Earnings Call: Q3 2018

Oct 25, 2018

Good morning, and welcome to the Origin Bancorp Incorporated 2018 Third Quarter Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Riegelman, Investor Relations Officer. Mr. Riegelman, the floor is yours, sir. Good morning, and thank you for being with us. Before we begin, I'd like to remind you that this presentation may include information about our management's view of our future expectations, plans and prospects that constitute forward looking statements. Actual results may differ materially from historical results and those indicated by these forward looking statements due to 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 and our most recent quarterly reports on Form 10 Q as well as other documents we periodically file with the SEC. The company undertakes no obligation to publicly revise any forward looking statement. If you're logged into our webcast, please also refer to our slide presentation, which includes our Safe Harbor statement beginning on Slide 2. For those joining by phone, please note that Safe Harbor statement and the presentation are available on our website at www.origin.bank. All comments made during today's call are subject to that Safe Harbor statement. Finally, in this presentation, we will discuss certain non GAAP financial metrics. Please note that the reconciliation of these non GAAP financial metrics to their closest comparable GAAP metrics are contained in our current report on Form 8 ks filed with the SEC. We believe that certain non GAAP financial measures can provide meaningful information to investors. These non GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non GAAP performance 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, everyone. As we begin, I want to touch on a few key highlights for the quarter and then Steve will cover the financial results and Lance will talk about loans, deposits and credit quality. I will end with closing remarks and open it up for questions. Overall, Origin Bank Corp. Had a strong quarter with reported net income of $12,300,000 or $0.52 diluted earnings per share. For the 2nd straight quarter as a public company, our net interest income was at a historic high, increasing by $2,300,000 or 6.3 percent over the previous quarter. We saw continued improvement in our net interest margin and our teams have done a great job in driving loan growth, remaining focused on building relationships and increasing low cost core deposits. I'm very proud of our teams and the strong loan growth we experienced during the quarter. Annualized loan growth for the Q3 was 26.9% and without our lift out teams was 19.7%. Lance will discuss the specifics around our loan and deposit growth later in the presentation. Our lift out teams have been active in the markets for a few months now and we are very pleased with their production. We look forward to what they will continue to accomplish in the coming quarters. Our teams continue to drive strong loan and deposit growth and remain confident that each team will continue to move toward projected profitability. Our company was built on relationships and remain committed to relationship building throughout all our markets. Now I will turn it over to Steve to provide additional details around the financial results for the quarter. Thanks, Drake. Let's begin with Slide 5, the financial highlights for the quarter. Our net interest margin was 3.76 percent for the quarter on a tax equivalent basis, which was up 2 basis points from the prior quarter. During this quarter, we saw yields on loans increase by 11 basis points, while the cost of total deposits increased 10 basis points. Due to our strong loan growth and short term liquidity needs, we borrowed $250,000,000 from the Federal Home Loan Bank. These funds were used to repay other higher rate advances and to fund loan growth. On a pro form a basis, without this borrowing, our net interest margin would have increased approximately 10 basis points as compared to the 2 basis points reported increase. As loans continue to grow, the credit quality of our portfolio continues to improve, resulting in a modest provision for credit losses. Our provision for the quarter was $504,000 an increase of $193,000 for the prior quarter, but in line with our expectations. Looking at key ratios, our return on average assets for the current quarter was down slightly to 1.08% compared to 1.17% for the linked quarter and return on average equity for the current quarter was 9.15% compared to 9.94% for the linked quarter. These ratio decreases were a direct result of our insurance acquisition and investment in our lift out teams. During the Q3, we completed an acquisition of an independent insurance agency headquartered in North Louisiana. The acquisition had a positive effect on non interest income and increased our non interest expense as well. This acquisition together with expansion of Houston LaSalle team increased salaries and benefit expense by $2,100,000 and was a major driver of our increases in non interest expense during the quarter. This also had an impact on our efficiency ratio as it increased to just over 69% for the quarter, up from approximately 67% in the linked quarter. Moving to slide 