Origin Bancorp : Third Quarter 2025 Earnings Call Transcription

About this update from Origin Bancorp, Inc.

Origin Bancorp, Inc. Third Quarter 2025 Earnings Call -Transcript Transcribed By: FINSIGHT 530 7th Avenue New York, NY 10018 DISCLAIMER: FINSIGHT makes every effort to ensure an accurate transcription. Enclosed is the output of transcribing from an audio recording. Although the transcription is largely accurate, in some cases, it may be incomplete or inaccurate due to inaudible passages or transcription errors. This transcript is provided as an aid to understanding but should not be treated as an authoritative record. FINSIGHT makes no representations or warranties to the accuracy and completeness of this transcript. Evercall Moderator Good morning and welcome to Origin Bancorp, Inc. Third Quarter Earnings Conference Call. My name is Tom, and I will be your Evercall Coordinator. The format of the call includes prepared remarks from the company, followed by a question and answer session. All attendees will be on a listen only mode until the Q&A portion of the call. Please note this event is being recorded. I would now like to turn the conference call over to Chris Reigelman. Chris, you may proceed. Chris Reigelman 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 call. Please refer to page 2 of our slide presentation, which includes our Safe Harbor statements regarding forward looking statements and the use of non-GAAP financial measures. For those joining by phone, please note the slide presentation is available on our website at https://www.ir.origin.bank . Please also note that our Safe Harbor statements are available on page 7 of our earnings released filed with the SEC yesterday. All comments made during today's call are subject to Safe Harbor statements and 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; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; our Chief Accounting Officer, Steve Brawley; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. Drake, the call is yours. Drake Mills Thanks, Chris, and thanks for being with us this morning. Before we discuss our third quarter performance, I want to share my perspective on Tricolor and the related charge-off. We had a 20-year relationship with Tricolor. During that time, Origin has grown into a dynamic company that strategically builds relationships and has a strong system of risk mitigation. For Tricolor, our systems and processes included audited financials, various loan covenants, monthly borrowing base certificates and a third-party trust company as collateral custodian. However, even with the best practices of risk mitigation, losses can occur in the event of a customer fraud. As a leader, it's important to use an event like this as an opportunity to better your organization by diving deep into policies, processes and portfolios to identify lessons learned. Our decision to charge off the entire Tricolor outstanding debt is extremely conservative. We do anticipate recoveries through a combination of no collections, insurance claims and legal recourse. This isolated event does not define Origin. When I think of our long history of success, the depth of our management team, the momentum we have generated with Optimize Origin and the unprecedented opportunities within our markets due to M&A-driven disruption, I am passionate and confident we will achieve our ultimate goal of being a top quartile performer. Now I'll turn it over to Lance and the team. Lance Hall Thanks, Drake, and good morning. I'm extremely proud of how we've executed on Optimize Origin and the momentum that has been created throughout our markets. We're ahead of pace on our stated plan and are creating real traction on our goal of being a top quartile ROA performer. Excluding notable items, our pretax pre provisioned ROA increased 48 basis points to 1.63% for the third quarter of 2025 compared to 1.15% in second quarter of 2024, when we began the planning stages of Optimize Origin. Over the same period, NIM has expanded 48 basis points. Total Revenue excluding notable items is up 10%, and non-interest expense excluding notable items is down 3%. We strongly believe the level of paydowns and payoffs that we've seen through the first three quarters of this year masks the high level of production we're experiencing. We continue to see positive trends in loan production, with loan originations up 19.2% year to date compared to the same period last year. At a more granular level, business loan production under $2.5M across our footprint is up 22.9% during that same period. Through Optimize and through insight into data gleaned from our banker profitability reports, our bankers have heightened their focus on generating ROA lift through relationship expansion. This is highlighted by treasury management fee income increasing 7% year over year and loan and swap fees up 62% during the same period. We've seen a strong build on the deposit side in Q3 as non-interest bearing