Good day, ladies and gentlemen, and welcome to the Origin Bancorp Inc. Q3 2022 earnings conference call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero to reach a live operator. Please note this event is being recorded. I would now like to turn the conference over to Chris Reigelman, head of investor relations. Please go ahead.
Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this presentation. Please refer to slide two of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and use of non-GAAP financial measures. For those joining by phone, please note the slide presentation is available on our website at www.origin.bank. Please also note that our safe harbor statements are available on page seven of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release.
I'm joined this morning by Origin Bancorp's Chairman, President, and CEO, Drake Mills, President and CEO of Origin Bank, Lance Hall, Chief Accounting Officer, Steve Brolly, our Chief Risk Officer, Jim Crotwell, our Chief Financial Officer, Wally Wallace, and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. The call is now yours, Drake.
Thank you, Chris, and good morning. This is an exciting and significant quarter for Origin as we completed the merger with BT Holdings on August first and the full system conversion at the beginning of October. When we publicly announced the partnership, I talked about BTH being a unicorn, that this is a cultural fit, a geographical fit, and a financial fit for both companies. I am proud of the Origin and BTH employees who made this process go so smoothly. The fact that this deal was announced in late February, received regulatory approval in June, closed in August, and finalized a system conversion in early October with flawless execution is a testament to the quality of our people, the strength of our relationships with the communities we serve, and the ability of our company to capitalize on the right opportunities.
In our investor presentation, we provided an update to financial metrics that resulted from the close of the BTH acquisition. Since our announcement in February, the rate environment has changed materially, leading to changes in our estimated purchase accounting fair value marks. While these purely accounting adjustments resulted in changes to our tangible book value dilution and EPS accretion, the bottom line is that the rate environment has improved the fundamental performance of both Origin and BTH, lowering the estimated tangible book value earn back period to 1.6 years. With the completion of the merger with BTH, Origin has enhanced its I-20 corridor presence with significant opportunity to grow market share in the deposit and loan-rich East Texas footprint while adding impressive scale to our Dallas-Fort Worth markets. Culture can often get overlooked in our industry, particularly with partnerships.
This past quarter, I was in each of our markets across Texas, Louisiana, Mississippi for our annual culture celebrations. There is a buzz around our company and a deep commitment to our culture of serving our customers, communities, and shareholders that is stronger than I've seen in my 39 years of being with this company. I am optimistic and excited about where we are and what we will accomplish. Lance, Steve, and Jim will get into the details of the quarter later in the presentation. As I look at the performance for the quarter and remove all the noise, our core profitability continues to strengthen and is in line with our long-term strategic goals. I am particularly pleased with our adjusted ROA of 1.34% and adjusted ROE of 13.14%.
With the addition of BTH, we showed impressive loan growth again this quarter with 14% annualized growth while applying strict underwriting standards to our process and continue to show improvement in our net interest margin, which was up approximately 40 basis points for the second quarter in a row. We remain focused on building long-term value for this company and took major steps this quarter to put us in a position of strength as we move forward. I'm proud of our growth. I'm proud of our employees for all they do to make us successful. I'm proud of the discipline we apply to managing our business with a strategic focus and commitment toward doing what we say we will do. Now, I'll turn it over to Lance.
Thanks, Drake. We have a lot to be proud of as a company. As I analyze the fundamentals of our production, I'm very pleased with the performance of our bankers across Texas, Louisiana, and Mississippi. I talk often about our strategy and our relationship-based approach to attracting and retaining clients. I feel strongly that we are executing on this strategy and are capitalizing on opportunities in all of our markets, particularly Dallas, Fort Worth, Houston, and now East Texas. Organic loan growth for the quarter was very strong. Adjusting for BTH and excluding mortgage warehouse, loans grew $215.3 million, or 3.5% compared to the linked quarter. This equates to a 14% annualized growth rate ahead of our low double-digit target.
