Origin Bancorp Inc (OBK) 2019 Q3 法說會逐字稿

Good day and welcome to the Origin Bancorp, Inc.

2019 Third Quarter Conference Call and Webcast.

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

I would now like to turn the conference call over to Mr. Chris Reigelman, Investor Relations.

Mr. Reigelman, the floor is yours, sir.

Good morning and thank you for being with us.

We issued our earnings press release yesterday afternoon, a copy of which is available on our website along with the slide presentation that we will refer to during today's call.

Before we begin, I'd like to remind you that this presentation may include information about our management's views of our future performance, business and growth strategy projected plans and objectives and various other matters that constitute forward-looking statements under Federal Securities laws.

Due to various risks and uncertainties, actual results may differ materially from historical results or any results implied or indicated by any forward-looking statements.

Discussion of these risks and uncertainties, please refer to the forward-looking statements section of our earnings release and the risk factors, including our most recent Annual Report on Form 10-K filed with the SEC, as well as any update set forth in other documents we periodic we filed with the SEC, forward-looking statements speak as of the date they are made and Origin undertakes no obligation to publicly update or revise any forward-looking statements.

If you're logged onto our webcast, please also refer to slide 2 of the slide presentation, which includes our forward-looking statement, Safe Harbor statement.

Those joining by phone please note the slide presentation is available on our website at www.origin.bank.

All comments made during today's call are subject to the forward-looking statement, safe harbors in our slide presentation and earnings release.

Finally, in this presentation , we may discuss certain financial measures that are not calculated in accordance with U.S. GAAP, please refer to the reconciliations of these non-GAAP financial measures to their closest comparable GAAP metrics in our earnings release and slide presentation, which are available on our website at www.origin.bank.

We believe that certain non-GAAP financial measures can provide meaningful information to investors.

However, these non-GAAP financial measures are supplemental and should not be viewed as a substitute for operating results determined in accordance with GAAP nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

I'm joined this morning by 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 will be happy to addressing questions you may have.

At this time, I'll turn the call over to Drake.

Thanks, Chris, and thanks to everyone to be on the call today as I consider our goals for the third quarter, while taking into consideration strong competition in our current interest rate environment.

I'm proud of what we've accomplished in our team is committed to building profitable relationships.

Our team believes in it remains focused on our strategies, which is evident with the success we had this quarter in particular driving profitable loan deposit growth.

We said in the past, our loan growth will be governed by deposit growth and I'm very pleased with the momentum we've seen on the deposit side, especially with non-interest bearing deposits growing over $200 million year-to-date.

We reported record net interest income and record net income for the quarter, which was impacted by a number of factors that Steve and Lance will discuss.

Our net interest income was $44.6 million for the quarter, which is up 3.8% from prior quarter.

Our net income for the quarter was $14.6 million or $0.62 per share.

You know, while interest rates have created a headwind for our company for much at 2019, our bankers have been diligent and disciplined in pricing new and renewed relationship utilizing relationship profitability versus only loan pricing.

The loan growth we saw in the third quarter was over 5% and our loan yields were in line with our expectations.

Year-to-date, we're seen long growth north of 13% on an annualized basis.

Our expenses for the quarter were also in line with our expectations.

Even with the interest rate environment, our bankers have found opportunities to add value to our customers and to enhance performance.

Now Steve will discuss more details around the performance of the quarter.

Thanks, Drake.

I'll start with financial highlights on Slide 4. We ended the quarter with $4.2 billion in loans held for investment, an increase of 5.1% from the prior quarter and a year-over-year increase of 16.3%.

Our deposit stand at $4.3 billion an increase of close to 13% on a year-over-year basis.

As Drake mentioned, we had record net interest income for the quarter of $44.6 million up 3.8% from the linked quarter.

Operational expense for the quarter was $4.2 million, an increase from the linked quarter and prior year same quarter.

Next, we'll cover more about this later in our presentation.

In the non-interest income and expense front, we saw some really positive developments.

Non-interest income was up 15.2% quarter-over-quarter, ending at $12.9 million.