deposits are up $158.6M or 8.6% quarter over quarter. While we've come a long way with Optimize Origin, I'm very optimistic about what we can continue to accomplish as we close out the remainder of the year and look towards 202. The hires we have made in our DFW markets, in addition to our southeast team reaching profitability, gives me great confidence in our ability to drive long term value in the most dynamic markets in the country. Now I'll turn it over to Jim. Jim Crotwell Thanks, Lance. As Drake mentioned previously, in early September, we became aware of allegations of fraud related to Tricolor. As you are aware, Tricolor filed chapter seven bankruptcy last month. As a quarter end, our credit relationship with Tricolor totaled $30.1M, including $1.5M in unfunded letters of credit. We are working with a successor servicer to begin the process of not only servicing the notes, but also working closely with the bankruptcy trustee to identify duplicative and any potential fraudulent notes. Given fraud allegations and the inability to clearly establish the level of unduplicated notes supporting our loans to Tricolor, We elected to charge off the entirety of the outstanding Tricolor debt, totaling $28.4M, and to fully reserve the $1.5M in unfunded letters of credit. While we do anticipate there will be some level of recovery from the notes pledged, we are unable to determine the magnitude of the suspected fraud with 100% certainty at this time. We will aggressively pursue all available remedies to protect the bank's interest and maximize recoveries in this matter. As such, net charge-offs for Q3 came in at $31.4M, with $3M in net charge-offs outside of Tricolor. On an annualized basis, excluding Tricolor, net charge-offs came in at 0.16% for the quarter. Loans past-due 30 to 89 days and still accruing reduced from 0.16% last quarter to 0.10% as of 09/30. Classified loans increased $10.7M, and as a percentage of total loans increased to 1.84% at quarter end compared to 1.66% as of 06/30, While non-performing assets increased $1.6M to 1.18% at quarter end, compared to 1.14%, as of the prior quarter. For the quarter, our allowance for credit losses increased from 1.29% to 1.35% net of mortgage warehouse. We did not experience any significant changes in our CECL model assumptions for the quarter, and the increase was primarily driven by increases in the individually evaluated portion of the reserve associated with our non-accruals. The level of our reserve at 1.35% net of mortgage warehouse compares to a level of 1.31% at year-end '23. Lastly, as to total ADC and CRE, we continue to have ample capacity to meet the needs of our clients and grow this segment of our portfolio, reflecting funding to total risk-based capital of 47% for ADC and 235% for CRE. I'll now turn it over to Wally. Wally Wallace Thanks, Jim, and good morning, everyone. Turning to the financial highlights. In Q3 we reported diluted earnings per share of 27¢. As you can see on slide 26, the combined financial impact of notable items during the quarter equated to a net expense of $23.3M, equivalent to 59¢ in EPS pressure. On a pre-tax, pre-provision basis, we reported $47.8M. Excluding $7.9M in net benefits from notable items in Q3 and $15.6M in net pressures in Q2, pre-tax, pre-provisioned earnings increased to $39.9M from $37.1M. On the balance sheet side, loans decreased 1.9% sequentially and decreased 0.6% when excluding mortgage warehouse. Total deposits increased 2.6% during the quarter, and 2.9% excluding broker. Importantly, non-interest-bearing deposits grew 8.6% sequentially, improving to 24% of total deposits. Both total and non-interest-bearing deposits also increased on an average basis, up 0.9% and 1.1%, respectively. As Lance mentioned, we are excited about the momentum we are seeing from our relationship managers across our markets, and we remain optimistic that loan production is accelerating, though pay downs have remained a near-term headwind to reported loan balances. While we currently are anticipating that loan growth will return in Q4, the continued declines in Q3 lead us to reduce our loan growth guidance from up low-single digits to essentially flat for the year. Given the positive momentum we have seen on the deposit side of the balance sheet, and the typically strong seasonal inflows in Q4, we are maintaining our deposit growth guidance of low-single digits for the year. Turning to the income statement, net interest margin expanded four basis points during the quarter to 3.65%, in line with our expectations. Driving most of this expansion was increased interest income from our securities portfolio, in large part due to the portfolio optimization trade executed during Q2. Moving forward, as you can see in our outlook on slide 4, and due primarily to the expectation of an additional Fed rate cut, we tightened our margin guidance range to 3.65% in Q4 '25, and 3.60% for the full year, plus or minus three basis points. Our