where we did have, as Lance mentioned, an uptick of about $3,000,000 in Q4, the trend from Q4 2017 to Q4 2018, which was $91,300,000 down to $79,000,000 we see that continuing. That $3,000,000 uptick was one credit that to make sure that we were clean from an audit process, we moved from an income approach of valuation to a fair value based on appraisal, because we wanted to be clean in that process. But I will say that even with that charge off because of the condition of the credit, the supporters of that, I mean the sponsors of that credit, we feel that we potentially would get a full recovery on that. But we are aggressive in how we address those. We want to make sure that we have a clean audit. So anyway, going back to those 3, we are, like I said, very sure that we do not have any loss and there's not any impairment in those credits. And so 3 credit downgrades in the quarter, were there any offsetting upgrades or I'm trying to understand kind of why the callout of those 3 downgrades? Yes. No, there weren't any of material that we're not. We do feel like our trends from an upgrade standpoint and going through the Q1 will continue in a positive way. But those three credits from the standpoint of justifying that position is still three of those credits we are pushing out of this institution and starting that process because we just don't like the trends that we see from a revenue and net income perspective on each one of those 3. Okay, got it. And then last question for me, I guess, on the margin. Steve, the margin looked good in the Q4. What can you tell us about the trend of that core margin going into the Q1 2019? Hi, Matt. The core margin, we think for on the loan side, we picked up 17 basis points last quarter. We don't think it's going to be as high as that, but maybe 2 basis points lower. On the cash side, we will have more cash than we had this quarter because of the seasonality of mortgage warehouse, the public funds coming in. If you looked at last year and the year before, we had about $217,000,000 to $230,000,000 in cash, but that was at 50 basis points or 164. The cash that we have now closer to $250,000,000 to $260,000,000 And so on the top side, we think it's going to expand not as much. And then on the deposit side, we think we'll still have some pressures on the deposit side. We had 13 basis points income increase this quarter. We feel that this quarter coming up will be about the same. The next question will be from William Wallace of Raymond James. Please go ahead. Thanks. Good morning, guys. Hey, Wally. How are you doing today? Very good. Thank you. Steve, maybe just following up right on the heels of the answer to Matt's question. If you're talking yields and costs, can you just kind of put it together for us so that I don't have to do all the math because I'm not really good at math these days. What's the net interest margin impact that you would anticipate with the help of the December hike and with the deposit pricing pressures that you anticipate? So total last quarter was 6, let's say between 4 to 5 this quarter. And then after that without any Fed movement, it's going to be relatively flat. That's what we're looking at after this quarter, but we'll update that as each quarter goes on. And Wally, I want to address that relatively flat without increases because we do feel pretty positive that our strategy around pricing discipline and obviously for us and we can talk about this more detail, we have put all the incentives in place, the triggers in place to drive significant deposit growth this year. Deposit growth will be, what I would say a throttle to our loan growth, even though we're showing strong loan growth for 2019. We do think that our selection and ability to pick out the higher earners are going to help us achieve some NIM that maybe is not we haven't seen historically. Are you finding on the deposit side that in order to be successful, you're having to maybe give a little bit more on price to bring deposits over from wherever institutions they are currently? Or are you finding that with a loan relationship or some sort of package that you can offer that you're able to pay what you would consider a reasonable cost? Yes. And I'll take a little bit of time quickly because you're hitting on something that I would like to discuss. Our Houston lift out team has been highly successful. And as I interviewed each one of those team members 2 weeks ago to understand where we were going in 2019. We were surprised at how quickly the asset side of the balance sheet grew from the lift out team. I think they impacted us about $130,000,000 since they arrived. So in those conversations, that team was very focused on covering up their expense, very gracious that we brought them on to the point that they said now they're turning their attention towards deposits. And as I said, we're going to be very pleased with the deposit growth. So as I understood what that meant, this is still relationship driven through these lift out teams. It is extremely competitive in Texas, but we do think that we're going to be able to be in range of what you expect to see. We're not going to go out and pay significantly higher than market to solve our deposit issues that we have today. So I'm comfortable after those calls that now that they are focusing on the relationships, our NIB growth continues to be very strong. Okay. And then just one kind of additional question around the margin. I had been modeling and anticipating that there would actually be some pressure to NIM related to the follow through effects of the leverage transaction. Was there any pressure or were you able to get fully invested early in the quarter? We got fully invested early in the quarter. 