This was driven by strong quarter swap fee income with our bankers being able to really create value for our customers in the bank with back to back swaps.

Non-interest expense was down over 5% on a quarter-over-quarter basis, ending at just over $35 million.

There were several factors impacting our non-interest expenses quarter which we will discuss later.

A non-interest margin on a tax-equivalent basis for the quarter decreased one basis point to 3.69%.

Our efficiency ratio for the quarter also decreased to 60.98% compared to 68.51% in the linked quarter and the year to date was near 65%.

Our results for the quarter also drove linked quarter improvement in ROA and ROE at 112% and (inaudible) respectively.

Looking at our net interest income and net interest margin trends over the next slide, you can see that our net interest income has increased steadily over the past five quarters.

Given the loan growth and increasing yields shown over the same periods, our income trends are in line with our expectations.

As I mentioned, our margin declined one basis point from the prior quarter on a tax-equivalent basis.

In a pre-tax equivalent basis, margin was flat at 3.65% quarter-over-quarter.

During the third quarter, increased loan fees driven by prepayments had a positive impact of 2.5 basis points when compared to the linked quarter.

As we look into the fourth quarter, we will have a full quarter impact of the two most recent federal reserve interest rate cuts as well as whatever impact we see from any potential rate cut that comes from the third reading later next week or later this quarter.

However, we remain focused on optimizing our funding mix and the rates we pay on that mix to help offset the potential negative impact falling rates will have on our asset yields.

Now, Lance will cover more about loans, deposits and credit quality.

Thanks, Dave.

As Steve mentioned previously, we've seen fantastic long growth this quarter.

We were up over 5% quarter-over-quarter and over 10.5% year-to-date.

As we look at the composition of our portfolio as shown in the presentation we continue to be focused on (inaudible) relationships with approximately 50% of the total loan portfolio at quarter end focused on (inaudible) owner-occupied CRE and mortgage warehouse.

We ended the corner with 30% of our total loan mix concentrated in non-owner occupied CRE.

A significant portion of this loan growth continues to come from the Texas market.

While I'm part of the loan growth throughout the markets, I continue to be impressed with a deep relationships our bankers are building which is evidenced by the deposit growth we have experienced.

Our total deposits have grown $501 million or 13.2% year-to-date.

And it's right mention (inaudible) have grown $203 million or 21% year-to-date.

With this outstanding performance by our bankers, are you not the end of the quarter at 27% of total deposits.

As Dave mentioned earlier, our provision for the quarter was $4.2 million in net charge offs at $3 million with the remainder date loan growth.

But also the quarter were primarily driven by the (inaudible) of a 3 credits.

The most significant being in the restaurant industry with the other two in healthcare.

Aside from the restaurant credit mentioned, we have exposure to the restaurant industry total and $73 million which is 1.7% of our total loans at quarterly end.

We do not do these charge offs as indicative of any trends in the portfolio.

(inaudible) remain at positive levels with 72 basis points at quarter end, and the level of non-performing loans remain stable.

For the quarters that charge offs were higher compared to net charge offs for Q1 and Q2, our year-to-date annualized net charge off ratio of 11 basis points is right in line with our expected annual net charge offs in the 12 to 14 basis point lines.

I'm very pleased with the production we have seen from the markets and our bankers have continued to focus on building meaningful relationships that are very profitable.

I'm going to turn it back over to Steve now to cover a little bit more on expenses.

Thanks, Lance.

I just wanted to cover our non-interest expense and operating efficiency a little bit and look at the non-interest expense for the quarter.

We ended up with $35.1 million.

There were a couple things in that that we need to unpack so we adjusted those to create clarity in the presentation.

In Q3, we were able to utilize all the FDIC assessment credit we had been awarded previously, which was a one time benefit of just over a million dollars.

We also had a benefit of $570,000 from self-insured medical expense reserves that were released during the quarter that were accrued during second quarter.

This created a quarter-over-quarter swing of nearly $1.2 million.

We talked last quarter about the transition of our telecom providers, and we recorded an expense reduction in Q3 of $150,000 due to this transition.