On slide 11, you can see the impressive 16.9% compounded annual loan growth we have shown since our IPO in 2018. As Drake mentioned, we're extremely excited about the partnership with BTH and the opportunities it presents in Dallas, Fort Worth, and East Texas. Origin and BTH have a shared vision for what we can accomplish. Like Origin, they have built and strengthened profitable core relationships. Their focus on C&I and owner-occupied commercial real estate have been impressive, and we believe we will be able to bolster those relationships through our suite of treasury management products and services, our larger balance sheet, and our targeted marketing efforts. Our bankers remain focused on driving deposits within our markets, and I'm proud of how they delivered, particularly with non-interest-bearing deposits.
In the Q3 and adjusting for BTH, we showed an increase of non-interest-bearing deposits of $91.2 million or 3.5%, which is 14% annualized. Total deposits declined for the quarter. However, this decline was due in large part to one customer moving significant dollars based on a business transaction and our strategic decision to allow some non-core funding to leave the bank. With an 83% loan-to-deposit ratio excluding mortgage warehouse, Origin is well-positioned to fund continued loan growth. We know deposit betas are top of mind, but I think it's important to point out that deposit betas aren't the only piece of the puzzle as it relates to net interest margin. We are pleased with how our deposit and loan pricing has been trending.
As of the Q3 , our cumulative total deposit beta was 16% and our cumulative NIM beta was 40%. We looked back at prior tightening cycles with our deposit beta range from 27%-37% and our NIM beta range from 22%-30%. Where we stand today, we believe Origin is well-positioned based on this historic analysis. Steve will provide more detail on our NIM later in the presentation. Before I turn it over to Jim to talk about our impressive credit metrics, I want to brag on our bankers. As Drake mentioned, we completed the system conversion with BTH at the beginning of October, and our employees did an incredible job throughout that entire process. We were always focused on the client experience and our teams executed in a dynamic way. I'm so proud of where we are in 2022. Our loan growth is up, o ur focus on NIBs remains strong, o ur treasury management team continues to be a differentiator. The integration with BTH and how our teams rose to that challenge was remarkable, and our culture has never been stronger. Now, I'll turn it over to Jim.
Thanks, Lance. Slide 14 provides a recap of our credit quality metrics. We continue to be extremely pleased with the strong performance of our loan portfolio. As a percentage of total loans held for investment, past due loans held for investment were 0.16% at quarter end, while nonperforming loans held for investment came in at 0.20%. Classified loans held for investment to total loans held for investment were stable at 1.01%, while annualized net charge-offs to average loans held for investment came in at 0.07% for the quarter, down from 0.12% for Q2. As I shared last quarter, our focus on relationship banking, along with sound underwriting and credit structure, continues to be the drivers behind the solid performance of our loan portfolio.
For Q3, we increased our allowance for credit losses from $63.1 million- $83.4 million, resulting in our reserve to loans held for investment increasing from 1.25%- 1.29% net of mortgage warehouse. As a percentage to non-performing loans held for investment, our reserve increased to 594% at the end of Q3, compared to 448% at the end of Q2 and 285% a year ago, which also shows our strong and improving credit profile. While our portfolio continues to be resilient, we're closely monitoring the impact of inflation and the likelihood of an economic recession on our portfolio. In addition, headwinds continue to persist as to labor supply, wages, supply chain disruptions, and geopolitical concerns and their impact on the performance of our portfolio.
As stated last quarter, we continue to believe that the markets we serve will be impacted to a lesser degree by a recession than other areas of the country. Again, we feel that we are well prepared in this time of continued uncertainty and are extremely pleased with the overall performance and outlook of our portfolio. I'll now turn it over to Steve.
Thanks, Jim. Slide 15 is our yields, costs, and loans held for investment portfolio slide. During the Q3 , our total yield on loans held for investment increased 68 basis points, which includes the impact of $1.4 million or approximately 7 basis points from BTH purchase accounting adjustments recorded during the Q3 . As an asset-sensitive bank, increased interest rates will be beneficial for Origin. We expect to generate an incremental $7.2 million or 2.50% in net interest income from a 100 basis point instantaneous parallel shift in interest rates. Slide 16 shows our recent net interest income and NIM trends. Of the total $19 million increase in net interest income during the quarter, $11 million was attributable to BTH, with the majority of the remaining change from increased yields and volume on loans.
