Origin Bancorp Inc (OBK) 2018 Q4 法說會逐字稿

Good morning and welcome to the Origin Bancorp, Inc.

Fourth Quarter and 2018 Full Year Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Reigelman, 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 statement.

If you're 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 financial 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 Brolly; 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 we -- 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 and 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'll report for the fourth quarter 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 fourth quarter of 2018, we reported net income of $13.2 million and diluted earnings of $0.55 per share.

For the year, we reported $51.6 million of net income and $2.20 diluted earnings per share.

We ended the year with loans held for investment of $3.8 billion.

That was an increase of $188 million for the quarter and $548 million 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 $3.8 billion, which is an increase of $56 million from the previous quarter and an increase of $271 million from the previous year.

Our bankers continue to remain on 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 speaks 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 $42.1 million increased 6.5% compared to the linked quarter and almost 23% year-over-year.

Our provision for credit losses was higher in the fourth quarter compared to the prior quarter and largely driven by our loan growth.

Noninterest income and noninterest expense had slight increases for the quarter, and we improved our efficiency ratio to 66.52% for the fourth quarter.

Net interest margin for the quarter was 3.82% on a fully tax-equivalent basis, which was an increase of 6 basis points from the prior quarter.

During the fourth quarter, we saw yields earned on total loans held for investments increase by 17 basis points while our cost of total deposits increased 11 basis points.

Moving to Slide 5. Our net income was $51.6 million in 2018 compared to $14.7 million in 2017.

The primary driver was $35 million or 22% increase in net revenue, $23 million increase in net interest income and $12 million increase in noninterest income.

We continue to benefit from our asset-sensitive balance sheet and benefited from our significant loan growth, as Drake 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, but 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 continued to see strong loan growth in the fourth quarter.

We have consistently emphasized building core relationships throughout our markets, and our growth in commercial and industrial loans speak to that emphasis.

C&I loans increased $80 million during the quarter and $283 million overall in 2018.

We also saw growth in our commercial real estate balances, with an increase of $66 million for the quarter and $145 million for the year.

While we've had a lot of success in growing loans during the year, we remain strategically focused on deposit growth and keeping our deposit base as low as possible.

We had $271 million in deposit growth during the year.

And of that, 44% was noninterest-bearing deposits.

We are extremely proud of our noninterest (technical difficulty) 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 fourth quarter.

This was driven by a charge-off of one commercial real estate relationship in the health care 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 nonperforming loans as a percentage of total loans held for investment during the quarter, which was 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 have embraced our culture and the Origin vision.

We've also added new investors whose support, we are grateful.

We remain committed to the strategy that we have 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 sixth 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 we now will open up the line for questions.

(Operator Instructions) And your first question will be from Matt Olney of Stephens.

Got a few questions here.

But first, congrats on 2018.

You guys were busy, and you guys accomplished a lot.

So congrats over last year.

Thank you.

Thanks, Matt.

On the loan growth front, pretty strong growth that we saw in the fourth quarter.

Can you just talk about any trends that are worth noting, whether it's any change in C&I utilizations or any particular market that was stronger for you?

And then if you could talk about the pipeline going into the first quarter.

Yes, Matt.

I'll turn that over to Lance.

Yes, yes.

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 on our North Louisiana franchise.

Then obviously, our Dallas-Fort Worth really drove a lot of the growth.

The interesting thing I would tell you that while maybe not exactly as high as the fourth quarter, our pipeline right now going into the first quarter 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 teams.

That's exactly what we accomplished, and we continue to see that going forward with a strong first quarter.

Okay.

Great.

And then on the credit front, what else can you tell us about the 3 downgrades that were mentioned in the 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 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 for quite some time.

Matter of fact, I went back to see if there had been any downgrades or impairment processes on any credits that we've had on the books less than 2 years.

And it's -- our credit quality moving forward is stellar, and we are extremely aggressive 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 -- well, we did have, as Lance mentioned, an uptick of about $3 million in Q4.

The trend from Q4 '17 to Q4 '18, which was $91.3 million down to $79 million, we see that continue.