Going forward, we don't expect to have any further significant impacts from this transition.

We also add an additional true up of $213,000 in franchise tax expense associated with a following of our 2018 tax returns, which we recorded in Q3 and we don't expect this to impact our run rate of franchise tax expense in any significant way.

We also had $441,000 additional loan expenses, loan-related expenses due to legal costs associated with the loan workout, one being the bad debt Lance touched on earlier.

With that, I'll turn it back over to Drake for closing remarks.

Thanks, Steve.

Steve, Lance, thank you for walking the call through the results of the quarter.

I'm very pleased with our company's recent decisions affecting our shareholders.

We repurchased 300,000 shares of stock during the third quarter, and we increased our quarterly dividend from $0.0325 share to $0.0925 per share through dividends and share repurchase.

We have returned $13.8 million to our shareholders in 2019, with $12.3 million of that in the third quarter alone.

Now earlier I mentioned the challenging environment we face which is requiring our team to be efficient with growth moving forward.

Overall, I'm pleased with the direction of our company and the way our bankers are executing on our strategic plan.

As we move through the fourth quarter 2019, we will remain focused on continuing to drive positive growth with meaningful and profitable relationships.

We will now begin the question and answer session.

(Operator Instructions) And the first question we have will come from Matt Olney of Stephens.

I want to start on expenses.

And it sounds like the $35 million was a little bit light.

And if I take into account some of those items that Steve mentioned The FDIC assessment and lower health care expense and if I think about a 4Q run rate is about $37 million in the fourth quarter.

Is that about the right place to start for a fourth quarter run rate?

Matt, look, we've done a lot of work on this since our second quarter call to try to create clarity especially for the analyst and we believe at this point, you know, that (inaudible) number is probably reasonable for the fourth quarter.

Got it.

Okay.

That's helpful.

And then on the credit side, it sounds like --there was a right off of --the restaurant loan created I guess most to hire charge offs in the quarter.

What else can you tell us about that loan?

Did you write it all off?

Is there any remaining exposure there's still some amount of that and not accrual.

Yes.

We have we wrote off the exposure of that credit and I want to talk about that just for a few seconds if I could but we have a $3 million balance remaining, which is the --we have in hand --for that business and we feel pretty confident --that will hold up at this point.

But we have and I want to make sure that I clarify this that we have $71 million remaining in our restaurant portfolio and have really --that portfolio pretty real deep down at portfolio feel extremely comfortable.

And I know that we've heard a lot of the term use one-off for us this loan is truly a one-off is not it does not look like any other restaurant loan that we have.

We're very comfortable with the portfolio and I've been said that in most of our calls with our investors that I'm extremely comfortable with that investment, I mean other the portfolio overall --we estimated between 12 and 14 basis points of loss on our portfolios for 2019.

We're at 11 right now and feel like we're going to come into that range.

Nothing else out there that we currently know of is it --should have impact that significantly but very comfortable with the remaining part of a portfolio think it's 1.3% of our portfolio at this point.

So truly one-off we've worked with it this is relationship that we've that we began deal with in 2013, 2016 we expanded they expanded pretty quickly into some southern states and at this point you know we are where we are with it.

Okay.

And then just generally on credit quality, any discussion or any of use as far as the overall path do list or classified credit size?

Any migrations or any themes that you saw in the third quarter?

Absolutely not past is continued to inch down well on the 1% sustained has continued to move south in and we just feel very good about our credit quality just finished up --external loan review they went through about 54% of the portfolio.

Very, very tough review came out with just a minor downgrade.

very complimentary --on the credit quality, especially when we look at the industries that we want to concentrate on So as I've been saying the last couple quarters as we took a --in some of our industries and concerns I think we're in very good shape.

Like said we projected 12, 14 basis points will come in within that, you know at this point.

Next, we will have William Wallace with Raymond James.

Maybe a quick follow-up on the loan and the exposure there.

Did you say -- did I hear you say that you already have a bid of $3 million for the entire business?

Yes.

Okay.

What kind of restaurant?

Was it -- is it fast casual...

It was a fast casual in the southern states.

