Origin Bancorp, Inc. (OBK) Earnings Call Transcript

Ladies and gentlemen, good morning, and welcome to the Origin Bancorp, Inc. Second Quarter Earnings Conference Call. My name is Tom, and I'll be your Evercall coordinator. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Chris Reigelman, Director 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 we will refer to during today's 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 of you joining by phone, please note the slide presentation is available on our website at ir.origin.bank. Please also note that our safe harbor statements are available on Page 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to our 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; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; our Chief Accounting Officer, Steve Brolly; 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.

Thanks, Chris, and thanks for being with us this morning. This quarter marks another important step in the work we started about 18 months ago with Optimize Origin. We have remained disciplined in executing a strategy centered on delivering elite financial performance while strengthening the culture that has always differentiated Origin. Today, we are seeing the benefits of that work across our company. We reported strong net income, ROA and ROE results in the second quarter. We achieved these results while maintaining disciplined growth, strong credit performance and continued investment in our people and our franchise. We believe the best long-term results come from balancing strong profitability with disciplined execution. What encourages me most is the consistency of our performance. Optimize Origin has become the way we operate. It influences how we allocate capital, how we invest in technology, how we recruit talent and how we serve clients and ultimately how we create value for our shareholders. The opportunities we discussed over the last several quarters continues to grow. The disruption we're seeing across our markets continues to create opportunities. Talented bankers and quality clients are looking for stability, a strong culture and a long-term partner. Our teams continue to capitalize on this disruption. We are well positioned to grow relationships without compromising credit standards and client selection process that have helped define Origin's success. As we move through the remainder of 2026, our objectives remain clear. We will continue to execute on Optimize Origin, invest strategically across our footprint, attract exceptional talent and appropriately deploy excess capital. These priorities position us well to achieve our near-term financial targets while continuing our pursuit of becoming a top quartile performer. Now I'll turn it over to Lance and team.

Thanks, Drake, and good morning. Over the past 18 months, Optimize Origin has transformed the way we operate. We are becoming a more disciplined, more intelligent and more scalable organization. Optimize represents the intersection of focused execution, strategic investment and the ability to capitalize on market disruption that positions Origin for long-term value creation. The results we report in this quarter highlight the generational market disruption opportunity in our footprint on both the banker and client acquisition fronts. Since April 1, we added 12 experienced bankers as part of our targeted and disciplined lift-out strategy. That follows the 15 bankers we added during the first quarter. In the second quarter, we expanded into Birmingham, Alabama with a well-known team of local experienced bankers. We also added production talent in North Texas, Houston, East Texas and Mississippi. These additions reinforce our belief that Origin is increasingly becoming an institution of choice for talented bankers and quality clients who believe that trust is earned, not acquired. Great Bankers attract great clients, and we're seeing that play out across our markets. I'm equally encouraged by the balance and discipline of our growth. Year-to-date, C&I and owner-occupied commercial real estate grew $196 million, other commercial real estate categories grew $167 million, and mortgage warehouse grew $61 million. This healthy growth is based on full relationships with disciplined pricing and attractive long-term results. Our strategic investments in growth markets continue to validate our vision. Through the first half of the year, our Texas and Southeast markets generated $323 million of loan growth including roughly $250 million from Texas alone on approximately $860 million of new loan production. The market disruption opportunity is real. We are taking advantage of this opportunity during this period with new bankers, new clients, new production and strong pipelines across the company. Our objective clearly is not just to grow asset size. Through data and models, our focus is on relationship profitability, pricing, core deposit generation and long-term returns. That discipline on both the asset and funding side of the balance sheet is becoming an important differentiator for Origin. On the deposit side, I'm very encouraged how we're executing. Noninterest-bearing deposits increased nearly $200 million during the quarter and are now 26% of total deposits. That is a meaningful outcome, but more importantly, it's evidence that our bankers are winning primary banking relationships. This is supported as I look more deeply into our deposit account opening data. Account openings accelerated meaningfully during the first half of the year, up more than 36% year-over-year. The pace continued to build throughout the second quarter. June was a historically strong month for deposit account openings with new account openings up 82% year-over-year. To me, this growth is one of the clearest indicators that our relationship strategy is gaining traction. Deposit account growth is not just a funding metric, it's a client acquisition metric. It tells us that the businesses and families across our markets are choosing Origin as their primary banking partner. While we continue investing in talented bankers, we're also making meaningful investments in technology, artificial intelligence and data to enhance our operating model. These investments are designed to give our bankers better information, faster insights and simpler processes so they can spend time doing what differentiates Origin: building deep relationships with clients. We believe these investments will improve productivity, enhance decision-making and allow us to scale the franchise more efficiently. Finally, I want to spend a moment on culture because I believe it is directly connected to the financial results we are producing. As highlighted on Slide 7 of our presentation, our most recent Glint survey produced the highest scores in our company's history across culture, engagement, employee satisfaction and willingness to recommend. These results are among the top 10% globally across all industries and reflect years of intentional investment in our people, our leadership and our values. As our industry continues to evolve, I believe that Origin's culture remains one of our most meaningful competitive advantages. I am so optimistic about the momentum we are building and the opportunities ahead for Origin. With that, I'll turn it over to Jim.