7, you can see that we continue to be well positioned to benefit from additional interest rate increases. At quarter end, we had a minimal amount of variable rate loans below a floor. On Slide 8, our total non interest income remained stable, while the mix has changed due to the acquisition of the insurance agency. While our sources of non interest income are diverse, continue to generate more than 3 quarters of our revenue from spread income. Lance will now give an overview of our loan deposit results and credit quality. Thanks, Steve. As Drake alluded to in his opening comments, we have continued to show strong growth in our core deposit base. We have increased our total deposits by 7.9% over the last 4 quarters, while our non interest bearing deposits have increased 12.3% during the same period. Our average non interest bearing deposits as a percentage of total deposits year to date is 25.6%. As you can see at the bottom of Slide 10, we have continued to increase the percentage of non interest bearing deposits over the last several years. Like others in our industry, we have felt pressure on deposit costs across our footprint, but our bankers remain committed to managing deposit costs, by building lasting relationships. As we look at year to date total deposit growth of $215,000,000 67% of that is non interest bearing. This speaks to the focus that our bankers have on core deposits and managing deposit betas. Our loan volume has been extremely impressive in the 3rd quarter with loans held for investment increasing $229,000,000 or 6.8% compared to the previous quarter. And over the last 12 months, total loans held for investment has grown 11.5%. Even with our increased loan growth, we've been able to maintain our desired portfolio mix with continued emphasis on C and I relationship building as seen on Slide 11. Our loan pipelines remain strong across our markets with growth coming from both our legacy and Liftout teams. We pride ourselves on the experience we create for our customers. This is embedded in all of our bankers across our markets. We believe this emphasis on relationship development and the customer experience, along with our return on relationship marketing campaign, is a key driver in our growth over the past year. This has and will remain a key focus for us moving into 2019. Finally, while our loan growth has increased, we continue to experience improved credit quality with favorable metrics across the portfolio. Now I'll turn it back over to Drake. Thanks, Lance. Our outlook for growth is strong and we are optimistic as we move into the Q4. While we're growing our business organically, we are always looking for ways to improve efficiency throughout our company. 1, in particular, is our mortgage business. In our mortgage business. I've been transparent about our desire to focus on a mortgage platform that reflects a community bank model, serving our customers and prospects within our existing footprint. We took an additional step this quarter in creating a more efficient model by streamlining our operational support team through a reduction in force. While this reduction increased expenses by $133,000 this quarter due to severance payments, we expect the reduction in force to result in a 1 $500,000 annual savings. Moving forward, our mortgage team continues to focus on expanding our relationships to drive core deposit growth and additional banking opportunities throughout our margins. At Origin Bancorp, our employees, management team and Board remain focused on providing long term value and building a franchise that is committed to a culture and a way of doing business that is impactful and differentiates us. Our strategic plan keeps us focused on the future and the opportunities that lie ahead. Really appreciate you joining the call today and we'll now open the line for questions. Thank you, sir. We will now begin the question and answer session. The first question we have will come from Matt Olney with Stephens. Please go ahead. Thanks. Good morning, guys. Good morning, Matt. I want to start with the FHLB advances that was mentioned in the press release. I think it was $250,000,000 that were added during the quarter and impacted the margin by 8 bps. I'm curious, did we get the full impact of this trade in the Q3 or incrementally, what else could we see from this trade going forward? Thanks. So we didn't get the full impact. It was about out of $250,000,000 it was closer to about $150,000,000 on average for the quarter. And the impact of the 10 basis points was using a spread of 65 basis points. That $55,000,000 was assuming that we went into cash right away. So during the next few quarters, that cash will be replaced by investments. So the impact will not be as high as it was this quarter. And Steve, can you try to quantify kind of what that impact could be? Are you saying that the impact from just this trade would be positive the next few quarters? On an income perspective, yes, absolutely. On a NIM perspective, it's going to take about 2 quarters to get back to where we would have been. All right. So it was incrementally 8 bps negative impact in 3Q, but are you saying going forward the incremental impact will be more or less than the 8 bps? It