1st couple of days, it was in cash, but we had a lot of loan growth in those 2 quarters. So it was fully invested. Okay. So okay. All right, fine. I'll stop there on margin. And I wanted to have one follow-up on the 3 credit downgrades. Can you tell us what regions those three credits were in? Yes. North Central Louisiana on 2 of those and Mississippi on the other. Okay, great. And then my last question before I let somebody else ask something. Drake, I just wondered if you could give us an update on your view of the mortgage business and origins, how invested you think you'll be in mortgage moving forward? Yes. We well, we've made some excellent progress, as I've talked about on the road and during the IPO with the restructure of our mortgage, we see that breakeven for us where I projected it maybe a quarter off could potentially come at the first end of the Q1. We are moving towards solving what we are going through a process of deciding on a solution for mortgage servicing where we feel our major issues are and we think that at the end of the Q1 we'll be able to announce that solution. That will give us significant cost saves there. From the retail production side, we feel that we're pretty much at a breakeven point going into the spring today. We are projecting adding 4 additional mortgage lenders to round out that group of mortgage lenders we talked about needing to have to get the levels of production to the point where we were profitable. So we've done a lot of work. We did go through a rift. We see some opportunities for some additional cost saves, but we do think that's going to be a significant swing for us in 2019 from the standpoint of earnings. Okay. Thank you for the update. I'll let somebody else ask a question. Thanks. Appreciate it, guys. And the next question will be from Brady Gailey of KBW. Please go ahead. Hey, good morning, guys. Good morning, Brady. So I think in the past, you've talked about loan growth in the low to mid double digit range for 2019. I mean, you did 20% in 2018 and higher than 20%, honestly, in the back half of twenty eighteen. So it seems like loan growth is coming higher than that previous low to mid double digit range. I mean is that how should we think about loan growth in 'nineteen? Yes. The way we see loan growth and we spend a lot of time in the markets with the market presence, and I talked a little bit earlier about pricing disciplines and being able to control loan growth and ensuring that we're getting the returns that we need through talked about earlier in that low double digit range. But, I'm talked about earlier in that low double digit range. But also we see deposit growth outpacing that. If for some reason our deposit growth does not outpace loan growth, it will slow that loan growth down. But we did bring on some lift out teams in the second half. They had some excellent relationships that we picked up through that process. We also, and I want to point this out, we're projecting 4 percent loan growth in North Louisiana and we achieved 11%. Where that was significant and the market is strengthening, we probably aren't going to recognize that type of loan growth in 2019 North Louisiana. So if you add up the markets and where the markets they're going to be at the end of 2019, that comes in at really low double digit loan growth. All right. And then on the deposit growth side, I mean, if you look at 2018, we saw the loan to deposit ratio year over year ago from 92% up to 100% as of the end of the year. It sounds like you're going to be more deposit focused, but what's actually going to push deposit growth up from 2018 levels? And are you hoping to keep the loan to deposit ratio flat here? I mean, would you like it down? What's the target there for that ratio? Yes. And I want to mention that in 2018, we made a couple of moves and I think helped strengthen us from a liquidity standpoint. We had a large single customer that had a $60,000,000 deposit that we allowed that to flow out of the bank because of the we needed to cut that dependency down. We also reduced our dependency on what we call broker deposits by almost 55,000,000 dollars excuse me, by $30,000,000 And so that's, let's say, dollars 80,000,000 to $90,000,000 swing negatively that I think helped enhance the quality of our overall core deposits. So as we move into 2019, we have specific plans to continue to focus on relationship managers that have deposit portfolios and we've seen a tremendous amount of success. Also treasury management, which we've invested heavily in and that's why we've had 44% growth in non interest bearing deposits is I think has one of the strongest plans for 2019 that we've seen in quite some