Thanks, Lance. We experienced sound and improving credit metrics during the second quarter of 2026. Total past due 30 to 89 days in accruing decreased to 0.06%, reflecting the lowest level over the past 5 quarters. Net charge-offs for the quarter were only $454,000, benefiting from recoveries totaling $2 million. On a percentage basis, annualized net charge-offs for the quarter were 0.02% and 0.08% year-to-date. Nonperforming assets decreased $9 million to 0.98% of loans representing the lowest level over the past 5 quarters. Classified assets also decreased to 1.79% from 1.97% as of the prior quarter, a decline of $10.2 million, driven primarily by the downgrade of 4 relationships more than offset by balance reduction in 7 relationships. For the quarter, our allowance for credit losses declined $827,000 to $98.2 million. On a percentage basis, our allowance reduced from 1.34% to 1.30% of total loans net of mortgage warehouse. As in recent quarters, we did not experience any significant changes in our CECL model assumptions with the primary drivers of the reserve for Q2 being the $5.5 million required in reserves related to new production being offset by the $4.5 million reserve release related to credit migration, including payoffs as well as a $1.6 million release driven by the reduction in historical loss factors within the CECL model. As to total ADC and CRE and as we have shared on previous calls, 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 51% for ADC and 237% for CRE. We continue to be pleased with the sound credit performance of our portfolio. I'll now turn it over to Wally.

Thanks, Jim, and good morning, everyone. Turning to our financial highlights. In Q2, we reported diluted earnings per share of $1.09 representing our strongest quarterly earnings performance since Q4 of 2021. Net income totaled $33.8 million, resulting in a return on average assets of 1.35% well above our 1.15% near-term run rate objective and another meaningful step toward our long-term goal of becoming a top quartile performer. On a pretax pre-provision basis, ROA was 1.73%. As you can see on Slide 26, notable items were negligible during the quarter, resulting in no impact to EPS. On the balance sheet side, loans grew 2.7% sequentially and 1.9% when excluding mortgage warehouse. Total deposits declined 0.6% during the quarter, consistent with seasonal trends. Importantly, noninterest-bearing deposits grew 9.6% sequentially and 5.2% on an average basis, ending the quarter at 26% of total deposits or 25% on an average basis. Moving forward, we continue to target loan and deposit growth in the mid- to high single digits for the year, though we are still tracking towards the higher end of the range. Turning to the income statement. Net interest margin expanded 21 basis points during the quarter to 3.92%, substantially exceeding our expectations entering the quarter. This expansion drove a 5.7% sequential increase in net interest income to $92.2 million despite a 1% decline in average earning assets. Margin expansion was driven by a combination of improved loan yields, slightly lower cost of deposits and runoff of excess liquidity due to normal seasonality in our deposit portfolio during the quarter. Moving forward, we have removed any Fed rate actions from our forecast for the remainder of the year, and we expect margin will remain relatively flat. Combined with our balance sheet growth expectations, we now anticipate net interest income growth in the high single digits for both the full year and Q4 over Q4. Shifting to noninterest income, we reported $15.4 million in Q2. Excluding notable items, noninterest income decreased from $16.4 million in Q1 primarily due to normal seasonality in our insurance business. We continue to track toward the lower end of our prior noninterest income outlook, resulting in an adjusted outlook for full year noninterest income growth in the low to mid-single digits, with Q4 over Q4 growth in the low single digits when excluding notable items. We reported noninterest expense of $64.4 million in Q2 excluding $0.1 million in net expense from notable items in Q2 and $1.0 million in Q1, noninterest expense increased to $64.3 million from $62.8 million in Q1 consistent with our expectations. Our expense growth outlook remains mid-single-digit growth for both the full year and on a Q4-over-Q4 basis after excluding notable items. Notably, we are maintaining our run rate ROA expectation of at least 1.15% in Q4 and a pretax pre-provision run rate ROA in excess of 1.72%, though we are tracking ahead of these targets. Lastly, turning to capital. We note that Q2 tangible book value grew sequentially to $36.37, the 15th consecutive quarter of growth and the TCE ratio ended the quarter at 11.1%. During Q2, we repurchased 217,034 shares at an average price of $46.60 while maintaining all regulatory capital ratios above well-capitalized levels. Notably, the Board increased our share repurchase authorization by $100 million, leaving $121.6 million in remaining authorization. During the quarter, we also continued returning capital through our recently increased quarterly dividend. We believe our balance sheet, earnings profile and capital position provide us with significant flexibility as we continue investing in growth while also returning capital to shareholders as appropriate. With that, I'll turn it back to Drake.