modeling now considers 25 basis point rate cuts in each of October and December, as opposed to only December in our prior guide. Shifting to non-interest income, we reported $26.1M in Q3. Excluding $9M in net benefits from notable items in Q3, and $14.6M in net pressures in Q2, non-interest income increased to $17.1M from $16M in Q2, due in large part to the addition of $1.2M of equity method investment income from increasing our ownership in Argent Financial to over 20%. Our non-interest expense was basically flat at $62M in Q3. Excluding $1M of notable items in both Q3 and Q2, non-interest expense increased slightly to $61.1M from $61.0M in Q2, in line with our expectations. We are maintaining our guidance for Q4 and lowering our guidance slightly for the full year to down low-single digits from flat to down slightly. Lastly, turning to capital, we note that Q3 tangible book value grew sequentially to $33.95¢ the 12th consecutive quarter of growth and the TCE ratio ended the quarter at 10.9%, flat from Q2. As shown on slide 25, all of our regulatory capital levels remain above levels considered well-capitalized. As such, we remain confident that we have the capital flexibility to take advantage of any capital deployment opportunities to drive value for our shareholders. In fact, during the quarter, we repurchased 265,248 shares at an average price of $35.85¢. Furthermore, we anticipate the full redemption of the remaining $74M of subordinated debt on our balance sheet on 11/01, which will allow us to save $3M in net annual increased interest expense. With that, I will now turn it back to Drake. Drake Mills Thanks, Wally. As you have heard throughout this call, we have a great deal of momentum heading into the fourth quarter of next year. I reference in my opening remarks about the opportunities, particularly in our Texas markets, associated with disruption from recent M&A. This year alone, there have been 15 bank acquisitions in Texas, with selling banks totaling $37B in deposits. I firmly believe that we have the infrastructure and bankers to win new business and capitalize on this opportunity. Thank you for being on the call today, and thanks to our employees who remain committed to our strategic vision of optimizing Origin. We'll open up for questions. Evercall Moderator Thank you again, team. Ladies and gentlemen, at this time, we will conduct the question-and-answer session. If you'd like to ask a question, please press * 1 on your telephone keypad to enter the queue, or if you've joined via web, please press the raise hand icon on the right side of your Deal Roadshow screen. Again, that's * 1 on your telephone keypad to enter the queue, or the raise hand icon on the right side of your Deal Roadshow screen. Our first question comes from Matt with Stephens. Matt, your line is open. You may proceed. Matt Olney (Stephens Inc) Thanks. Good morning, everybody. Drake Mills Good morning, Matt. Matt Olney (Stephens Inc) I want to dig a little bit more on credit. Can you just talk about your NDFI exposure, about what this does include, and maybe what it does not include, and then, secondly, any more, as you scrub the portfolio, anything you want to disclose as far as exposure to other auto lending or subprime credits that would that would be of interest? Thank you. Jim Crotwell Matt, good morning. It's Jim. Matt Olney (Stephens Inc) Good morning. Jim Crotwell I'll start with a little bit of a recap, color on subprime, and then kind of move through some of the questions you asked. Our subprime portfolio at the end of the quarter was about $92M, that represented about 1.2% of total loans. The breakdown on that would be about 68% would be residential, about 15% RV, and about 15% auto. And then kind of moving to your question about subprime auto, reflect, if you kind of did the math on that, it's only two-tenths of 1% of our entire portfolio, and it consists of two relationships, both of which are performing, you know. And on both of those, as a sole lender in both of those relationships, some of the issues that we experienced in Tricolor, the double-pledging of collateral is really not an issue in the situation of these two relationships. Moving to the total NDFI portfolio, which is excluding mortgage warehouses, our NDFI exposure is approximately 5% of total loans; 61% of that is real estate related, with 15% related to capital call lines of credit, and the remaining 25% is spread across about six different categories. We've done a deep dive into this entire segment of the portfolio, and these companies have experienced management teams, the underlying loans have good income and cash flow, and our long term relationships with the bank, and we have no past-dues and no-performing loans in the entirety of our NDFI segment. Matt Olney (Stephens Inc) Okay, perfect. Thanks for the disclosures there. And then, I guess, Drake, I heard you mention the Tricolor and the fraud allegations. Can you just walk us through