In addition, the changes in our NIM quarter- over- quarter are consistent with the changes in net interest income. Slide 17 is the investment security slide. On a net basis, we ended the Q3 relatively flat compared to June 30. As the BTH investments were recorded at fair value on day one of the merger, this gave us the opportunity to liquidate most of their portfolio without incurring a realized loss. We used that liquidity primarily to pay down short-term borrowings. Slide 18 is our net revenue distribution. The top graph shows our net revenue growth since our IPO.
Our revenue has nearly doubled in the last three years, driven by strong, consistent loan growth and most recently, the BTH merger and increased interest rates. We made a strategic decision to impair our Ginnie Mae MSR portfolio by $2 million, which is part of the bottom right table. We believe that there is a current oversaturation in the market for these assets. Therefore, it was prudent to reduce the carrying value. Slide 19, our non-interest expense analysis. We reported total non-interest expense of $56.2 million, an increase of $12.1 million.
The increases this quarter are primarily due to $2.8 million of merger-related expense, $2.3 million in salaries and employee benefits from the additional BTH employees, $1.3 million amortization of intangible assets from the merger, $2 million from BTH operational expenses other than those I just mentioned above, and $1 million increase in our incentive accruals due to exceeding performance metrics. Moving to the next slide, we show trends in our regulatory capital ratios. We continue to be well-capitalized and are in a strong position to take advantage of future opportunities to drive value for our shareholders. Now, I'll turn it over to Drake.
Thanks, Steve. Since I've been leading this organization, we've been focused on building a company which is committed to a unique corporate culture with a drive to create long-term profitable growth for the benefit of all stakeholders. There is a slide in our presentation that demonstrates long-term growth in total assets, total stockholders' equity and total shareholder return that have increased substantially over the past three decades. Origin is built for long-term success, and the additions of BTH this quarter strengthens our company even more. Throughout our history, we've been committed to our culture and hiring the best employees within our markets. As Steve mentioned earlier, we made a decision last quarter to implement inflationary raises for a large segment of our employees. While this impacts our expenses, it was the right thing to do.
Our mission is to passionately pursue ways to make banking and insurance more rewarding for our employees, customers, communities, and shareholders, and we remain focused on that mission every day. I am very pleased with where we are as a company. Looking at the Q4 , we anticipate additional net interest margin expansion, loan and deposit growth, further improvement in our efficiency ratio, and continued stability in our credit metrics. Our current capital and liquidity levels put us in a strong position. We have the right people in dynamic growth markets, and we have shown our ability to drive long-term value. Thank you to our employees who are committed to our culture and to our shareholders for their confidence in the vision of Origin. Thank you for being on the call today. Now we'll open the call up for questions.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. If you're using a speakerphone, we ask that while posing your question, you just pick up your handset to provide favorable sound quality. Once again, ladies and gentlemen, if you do have a question or comment, please press star one on your telephone keypad at this time. Please hold as we poll for questions. We'll take our first question from Michael Rose from Raymond James. Please state your question.
Hey, good morning, guys. Thanks for taking my question.
Morning, Michael.
Good morning. Maybe just if we could start with the updated thoughts around the acquisition. Yeah, I think clearly the, you know, what you show in the slides is the EPS accretion is less and, you know, you foreshadowed that in the 8-K that was put out a couple of weeks ago, but the tangible book dilution earn back are less as well. If you can kind of just walk us through kind of the changes in the marks and what kind of transpired from start to finish would be helpful. Thanks.
Yeah, I'll start, Michael. It's, you know, really when you look at where we announced versus where we closed, and I think if you put up the metrics, you would say the deal looks better after we closed. Obviously, the interest rate environment changed significantly. I think the bulk of what we're dealing with from the standpoint of EPS accretion or the decline in EPS accretion has the most to do with the CDI and the amortization at CDI. I mean, we announce the deal, interest rates at, you know, let's say 50 whatever, a half. Then, all of a sudden we're starting at what, 3.30, Steve, or somewhere in that range.
Yes.