Thanks, Wally. Over the past several quarters, we've talked extensively about Optimize Origin and the transformation across our company. Today, we're seeing what that transformation looks like when it's more fully reflected in our financial performance. This quarter wasn't simply about reporting strong earnings, it was about demonstrating that we can consistently produce higher levels of profitability while remaining disciplined in how we grow, how we manage risk and how we invest in our people and our communities. I'm extremely confident in Origin's future. Our markets present outstanding long-term opportunities. We are attracting talented bankers and high-quality clients. Our investment in technology and innovations are improving on how we serve our customers and how we operate as an organization. And perhaps most importantly, we are executing at a high level of discipline. When I step back and look at Origin today compared to 18 months ago, I see a fundamentally different company. Through Optimize Origin, we become more disciplined in our execution, more intentional in our investments, more data driven in our decisions and more focused on long-term value. The results we're discussing today aren't the destination. It's evidence that the transformation is working. Thanks for being on the call. We'll open up for questions.

[Operator Instructions] Our first question comes from Matt with Stephens.

Start on the loan growth front. Another quarter of solid loan growth. I think based on Lance's comments, a lot of that growth was in Texas and also in the Southeast markets. Just any more color you can share about the loan growth, the loan pipeline from here? And specifically, what you're seeing around loan pricing. I think Wally mentioned in the second quarter that the loan yields improved. Anything to call out there?

Thanks. Yes, we're incredibly proud and optimistic at the same time of what we're seeing on the loan side. Really a combination of the fact that we really just have dynamic markets that we're working in and in Houston, Dallas, our investments we made. I actually saw a chart the other day, Matt, that KBW put out, talking about dislocation markets across the U.S. and the #2 market was Houston, the #4 market was Dallas, the #6 market was Birmingham. So I think it aligns with where our investments are, where we're focused on lift-outs, where we're investing in teams, and I think that makes a ton of sense. We've actually had loan growth in all of our markets, but the primary driver has been in Texas and the Southeast, as you would expect. We're very, very granular in what we're seeing across those footprints. I mean our average loan size is still about $590,000 going through with Preston and Jim, kind of the industries of the markets that we're seeing those come across. More than 50% of our loan growth has been C&I for the year. The CRE is exactly what you would expect for us and it's been reflected in our credit quality. So just incredibly positive. On the pricing side, our new loans for the month -- the most recent months were coming in at about 6.4%. So the discipline has been strong. Really proud of our bankers and what they're accomplishing. Seeing just full relationships, I mean, treasury management revenue continues to grow about 15% annualized. So just an incredibly positive story there. Clearly, we are seeing pricing pressure from our competitors on sort of the loan and the deposit side. And we're also starting to see term pressure. I would say, looking at some larger relationships across the market, we're seeing a lot of our competitors sort of offer nonrecourse and more regularly than we've been seeing before, but that's not the way that we've modeled our business. I mean we're pretty conservative on our credit culture and our credit quality. So I think we'll continue to do that. That being said, the pipelines remain very strong because of the market, but also because of the lift-outs. We've done a good job, as we talked about now, I think it's 27 hires this year, being very strategic with those hires. At this point, only $12 million of our loan growth has come from bankers that have been hired in 2026. So I think the theme for us continues to be ROA ramp, but at the same time, investing in future revenue streams.

Okay. That's great, Lance. Appreciate the commentary on that. And then I guess, if I were to switch over to deposits. I'm curious about deposit pricing. Obviously, we didn't see any deposit growth in 2Q from the seasonality that Wally mentioned. But I think the guidance implies you do expect some good deposit growth in the back half of the year. So just any more color on what you're seeing on deposit growth in the back half of the year and where you expect it to come from? Just trying to get a better idea of if we should anticipate your average deposit cost moving higher from here?