Okay.

And then you said you've done it, you've done a deep dive into the remaining portfolio.

I'm curious if you happen to have any information on hand as to maybe some of --the breakout of types of restaurants in your portfolio and if you'd like to add that you can share with us.

We actually -- out of the [$71 million] we have, actually looking at the list at this point, the most of it, I would say that it's pretty much 50-50 it appears between fast casual and then fast food.

We have a couple of real strong standard corporators, we have a Burger King operators really strong with (inaudible) also and just I think well position.

And the other thing about restaurant portfolio we have significant sponsorship behind that portfolio and strong operator.

So, and like this one that we talked about a loss this was a 2013.

This wasn't a new relationship we just brought in had significant investors behind this restaurant and there was a lot more money lost in the investment side then it was on the bank side.

But I feel very good and I would, as you know, extremely transparent.

If I had we had issues around the restaurant portfolio we would tell you, but again it's 1.3% of our portfolio and we feel very good where we are at this point.

And one last question on that.

Before we move on, do you know the average loan size, relationship size in that portfolio?

Looking at this list, I'm going to say it's probably in the $3 million to $5 million range.

Okay.

Great.

You talked about a expense of 36.7 to 36.8 in the fourth quarter, last quarter we spoke about some changes that you've made in the mortgage business around servicing.

I'm wondering if you could help us think about what we might look at on the expense side, maybe in the first quarter of 2020 once we start to see the impact of changes that you've made on mortgage.

And I guess we're it's done that as we.

I will finish it in our conversion to sub-service in our mortgage servicing portfolio level and they'll be on November 1, we expect that to reduce expenses, around $1 million for 2020 from the sub-servicing perspective, we continue to look at servicing strategically the direction we're headed.

As you know, we have focused on reducing the size of our mortgage operation to a retail footprint operation that you'd expect in the community bank.

Sub-servicing and I believe is the first step and that's addressing the volatility in servicing.

We believe that at some point we could potentially even exit the services business and just focus on mortgage production and that's something that we've had some success here recently on attracting and continuing to add what we think are very strong mortgage bank as we had real success here recently in our core market and with an individual we think it's going to be a game changer for us.

So we're really focused Wally on mortgage production and starting to diminish the impact that servicing will have in the future.

We just, I like thinking about not having that compliance risk, not having the volatility and so from a run rate perspective to answer your question, I think you can reduce that run rate over four quarters by $1 million in 2020 and we're going to work hard to, I mean we have for instance going through a health insurance rebid right now that's a big issue for us to try to understand where the cost are but overall, from an infrastructure standpoint, we feel very good that we have a pretty good cost structure moving forward.

And just to clarify, when you say, it could be $1 million lower.

Do you mean it could be $1 million per quarter or $250,000?

No, no.

$1 million for the year.

Okay.

I think to put this in perspective, we at this point, we're projecting about a 3% to 5% expense increase for 2020.

Okay.

We're going to miss the working on that as we speak.

Okay, great.

And then my last question is --on the net interest margin.

We had to cut in September.

You guys have a lot of floating-rate loans, but you've had pretty strong deposit growth.

I'm wondering if you could just kind of help us think about how we might model.

Net interest margin compression with a Fed moves?

We're doing a lot of work around that at this point, we think with a Fed moving and we're baking in a Fed move for this quarter and really feel that we're going to be pretty comfortable in that, with the move 10 to 12 basis points impact on NIM.

One upside to that we've seen a somewhat of a decline in the percentage of our floating rate loans from 62% to 59% and feel at that trend could continue.

And it's again something that we're working on, not to really position ourselves more neutral necessarily because we're not going to be in this environment forever, but we are working to less than the impact of that, but our deposit growth has been strong, we feel in the fourth quarter that we're going to see, not deposit growth, the level we saw in the third quarter, but we're going to see strong deposit growth.

So again we are going to stay focused on that.

I'm going to say 7%, 8% loan growth and that 8% to 10% deposit growth moving forward.

Okay, great.

And to clarify, you said, we could see 10 to 12 basis points of pressure in the fourth quarter that assumes that the Fed cuts next week, included?