You move from $6 million accretion to $38 million accretion. That's the majority of the impact of the change in metrics as we looked at this deal overall. You know, for me, that's accounting. When you look at the deal overall from loans, deposits, the people in the markets, our opportunity to really leverage East Texas, which I am so excited about, I understand the accounting is a big part of it, but the metrics around the deal, the markets, the people and the opportunities did not change, and we're so excited about it. Wally, I don't know if you wanna add anything to you know, the deal metrics.
The only thing I'd add. Hey, Michael, it's kind of funny talking to you first here, by the way. The only thing I'd add is, like Drake said, the change in the rates drove meaningful changes in all the purchase accounting marks. It adds a ton of noise. At the end of the day, a lower tangible book value payback period is what we ended up with, which we think is positive, and that doesn't take into account the fact that also what changed in that period was that our asset sensitivity. Made our earnings power stronger and BTH's earnings power stronger. Ultimately, we think the earnback is even less than what was on that slide. I'll just stop there.
Yeah, Michael, I'm sorry. I said accretion, I mean amortization on the CDI. I apologize.
Understood, you know, really appreciate all the non-GAAP adjustments in the slides, especially the expected accretion as we think about the next, you know, couple years. If I strip that out, which, you know, won't have a major impact, or at least as big as I would have, you know, we would have thought at the beginning, just what you mentioned, given what you just mentioned. How should we kind of think about, you know, BTH being layered in and the balance sheet moves that you made and how that's gonna relate to margin expansions as we move forward, particularly in the context of what still looks to be like a, you know, pretty good loan growth, you know, positive earning asset mix shift as we move forward. Just any sort of, you know, near-term call would be great. Thanks.
For us, one thing that I saw in the last two months for BTH is, as we announced, they had hit a wall from the standpoint of production. Their people were so overwhelmed by volumes and customers that they were taking care of what they had without hardly any outreach. Well, what we saw was a pickup in growth in the last two months. Our intuitions told us that you support these people, do the things that they need to do. Certainly, we're in the midst of that. We have to provide these people with portfolio managers and really the systems that we use. This will take some time, but we're seeing some early growth opportunities.
I do think that what those growth opportunities in their markets, especially East Texas, will do, will help continue NIM expansion. You know, from a NIM expansion process or where we are today, we certainly have not peaked. I think we're gonna see good NIM expansion in the Q4 . We will continue to focus on starting the process of growing out or doing the things we need to do in East Texas, which I keep talking about East Texas. They have a significant impact, as I talked about in the introduction, in our Dallas-Fort Worth markets. Jay and Roy Burgess will work well together with those teams.
I'm just excited about our opportunity to go in, do some marketing in East Texas and really start to benefit from the growth in those markets. And I hope I'm answering your question, but I'm really bullish about NIM next quarter. We have some good opportunities as we continue to see, I think, fair pricing in the new credits that we're bringing on.
Very helpful. Then maybe just finally for me, I know the deal just, you know, recently, you know, closed, but there clearly is gonna be, there is and will continue to be dislocations kind of in your, in your core markets. I mean, would you be open to doing another deal should an opportunity arise in the near term? Or is it kind of take a pause and, you know, get the cost savings and realize all the benefits from the deal before you look at the next one? Thanks.
You know, we're focused on integrating BTH. That's what I'm focused on. I'm not gonna say that there couldn't be another great deal walk in, but there's not gonna be a BTH that walks in. I feel like we need to do the things necessary to make sure that, look, we have used the term flawless execution in the BTH deal, for the most part, that is exactly on point. But we can't stop in making these people feel comfortable in this organization. This is all about culture. When I tell you that these two organizations breathe culture the same way, that is accurate.
For me, spending time in East Texas, making sure that Jay and his teams are on board, we still have to integrate products and services from the standpoint of making sure their customers are online. That's where we're focused. I think if we let up at all, we could have a full block. We've been fortunate. We had 79 open positions and desperate for quality people. In our cost saves, as we built this out, there were 40 some odd people at BTH that historically would not have moved forward. The quality of their people and what they brought to the table filled 40 of those positions that we had in a big way.