Yes. The most recent kind of new deposit costs for us are about 2.7%, that didn't surprise us. As we've talked about a lot, as you know our story, the seasonality there with being here for over 100 years, we have deep relationships with community partners. So our public fund portfolio kind of moves down in the second quarter, we'll see it ramp back up in Q4 and Q1 of next year. Also with the balance of C&I that we have, tax dollars affect us in Q2, probably more than other banks. But overall, deposits is a big positive story for us. I was looking at year-over-year, we've had about 7.5% growth in deposits, so a little over $600 million, but the exciting part was that 23% growth in NIBs. I think that kind of goes back to using data the way we're using it to focus our bankers on C&I growth and C&I clients. The interesting story is just how real dislocation is in our markets. I was looking at new deposit account openings and that story has been extraordinary. To kind of give you some numbers. I mean we opened over 1,800 new deposit accounts in June. Go back 12 months ago, that was right under 1,000. So I mean, literally almost doubling the new deposit accounts we're seeing. And I would say while that is a combination of lift-out, it's also extreme effect of what we're seeing as far as dislocation, new client acquisition, client dissatisfaction in the market from some of our competitors that is ramping every month, and I think that's going to continue to be that. So while our loan pipelines are good, I'm confident in our ability to fund that.

Our next question comes from Woody with KBW.

I wanted to follow up on the noninterest-bearing. And have you noticed -- as you noted, the growth you saw in the quarter was really impressive. And I was just wondering how sticky do you think that, that growth ultimately is? Because it does feel like if it is sticky, then that could be a positive to total cost of deposits next quarter.

Yes. Woody, I think the -- there's -- between lift-outs and between market disruption, but our focus on C&I and the impact that these noninterest-bearing accounts and relationships are having, I think, are extremely sticky. I think that's why I feel the focus we have on growing that side of the business and how our lift-out strategy is focused on C&I lenders is really starting to pay dividends. So I think it's one of the stickiest dollars we have other than through the utilization of those into the company's investments and those type of activities. But we're really pleased with that growth on the NIB side.

Got it. And then maybe if I could shift to fee income and just I wanted some color on the Argent fees this quarter. It looks like it took a step down and just was curious on the outlook there.

Yes. Woody, so we book the Argent -- our portion of Argent income on an estimate basis and from time to time, we just have to adjust the estimate for -- based on actuals. And I would just say that since Argent's acquisition of the Huntington Trust business, their earnings have been a little bit more volatile. But net-net, our outlook for the year remains unchanged, right, in that kind of $5 million to $6 million range, which we've spoken about consistently.

Okay. Got it. And then maybe just last for me, just curious, given all the growth momentum you have, it feels like a $10 billion cross is likely this year. Is that still the plan? And can you just remind us on the impact of Durbin and some of the levers you have to help offset that?

Yes. We've completely crossed -- I mean we're over the 10b mark, we're there. Great relationship with everyone working towards making sure that we're prepared and behind -- have most of that behind us. Durbin Amendment impacts us midyear next year, and that's going to be in the $4 million, $4.5 million range, but we're working feverishly to have other opportunities replace that. Originally, the wonderful relationship we have with our Argent partners and what they were able to -- what they -- it's amazing what they're -- how they're growing the company and how impactful they are. That was always a plan for us to utilize that relationship and the equity method of accounting to be able to offset the Durbin impact, but we're there. We're over 10b. We have great growth. We have most of the cost behind us, obviously. We will continue to improve our audit process, we still have some investment there and certainly IT audit in some areas like that. But we're in a good place today and have the majority of the 10b cost behind us.

Our next question comes from Michael with Raymond James & Associates.

Just wanted to go back to the loan side. Obviously, I understand that not much of the growth has come from the hires that you've put on the books this year? I also saw that you just opened the Birmingham market, which is good to see. You're already talking towards the upper end. It does assume some deceleration in the back half of the year. I guess what's driving that? And I guess the real question is, is there potential upside to that outlook just based on all the commentary pipelines, hiring, kind of, et cetera?

Yes. Thanks. Good question. Yes. What is hard for us to control, obviously, is competition when it comes to sort of terms and rates. And so that kind of makes us stay to that sort of mid- to high single digit. But you're not wrong in the sense that everything we're seeing from a pipeline perspective, especially once we get past kind of non-solicitation time frames on these new hires, I agree with you. I couldn't be more excited for Will and the team that we hired in Birmingham and the business that they're going to build there. We've had, as I talked about 12 new hires across our footprint, excited about what we're doing in East Texas. So I am also very optimistic and think that there's upside to what we're doing, and it's going to just be really subject to kind of the battle around terms and rates on some of the bigger C&I stuff, but I feel confident in our ability there.