will be less. One of the things we'll do is we'll use the cash that we had and then use it for lending activities. And that lending activity is going to have a higher yield than the cash we have right now. So just over time, that $250,000,000 will be replaced in a normal FIM environment. Got it. Okay. And then switching gears, we saw some really good growth on the non interest bearing deposits now for the second of quarter. That's challenging in this environment. I'm curious where this is coming from within your footprint and how much more opportunity is there going forward? Hey, Matt, this is Lance. We've seen tremendous growth in our Texas markets and I think that's part of the lift out strategy as they're delivering clients that they've had for years versus us going out and creating that through new prospecting. So we're doing a combination of both, but that strategy is really working for us. Okay. And then I guess last question for me in terms of capital. You've done a nice job deploying some capital here through organic loan growth. But I guess in light of lower valuations in the industry, your stock's been volatile. I'm curious at this point what your views are on stock repurchase plans? Do you have an authorization? Just in general, what's the Board's view about capital deployment with respect to our repurchase program? Yes, Matt, this is Drake. We certainly are having those conversations. This Board meeting yesterday continued those conversations. There is a feeling that this quick off the IPO and the strong loan growth that we have that we should continue the direction we're headed with plans to put a stock repurchase program in place in 2019. Got it. Okay. Thanks guys. I'll hop back in the queue. Thank you, Matt. And the next question we have comes from William Wallace of Raymond James. Good morning, guys. Hello, Wally. How are you doing today, Wally? Very good. Thank you. I want to circle back on the FHLB. When did that when was that purchased? It was during the quarter. It was in August, towards the middle of August. So if you had 8 basis points of pressure to NIM from that for some of those purchases halfway through the quarter, you're saying that we're not going to have another 8 basis points in the Q4, but it will be somewhere between 0 and 8. That's correct because if had we kept it in cash, you would think that NIM pressure would be higher. But we're going to obviously take that cash, move it into loans. We move some into investments. So we do not feel that 8 basis points. I think that is the maximum. And matter of fact, if we had it for the Q4, we don't believe it would have been 8 basis left to deploy as we sit today? Well, very little right now. We have I think the average is about 150,000,000 dollars that we have. We did have a very large loan growth period, and we expect next quarter to have the same almost identical loan growth. And so we think that cash is almost at the minimum right now. Okay. So you think the 4th quarter loan growth could be near 6%, 7% again? Yes. Okay. Yes. Well, at this point, our pipelines are showing with high percentage between 1 $175,000,000 to $215,000,000 Okay. So you've done a lot of team lift outs in Texas and clearly it's benefiting the loan growth. Maybe how should we think about 2019? I would anticipate that loan growth would be elevated, but there's some period where I assume the new hires, their rate of addition to the pipeline slows. So can you maybe just just help us think about what you think would be a fair target for loan growth incorporating the positive benefits of all these lift outs? Yes. We're just we're really just now starting to see the impact from our Houston team. Did not see a full impact, a quarter impact on the Dallas lift out. But I think what's impressive at this point is you take out, as I said earlier, you take out the lift outs. We still had 19.7% loan growth annualized over the quarter throughout our markets. And we're seeing that loan growth pretty consistently with not only our mix of loans, but the type of concentrations that we've seen in the past very similar. So what we're projecting at this point is that we think sustainability is somewhere in the mid, let's just say the low to mid double digit loan growth annually for 2019 and we think that's sustainable in our model. Certainly putting significant strategies in place around deposit growth now to be able to fund that, but feel comfortable as we see our municipal deposits come in, in the next 2 months. We think that we're going to continue with the loan deposit ratios as we communicated before. Okay, great. Thank you. And then moving to the commentary that you had around mortgage, you said there was a risk and what was the severance number? $133,000 for the quarter. So if I take that out of the 3rd quarter expense, say call it 30 $4,100,000 or $34,200,000 is what you end up with. And then you get a $1,500,000 in savings annualized. So will we see that starting in the 4th quarter? I mean, that's immediate, I assume, correct? That is immediate now. One aspect of it, as we can as I talked about earlier, we will continue to organically grow and we see deploying capital pretty efficiently through that. We have added 8 mortgage loan