time. So again, our incentive plans have been adjusted heavily towards deposit. Everyone out there, even from directors perspective realize that we're going to make an ask on every deposit opportunity we have. So the focus on that and plus in the Q1, we picked up about $55,000,000 of additional deposits from public funds that were supposed to come in at the late part of the Q4, but didn't come in until the Q1. So we see through the 1st month better deposit growth and loan or stronger deposit growth and loan growth. Right. And is M and A an option to help on funding side and just updated thoughts on M and A as we head into 'nineteen? Yes, very I'm very focused on M and A. We have actually 4 different conversations ongoing as we speak. And each one of these with the exception of 1, would be significant deposit M and A opportunities for us. The one I'm mentioning is a little bit higher than we'd like to see, but a significant franchise that we think could impact as well in the Mississippi market. So I do think that there is an opportunity. We're certainly not modeling that at this point, but we're aggressive and I'm going to continue to be aggressive because that certainly could be a quick solution for us. All right. And then finally, for me, I know we talked about the efficiency ratio getting down into the low 60 percent range by the end of this year, and then maybe a smidge better next year in 2020. But is that still the right way to think about the expense base and the efficiency ratio? Yes. We for the most part, and this is something that we'll start to talk about, we are we have been concerned, I mentioned this in a couple of occasions about redlining opportunities or to saw redlining opportunities. And we have 2 branches, 1 in South Dallas and 1 in Mississippi that will be opening in the second quarter. And we think we're doing that very efficiently, but it will have an impact slightly on our efficiency ratio. So as we look toward where our budget is versus maybe where the consensus is, it could be slightly higher. When I say slightly, within below that $65,000,000 but not quite to where we expect, but we do have some opportunity, I think, to impact that. And the next question will be from Brad Milsaps of Sandler O'Neill. Please go ahead. Hey, good morning. Hello, Brad. Hi, Brad. You guys have addressed most everything, but I did want to ask maybe around fee revenues. This quarter you had the partnership income gain. I know that can happen from time to time, which kind of help offset some seasonal weakness in other areas. Drake, you touched on the mortgage bank, but just anything else on fees, just kind of seem to be kind of maybe running a little bit lower than maybe I thought, just kind of curious kind of what your outlook could be there over the next couple of years? Yes. We have on our partnership revenue, we actually had about a $500,000 loss in the 3rd quarter, about a $750 a $750 profit gain, I would say, in the Q4. So we are that's pretty much stabilized. We think we feel pretty good about fee generation in 2019 with our pipelines, the type of relationships that we're bringing over, it's heavy fee driven. And also our incentive plans are weighted heavily towards the fee side of the business. So I think we'll see we saw a decent increase in fees overall for 2018. I think we can see that type of increase or better in 2019. Okay, that's helpful. And obviously, you got a lot of questions on credit already. I did want to ask about the reserve. Obviously, the credit you charged off, you'd already provided for, but you have taken the reserve down, if my math is right to you, about 90 basis points of loans. You've had a tremendous amount of loan growth this year. Just how are you guys kind of approaching the reserve? I know there's a lot of moving parts, some of it you can't control. But is the goal to get that back above 1%? How are you thinking about provisioning as you move through the year? Yes. And when we're looking at, obviously, that's a reflection on what we think the quality of the portfolio overall is. We're still slightly ahead of our peer from at 90 basis points. We are reserving properly for the additional credits that we're bringing on in the loan growth. But I would have to comment that at this point, the outlook for credit overall is very good and feel that that is very representative of where we are at 90 basis points of the quality of that. Okay, great. Thank you. Thank you. And ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back to Drake Mills for his closing remarks. Thank you to everyone that attended the conference today. For us, 2018 was an outstanding year. I know we there's some concerns about credit. We are extremely aggressive on how we deal with our credit, but I am comfortable and very confident about our credit going into 2019. I also am confident that 2019 can be as successful better than 2018. We know that our challenges are deposits, liquidity and mortgage and we are very focused on meeting those challenges. But I appreciate the support, very grateful for the investor support that we get and also the analysts, the conversation. So thank you for attending. Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.