We baked in a cut.

We're not, I thought about given it without the cut, but we're pretty sure the cuts, going to be there, so we're giving you one number, and that's probably, if you want to know 2 to 4 basis points adding with the cut.

Okay, great.

All right.

On a lighter note, I know you've spent a lot of time in Houston, but I just say go net.

That's okay.

The next question we have will come from Bradley Milsaps of Sandler O'Neill.

It's actually Peter Ruiz on for Brad.

Most of the questions have been answered, but just maybe following up on the margin.

Really appreciate the color there that you gave on the expectations there.

Especially, including an October cut, but kind of just taking a deeper dive.

Do you guys have a sense of what the spot rates were sort of for deposit cost may be near the quarter end.

Okay.

Spot rates for the quarter for the month of September were 156 for total interest-bearing deposits.

Okay, that's great.

That does not include the non-interest bearing.

So the spot rate 156 total interest-bearing deposits.

In July that number was 162.

Okay.

And again, we're going to focus a little bit here on significant growth in, -- we are very pleased with our continued incentives and the teams that we've built around treasury management around deposit gathering teams in both the DFW and Houston markets and just see and sound non-interest bearing deposit growth.

I would add also from a broker's perspective.

Obviously, the majority of what we do there is we talked a lot with everyone here about our relationship with Origin financial that has come down from the 220 something range to 189 at the end of the quarter and we'll continue to see that by money market rates go down.

Okay, great.

I appreciate all that color.

And maybe I think Drake, if I heard you correctly, kind of guided the 8% to 10% loan growth here in the near term.

Maybe just give a little bit of color on what you're seeing in your markets right now?

Obviously, I'm sure Texas is strength but anything else you can provide?

I want to go back to that because I said 7% to 8%, loan growth and then 8% to 10% deposit growth moving forward.

And obviously, we're in such dynamic markets in Texas and seen a lot of success there, starting to see some decent growth in Mississippi where it's been flat last year.

Still surprised that in Louisiana at 5.3% annualize growth year-to-date.

So have a decent growth in the market, but when you look at the DFW and Houston they certainly are the Houston 33.7% annualized loan growth.

So those teams that we, we were fortunate to lift out and get in inside of it performed as expected maybe was stronger than expected.

Next, we will have Brady Gailey of KBW.

So a nice loan growth quarter from you all, it sounds like a lot of it was Texas was any of it energy-based loan growth.

We had one credit that was energy-based that was around I want to say $8 million, $10 million.

Not E&P.

Yes, and again let me stress.

When we talk about energy, it doesn't have a dollar of E&P in it, it services and midstream.

So Brady, from a funding perspective, we're about 1.5% of our portfolio in total energy.

It was this credit I just mentioned was a long-term strong relationship out of our Houston team.

Okay.

So Drake, you got active with the buyback you repurchase about one, a little over 1% of the company, will that, will that continue from here.

Yes, I think it's an option for us and we'll continue to look at those tools depending on market and where we are , we're having what we think is very strong organic growth in each month.

We look at where we are, what options we have and certainly that's going to be an option and a tool that we'll use as necessary.

Okay, maybe an update on M&A and how conversations are going?

Are you closer further away from announcing a deal?

It's still an active, very active.

We're trying to find the right partner and I don't want to say I'm picky, but it's going to be the right deal for us, and we still have the same number of active opportunities and so it's tough to say I'm closer on farther way and the other side of it is that we're certainly trying to understand the seasonal impact of acquisitions moving forward and really how you just price based on that.

And does it impact from that standpoint.

Okay.

Then you added a little more FHLB in the quarter.

I know you did some last quarter and in the second quarter.

But can you just talk about if you plan to continue to do that and you know what the strategy is behind this kind of balance sheet remix?

Hey, Brady, this is Steve.

This past quarter, we did do a $100 million in a [photo] which they have the option, and that was a 35 basis points.

They have the option to call back in later November.

Last year, we mentioned 250 million at 165 that was callable at their option in the summer and they did not call based on the rates.