officers, production officers during that period of time. So we'll have a 3 month ramp up period with those 8 officers that will somewhat dilute that over the next 3 months, but then you'll start seeing the full effect of that. So we're committed and continuing to, especially in Texas markets, to enhance our retail loan mortgage loan production. Okay. So if I look at maybe just kind of thinking about an efficiency ratio, you're at 69% by my model in the Q3. How do you based on your growth expectations and ramp ups, etcetera, what do you think is a reasonable expectation for efficiency as we move forward, say, next year to maybe even 2, 3 years from now? Yes. I think we're going to get back on track pretty quickly with our efficiency ratio and still the numbers that we discussed during the IPO for 2019, I'd still believe are in line for the direction we're going. For instance, if you look at our current efficiency ratio without core what I call core efficiency ratio without mortgage and insurance, it's 58.97% at this today. And so the majority, if you look at the increase in expenses, dollars 950,000 especially on the comp side was just the RCF that was 40 employees at the insurance agency that we brought on. $1,100,000 was the 2 lift outs. So if we look at the production and how quickly, for instance, we talked about during the IPO Houston's projected ROA for year end and it was 50 basis points pre lift out. Well, today we are at 50 basis points in Houston with the lift out. So we're ahead of schedule there. So I do believe that we'll get back on track from the efficiency ratio by year end. And remind us what was the target that you had communicated during the road show? Wally, don't do that to me. I think it was 65, and I'll come back to you, Wally. I believe it's between 65 66. And then we were shooting for the mid low 60s for the end of 2019. Correct. Okay. Total efficiency ratio, not core. Right. Okay, great. All right. I'll step out and let somebody ask a question. Thank you. Thank you, Wally. Next, we have Brady Gailey of KBW. Hey, good morning, guys. Good morning, Brady. Good morning. Maybe just one last one on the margin. I mean, you take a step back from all the moving pieces. It sounds like the NIM will increase from here. Is that the right way to think about the margin? Yes. The way we see our core deposit growth and the type of deposits and there are some strategies that we are implementing. Our team actually is in town today. They have a strategy meeting around deposits and we're implementing a couple of opportunities that we think are going to continue to allow us to see a positive NIM expansion through the Q4. Okay. All right. And then you all have done a lot of work on the mortgage group, especially this quarter. Is there anything left to do strategically, any strategic changes in mortgage? Or do you think that group is kind of set up how it needs to be for the future? No, we think there are still opportunities. We're taking it. We as I said on the road, we are pushing to be at a breakeven run rate on the mortgage side by year end. We're running that direction. I think what the hurdle point for us is managing mortgage servicing. As I discussed earlier, we have a for a couple of years, we took on some AOTs and wholesale and then we've seen a faster prepayment speed on that book of business. So we have implemented during this quarter a very robust retention program and door knock program and have seen some early benefits of that to hopefully slow down prepayment speeds and not see as much impairment. So I think there is still opportunity from efficiency, people, production and also the mortgage servicing impairment side. Okay. All right. And given where the stock price is, I guess, you're more likely to get asked the buyback question than the M and A question. But I mean, anything new on the M and A front? I know you all have been looking around, especially in Mississippi. Do you feel like the activity has picked up on that front or is it about the same? It's about the same. The opportunities that we believe we have, we're still focused on. And again, these would be significant enhancements to funding as we look at the M and A opportunities. And one aspect of the market, there were some opportunities for some of these institutions to look at potential IPOs. And I certainly believe that's off the table. So it could enhance our opportunity to continue to build these relationships and maybe speed up some of those opportunities. Got it. Thanks for the color, guys. Thank you. And the next question we have will come from Brad Milsaps of Sandler O'Neill. Please go ahead. Hey, good morning, guys. Good morning, Brad. Just wanted to follow-up on maybe loan yields. It looks like they are up about 11 basis points in the quarter. Steve, do you think that's pretty typical for what you'll see from future moves in Fed funds or LIBOR? Just kind of curious kind of what the pricing environment is like out there and kind of where the new loans are coming on the books kind of relative to the current yield? The new loans are coming on really strong. So we are still expecting about a 60% beta, so 25% increase on rates, we're going to get between 15% 17%, and we still feel