What that allowed us to do, and you might say, hey, those should have been cost saves, but what it allowed us to do is keep a very strong presence in East Texas, where I think that benefits when the community looks at how we integrate and how we use their people and the quality of that market. Those are all positives for us. We're gonna stay focused on that. Certainly, if another unicorn, I don't think that's the right way you describe unicorns, pop up, we would certainly take advantage of that.
Perfect. Thanks for that. Taking my questions.
Thank you. Our next question comes from Matt Olney from Stephens Inc. Please go ahead, Matt.
Hey, thanks. Good morning, everybody.
Good morning, Matt.
I wanna ask about deposit growth. It looks like in the Q3, the legacy end of period deposit balance has contracted. I think Lance mentioned in the prepared remarks that the NIB deposit growth was really strong ex the BTH. Any color on the pipeline of deposit growth from here and thinking about the Q4 , is it something similar to where we could see continued strength of NIB growth, but runoff of some higher cost deposits? Or are we now at the point where the deposit balance at nine and 30 looks pretty sticky, and we could see total deposit balances start to grow again? Thanks.
Yeah. Hey, Matt, good morning. It's Lance. I mean, look, there's no question that liquidity has sort of been pulled out of a lot of the banking systems through treasuries, through brokerage firms. You know, we're sort of balancing NIM. At the same time, we're balancing our asset size to make sure we stay under $10 billion this year. I think we've tried to be strategic and smart about how we focus on core deposits. You know our story and the way that we've built our company around geographic management models, around incentive plans that pay an equal amount for deposits than they do a loan, for the way that we have used lift outs to attract deposit specialists and treasury management.
I feel confident as the banks begin to compete more fiercely on deposit pricing, that we're gonna be able to do a really good job of staying in our window that we want to, which is gonna be, you know, mid- to high 80% loan-to-deposit ratio. We continue to grow NIMs, which is critical for us. That's been a strategic focus for the last three or four years. Super excited about the opportunity to grow deposits in East Texas specifically. And then let's also kind of don't forget the, what I'm going to say, the luxury we have in North Louisiana. As we look at where deposit growth and deposit runoff has been for us this year, we've still had strong growth in Louisiana and Mississippi and some of our more rural markets.
It's allowed us to be strategic and not fighting as harshly for some of the non-core stuff. If you remember, we talked about it last quarter, you know, we let $250 million go in Q2. I think you'll see us manage to $10 billion and then become much more competitive on the rate side. Very confident in our ability to manage through.
Okay. Appreciate that, Lance. Then on the loan growth front, nice results, ex-BTH. Now that you folded in BTH, you consider the pipeline and the current economic environment, what are the updated thoughts around organic loan growth for the Q4 and looking into next year?
Yeah, Matt, it continues to surprise us when we look at pipelines, and current pipeline looks extremely good going into the Q4 through the first month. You know, at this point, because of the pullback, usually we talk about loan growth, less mortgage warehouse, and I might as well go ahead and address this now. Our mortgage warehouse, we ended up last quarter $461 million. We'd obviously brought over about $40 million from BTH, and those were relationships that we were going to exit. We've gone through that process. We're going to end up, I think at the end of the Q4 , somewhere around $300 million in mortgage warehouse.
What is exciting about that is that we are focused on high-quality clients that are managing the expense structure and relationships we feel will continue to be here. We actually found out that several of our relationships are lowering or reducing their number of banks. We're not feeling that reduction from those high-quality clients, and that's a positive. I think you're going to see mortgage warehouse about 5 or 6% of outstandings, and I like that where we are right now going into the uncertainty of the environment. As far as loan growth, ex mortgage warehouse, I think we're going to see, let's say a low double-digit growth through the Q4 , which is still surprising.
Quality, we continue to apply very strict underwriting guidelines as we have set the last several years. We feel good about the quality we're bringing on. Going through 2023, if we start looking at pipelines, talking to our markets and everything, I still think we can maintain a high single-digit growth through 2023 on the loan side.