What we do is, we'll look at the Federal Home Loan Bank borrowings, we'll look at brokered deposits.

We'll will look at a warehouse that is lines of credits that we fund and it's a daily look where we are, where we're going to be.

And it's not a, will we do this continuously it's as a total mix.

The other thing we have to look at is the Federal Home Loan Bank and we will not do these LIBOR based lending as of a couple of days ago after first quarter of next year.

So we'll continue to look at the Home Loan Bank with that be coming out with other products.

And I hope that gives you comfort.

Brad, this is Drake.

I will say that with such a strong focus and drive on growing core deposits.

We're starting to see less reliance on brokered deposits and less reliance on borrowings.

So as I said earlier, we were successful to lift out teams, the asset growth has been strong.

I feel the momentum is catching in and loan deposit ratio is slowly inching down as we expected it to.

(Operator Instructions) Next we have a follow-up from Matt Olney of Stephens.

I just want to revisit the discussion around the margin, and it sounds like you're expecting 10 to 12 bps of compression in the fourth quarter.

I'm trying to reconcile why the third quarter margin held up so well and why you're expecting more compression in 4Q.

It seems like the LIBOR headwinds could be similar or maybe a little bit more in the fourth quarter, it sounds like the fees were good in third quarter, maybe you're assuming less fees in the fourth quarter?

Anything else that you can share that would help us understand why the margin will be down a lot more in 4Q than we saw in the third quarter.

This is Steve.

Agree with what you've said, we had 2 to 3 basis points of extra prepayment fees.

We do expect a normal prepayment, but this last quarter had a large amount of prepayment fees, which we do not expect going forward.

So, that's going to be 2 to 3 basis points there.

Also during the second quarter, we had those two rate cuts but it was only doing partial.

We will have the full impact during the fourth quarter and then we expect another rate cut next week.

So, when you add all those together, that gives you the 10 to 12 basis points.

And on the deposit side and specifically the non-interest bearing deposits.

That growth was very strong in the third quarter, can you talk about the pipeline for non-interest bearing deposit growth?

And I guess some banks talk about seasonality of that business.

Do you guys have any seasonality to speak of, in that business?

Yes, we will have some seasonality, we've had some nice lift in NIB and our mortgage warehouse customers, Matt.

We feel like we'll see some pullback in that.

However, at the same time, we have about $300 million in public funds we bank a lot of the municipalities across North Louisiana.

Some of those are tax dollars.

So, we actually get a lift there in public funds in the fourth quarter from a seasonality perspective.

It's likely it will offset a little bit.

Okay.

That clears that up.

I think that the effective tax rate was a little bit higher in the third quarter.

I think you alluded to that in the prepared remarks.

Any color you can give us as far as what kind of tax rate we should be assuming for 4Q and then 2020?

19.5% to 20% effective going forward for this quarter.

And then probably the same amount for 2020.

Well, sir, no further questions at this time.

We'll go ahead and conclude our question-and-answer session.

I would now like to turn the conference call back over to Mr. Drake Mills for any closing remarks.

Sir?

Thank you.

And I appreciate everyone on the call, but I want to make the point that we have continued to run this institution as we [saw] in the IPO.

We think we are in the most dynamic markets, we're having significant success in Texas, especially on the Houston market.

And I say that really some momentum moving in DFW with deposit team, so I feel very comfortable that we can continue to perform within the strategies that we laid out, we feel extremely good about the team, the people, the quality of the loans that we're bringing home and I just think that we're well positioned.

I had a question the other day about where is our next market, where is our next move and my response was - I have 1/3 of 1% market share in the DFW and Houston.

I mean the greatest markets.

I have a lot of market to grow and we have the infrastructure there.

We just think that we have to continue to leverage this infrastructure to be successful in those Texas markets.

I appreciate everyone on the call.

Thank you for your time and we're always available for additional calls if there are questions that you need.

Thank you.

And we thank you, sir, also and to the rest of the management team for your time.

The conference call is now concluded.

At this time you may disconnect your lines.

Thank you again, everyone.

Take care and have a wonderful day.