And that $3 million uptick was one credit that -- to make sure that we were clean from an audit process, we moved from an income approach evaluation 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 will 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 call-out of those 3 downgrades.

Yes, no.

There weren't any -- of material, they were not.

We do feel like our trends from an upgrade standpoint and going through the first quarter will continue in a positive way.

But those 3 credits, from the standpoint of justifying that position, is still very, for us, conservative and aggressive in how we address those.

And all 3 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 from me, I guess, on the margin.

Steve, the margin looked good in the fourth quarter.

What can you tell us about the trend of that core margin going into the first quarter and 2019?

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 let -- looked at last year and the year before, we had about $217 million to $230 million in cash, but that was at 50 basis points or $164 million.

The cash that we have now is closer to $250 million, $260 million.

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 the -- this quarter coming up will be about the same.

The next question will be from William Wallace of Raymond James.

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 very 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 in 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 loan -- strong loan growth this -- for '19.

We do think that our selection and the ability to pick out the higher earners are going to help us achieve some NIM that maybe is not -- you -- is -- 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, 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 million since they arrived.

So in those conversations, they -- 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 did -- were you able to get fully invested early in the quarter?

We got fully invested early in the quarter.

First couple days, [there was some] cash, but we had a lot of loan growth in those 2 quarters.

So it was fully invested.

Okay.

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 3 credits were in?

Yes.

North, Central Louisiana on 2 of those.

Mississippi.

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 Origin's, 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 may be a quarter off, could potentially come at the end of the first quarter.

We are moving towards solving what we -- are going through a process of deciding on a solution for mortgage servicing where we feel like our major issues are.

And we think that at the end of the first quarter, we'll be able to announce that solution.

That's -- 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 our earnings.

And the next question will be from Brady Gailey of KBW.

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 2018.

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 '19?

Yes.

The way we see -- Brady, the way we see loan growth, and we've spent a lot of time in the markets with the market presidents, and I talked a little bit earlier about pricing disciplines and being able to control the loan growth and ensuring that we're getting the returns that we need through some -- through our investments.

So at this point we see, for '19, loan growth in the markets that we've 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, we 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% 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 in North Louisiana.

So if you add up the markets and where the markets think 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.

If you look at 2018, we saw the loan-to-deposit ratio year-over-year go 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 that I think helped strengthen us from a liquidity standpoint.

We had a large single customer that had a $60 million 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 million -- excuse me, by about $30 million.

And so that's, let's say, a $80 million to $90 million 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 noninterest-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 deposits.

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 first quarter, we picked up about $55 million of additional deposits from public funds that were supposed to come in at the late part of the fourth quarter, but didn't come in until the first quarter.

So we see, through the first month, better deposit growth in loan -- or stronger deposit growth and loan growth.

All right.

And is M&A an option to help on the funding side?

And what are your updated thoughts on M&A as we head into '19?

Yes, very -- I'm very focused on M&A.

We have actually 4 different conversations ongoing, as we speak.

And each one of these, with the exception of one, would be significant deposit M&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 us 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 from me.

I know we talked about the efficiency ratio getting down into the low 60% 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 occasions about redlining opportunities or to solve redlining opportunities.

And we have 2 branches, one in South Dallas and one in Mississippi, that we'll 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's -- it could be slightly higher.

And when I say slightly, within -- below that 65%, but not quite to where we expect, but we do have some opportunities I think to impact that.

All right, great.

Thanks and congrats on a nice quarter.

(Operator Instructions) And the next question will be from Brad Milsaps of Sandler O'Neill.

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 seemed to be kind of maybe running a little bit lower than maybe I thought.

Just kind of curious kind of what your outlook would be there over the next couple years.

Yes.

We have -- on our partnership revenue, we actually had about a $500,000 loss in the third quarter, about $750,000 profit or gain, I would say, in the fourth quarter.

So we -- 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 could 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 credits you charged off, you'd already provided for.

But you have taken the reserve down, if my math's right, to 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 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 new 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 and the quality of that.

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.

Okay.

Thank you to everyone that attended the conference today.

For us, 2018 was an outstanding year.

And I know we -- there are 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 or better than 2018.

We know that our challenges, our 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 and conversations.

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 line.