any insurance that could offset some of these charge-offs, and what does that look like, compare the charge-offs that we just saw and what are some thoughts on timelines around that insurance? Drake Mills You know, Matt, as I said, we are aggressively pursuing recovery on these loans. We believe in time that we will see some degree of recovery, but there are too, right now, there's too many variables at present for us to sit here and quantify how much that will be and when that will occur. That's why we took charge the way we did. It's at this point, we feel very good that we have these avenues of recovery, and, as I've told investors and other relationships I have, I am going to be working diligently to ensure that we have recovery. But it's unclear. That's why we took the charge the way we did. We feel confident that we will have some recovery. It's just, you know, in this Chapter 7 and going through bankruptcy and understanding the timing of this is extremely difficult to quantify anything. Matt Olney (Stephens) Okay, appreciate that. And then, if I could just shift gears over to the long growth commentary. I think the updated guidance now calls for flat balances in 2025 year over year. If we go back to January earlier this year, I think the guidance was mid to high single digits, and that has kind of walked down each successive quarter since then. And Origin is certainly not alone in seeing some of the slower loan growth trends this year, but it does feel more acute at Origin than maybe some of your peers. So can we just take a step back and remind us about your loan growth views throughout the year and how that evolves? And then I would love to hear any kind of preliminary thoughts you may have on loan growth in 2026. Lance Hall Yeah. Hey, good morning. Matt. It's Lance, be glad to go through it. Actually, really bullish and optimistic about where loan growth is going in Q4 and next year, but we'll kind of step back and understand why I used the word earlier that I feel like our extraordinary origination and production has really been masked by paydowns and payoffs. So if you think about that, we have actually been averaging the last four quarters $685M a quarter in paydowns and payoffs, which are extraordinarily high historically for us. Combination of that is slowing things down purposefully to stay under $10B has led to a little less than $400M in reduction of our commercial construction and development portfolio. So it takes some time to rebuild that back up. So that is- you know, a big part of our origins for this year is kind of getting back active and aggressive in that space, and that's one of the reasons we're very bullish on the fundings that will come from that next year. But just kind of give you a little color, that $685M per quarter of the last four quarters is, you know, compared to a little over $500M, which would be sort of a typical quarter for us. And so, you know, you know, part of that is tariffs. Part of that is, you know, us pushing out credits that Jim has talked about the last few quarters. But again, I think that is sort of covered up. What has been pretty extraordinary on the origination side, our originations for the first nine months of this year, up almost 20% compared to the nine months of the year previously. Strong pipeline for Q4. I think we're expecting about 2% growth X warehouse for Q4. So even if you annualize that, you know, kind of at 8% on an annualized basis. You know, I think our guidance for 2026 would continue to be mid to high single digits. But we're seeing really positive momentum kind of throughout each of our markets. Texas is starting to come on strong again. Louisiana has been really strong. This year, we've had about five and a half percent loan in deposit growth in our Louisiana market. Really like seeing what we're seeing out of Nate in the southeast team, good year out of Mississippi. So we're well positioned right now. And then I'm sure later, we'll talk about optimization and kind of say how that's translated into NIM expansion and ROA expansion, and so the engine is running really well now. It's just having to kind of get past this unprecedented level of paydowns and payoffs. Matt Olney (Stephens) Okay, appreciate that, Lance. Thanks for the commentary. I'll step back. Drake Mills Thank you, Matt. Evercall Moderator Thank you again, Matt. Our next question comes from Woody with KBW. Woody, your line is open. You may proceed. Woody Lay (Keefe Bruyette & Woods (KBW) Hey, good morning, guys. Drake Mills Good morning, Woody. Woody Lay (Keefe Bruyette & Woods (KBW)) Wanted to start, I think in the opening comments you mentioned, sort of, in the wake of this event, you'll be evaluating sort of the processes and systems in place to avoid incidents like this in the future. Do you expect there to be any impact to the expense run rate if there's additional investments that need to be made? Drake Mills

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