that's accurate for the next few quarters. Great. That's helpful. And with the growth as strong as it's been in the loan book, you guys have also been increasing the securities portfolio as well. I know you got a lot of excess capital, but deposits are being stopped up pretty quickly. Do you think that kind of levels out from here or do expect to kind of continue to push forward with some of the increases on the securities book? We will increase securities just a little bit. Some of the increase we have is because of the $250,000,000 Federal Home Loan Bank. We put some securities on the books to match that. So when we have to pay it off, we'll have some liquidity there. Other than that, we expect the growth to be back to the normal growth, nothing extraordinary. Got it. And what is the rate and the duration on the FHLB advance? 1.65, it is a 15 year, but a 1 year callable. So we are Their option or yours? Yes. Their option. Okay, great. And then final question, you guys have improved credit metrics a lot. You had net recoveries this quarter, only about a $500,000 provision against over $200,000,000 in loan growth. Just kind of curious on directionally kind of where you see the reserve leveling out and kind of what to think about in terms of provisioning against, it sounds like you have another really strong quarter of loan growth and maybe even up guidance a little bit for 2019. So just want to kind of think about how you guys are thinking about reserving going forward? Yes. This is Lance. I would think we're going to get back to a normalized provision because of the strong growth that we continue to see. That being said, our credit quality metrics continue to improve really across the board. So we actually spent some time on that yesterday looking through sub standards and opportunities for upgrades and I think we have some significant opportunities there. But because of the growth, I think from a modeling perspective, we'll get back to a normalized provision. Great. Thank you. Thank The next question we have is a follow-up from Matt Olney of Stephens. Yes. Just a follow-up on recruiting bankers and team lift outs. You've had great success there for a number of years, especially in the Texas market. I'm curious what the opportunity is today as far as incremental team lift outs and bank recruiting? Thanks. Yes. And Matt, we have additional opportunities. I think what I would like our investors to understand is that we are trying to balance our expense growth and production. And so we're focused the team lift outs that we're looking at today and we have one that could be announced, And so we're looking as I think we should at first off the profitability opportunities from standpoint of breakeven and that timeframe and then funding opportunities through these teams. So we slowed that down a bit because of strong asset growth we have and also the production we're seeing in our core markets. So I believe that if we announce something in the Q1, it's going to be it's going to have some real funding opportunities in that group. Hey, Matt, this is Lance. If I can add on, trying to make sure we're being really smart about the teams that we bring on. For example, the group of 5 in the North Texas market that we brought on this quarter, I think it creates a lot of granularity for us in our portfolio that they truly are a small business, lower middle market banking team. A lot of NIBs, a lot of small business operating companies really like the granularity that created for us in North Texas. In Louisiana and Mississippi, it's going to be more about bankers here and there versus teams. The big team opportunities we believe still are going to be in Texas. Got it. Thanks guys. And if I could, I'd like to go back to Wally's question concerning what we communicated on the road from an efficiency ratio standpoint. And we communicated that we'd be in the mid-60s by the end of 2018 with that will certainly deteriorate a little bit or become a little higher because of our last activities. But I do think that we'll be in that 66% range. We also communicated by end of 2020, we'll be in the low 60s, high 50s. Think that we can accelerate that. So Wally, hope that answers your question. And actually, sir, it appears that we have no further questions. And if okay, we'll go ahead and conclude the question and answer session. And Mr. Mills, I would like to hand the conference back over to you, sir, for any closing remarks. Well, first off, thank you everyone for their time today. We appreciate the support. Feel that as we were on the road and successful IPO that we're being able to focus on exactly what we brought to the street and continue to feel like our success will come through the Q4. And it's been very important to us that the first three quarters out of the box that we hit our numbers and we focus. So again, while we're taking a little bit of slow start on additional lift out opportunities and really focusing on being a good public company, a good report. So appreciate the support and if there aren't any questions then we'll end this call. And we thank you, sir, and to the rest of the management team for your time also today. Again, 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.