Hey, Matt, this is Lance. I might would add, we just continue to be excited about where the loans are coming from. If you go back over the last four quarters, I mean, Houston has grown, had loan growth of 44%, DFW 29%, and that's reflective of what we're continuing to see in our pipelines. You know, we continue to be excited about our lift out strategy. We have added another seven producers in Q3. That stays right in line. The last 12 months has been 28. That continues to be a combination of commercial bankers as well as private banking with treasury management, deposit gatherers, business development. It's very heavy deposit focus on who we're hiring. I went back and looked at sort of the producers hired over the last 12 months. They've grown loans $339 million, deposits almost $140 million. These people are producing at a really high level. We love the credit quality that we're seeing from these long-term relationships that they're dragging over. Just the strategy of the lift outs and the focus on Texas continues to pay dividends.
Okay. Thanks, guys. I'll hop back in the queue.
Thank you.
Thank you. Next, we'll go to Brad Milsaps from Piper Sandler. Please go ahead, Brad.
Hey, good morning.
Good morning, Brad. Glad to welcome you back after being absent for a while.
Exile, I suppose. I wanted to kind of follow up just on maybe the size of the balance sheet. I know you guys were, you know, making a lot of adjustments to stay, you know, to make sure you stayed under $10 billion. Just wanted to make sure, you know, I kind of had the right starting point, you know, for average earning assets. Are you pretty much through kind of all, you know, the adjustments you wanted to make? You know, notwithstanding what you just said about mortgage warehouse, just want to get a sense of, you know, does the balance sheet kind of stabilize from here, or does it, you know, trend down further? Just kind of curious, want to make sure I have the right sort of jumping off point, you know, to drive NII, et cetera.
Yeah. As I'm always going to be, I'm as transparent as needed. I felt like after we sold $450 million in securities with BTH and reduced debt that we had a very good runway to stay right under $10 billion for 12/31. We're pushing that a little bit at this point with pipeline growth. We still have opportunities with a couple of triggers to pull to ensure that we stay below $10 billion. I suspect we're gonna end up the year somewhere around $9.8 billion. At that point, we're off to the races continuing to grow the balance sheet as we have in the past.
Great. Thanks, Drake. Maybe, you know, a similar question around expenses, maybe, you know, a touch higher than I was looking for, but obviously you've got cost savings still to come. Can you just kind of speak to maybe the expense trajectory a little bit, as we think about, you know, another month of BTH in the fourth quarter, and then as maybe you start to see some cost savings into 2023?
Hey, Brad, it's Steve. There was a lot of noise in this past quarter. We ended up at $56.2 million. When we look at the merger costs that will be taken out, but you have to add in the salary expense that we talked about, where we increased wages during the Q3. The Q4 will be the entire quarter. We also have one month of operating expenses, as you said, for BTH. When you run your models and if you end up between $57 million and $58 million for the Q4 , we would say that's very reasonable. Then going forward to next year, I think we're at mid-single-digit increases from that number on the Q4 . Again, we've gotten ahead of the inflationary rate, wage pressures because we had the extra salary increases during the Q3. We really think we haven't finalized the budget, but we think mid-single digits from that $57 million-$58 million Q4 mark.
Very helpful. [crosstalk].
Brad-
Go ahead, Drake.
Let me say this because I think this is very important. We have in our plan for budget, significant opportunities to grow, and we're gonna continue to look at this, you know, even as we face an inflationary period, we think that our footprint will lag, you know, the recession. You know, as we go through that, we see significant opportunities to enhance this organization from a growth perspective, but profitable growth. That's what we're focused on is NIM growth, but yet at the same time, doing the things and taking advantage of dislocated market. That's what's built into some of this budget. You know, on top of the cost savings that we see in the next 12-14 months, as we finalize systems and do the things that's necessary. I feel really good about where we are to continue positive operating leverage and do the things we need to do, but not forget about the growth and the taking advantage of the market dislocation that's currently intact.
Got it. Makes sense. That would include that step up in the CDI number, correct? That's $57 million-$58 million?
Yes, it does.
This does conclude today's conference as it ended abruptly due to an unforeseen telecommunications issue. This interruption was in no way caused by Origin Bancorp, and our conferencing partner sincerely apologizes for the disruption.