Origin Bancorp, Inc. Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to the Origin Bancorp, Inc's Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Chris Reigelman, Head of Investor Relations. Sir, please go ahead.

Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website along with the slide presentation that we will refer to during this presentation. Please refer to Slide 2 of our slide presentation, which includes our Safe Harbor Statement 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 www.origin.bank. Please also note, our Safe Harbor Statements are available on page 6 of our earnings press release that we filed with the SEC yesterday. All comments made during today's call are subject to the Safe Harbor Statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; Chief Financial Officer, Steve Brolly; President CEO of Origin Bank, Lance Hall; our Chief Risk Officer, Jim Crotwell; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we will be happy to address any questions you may have. Now, I'll turn the call over to you Drake.

Thank you, Chris, and good morning. Looking back on the past quarter and the full year, I am pleased with our results and what we have accomplished as a company. Moving into 2022, we are deliberate and purposeful in how we execute through our planning process that is focused on creating sustainable long-term value. Our success places us in a position of strength as we take advantage of positive operating leverage. You can see that we had an impressive fourth quarter and a full year 2021. We ended December with $7.9 billion in total assets, $5.2 billion in loans and $6.6 billion in deposits. Lance will provide more detail regarding our loan deposit growth, but I want to steal a little thunder from him and mention that we showed 5.7% growth in loans excluding PPP and mortgage warehouse quarter-over-quarter, which is 23% annualized. As we begin 2021, we felt confident in our ability to deliver high single-digit loan growth, and that's exactly what our bankers delivered. Again, backing out PPP and mortgage warehouse, we saw an increase of $404 million or 9.9% year-over-year. I'll save the deposit growth for Lance, but I'm pleased with how our bankers continue to deliver strong growth, the core organic relationships. Looking at our income statement, I'm proud of our results for the quarter and the year. We finished the quarter with record net income of $28.3 million or $1.20 diluted earnings per share. Our net interest margin was 3.06% on a tax equivalent basis, and our efficiency ratio was 56.92%. For the full year, we had record net income of $108.5 million or $4.60 diluted earnings per share. Our pre-tax pre-provision earnings was $122 million for 2021, up 17% year-over-year. Our efficiency ratio improved in 2021 even with slight increases in non-interest expense, which Steve will go through later in the presentation. Our primary strategy that continues to be front and center for our management team is the efficiency of this company. As we are focused on expense management, we will always be mindful of the investments in people and infrastructure that produce stronger revenue streams. This has been evident in our investment in the Texas market, which you can see on Slide 9. Our Texas bankers grew loans $373 million and grew deposits $558 million in 2021. When you look at the last five years, we've grown loans and deposits at a compound annual growth rate of over 21% and 28%, respectively. We've had incredible success in DFW and Houston with the way our teams produce. This applies to our legacy bankers as well as our lift-out teams. We will continue to leverage our infrastructure and aggressively pursue the most talented bankers in our market. Now, I'll turn it over to Lance.

Thanks, Drake. We had another strong quarter of growth and I'm proud of the meaningful results our bankers have produced. Origin has always had the philosophy that our success comes directly from having the right people. We certainly have high-quality bankers who have attracted high-quality relationships throughout all of our markets. We've been purposeful and strategic with client selection. This has been and will continue to pay off for us as we continue to focus on the client experience and being trusted advisors. On Slide 10, you can see dynamic organic loan growth of over 50% and a compound annual growth rate of 10.8%, and our loan portfolio, excluding PPP and mortgage warehouse, over the last five years. As you dissect the core of our loan business excluding PPP and look specifically at C&I, owner occupied CRE and owner occupied C&D, we show five year growth of 37% with a compound annual growth rate of 8.2%. Drake appropriately bragged on our bankers production in the fourth quarter as loans held for investment excluding PPP and warehouse grew $241.5 million or 5.7% compared to the linked quarter, which is 23% on an annualized basis. I'm also pleased that we delivered 9.9% loan growth for the year. In prior quarters, we've spoken in detail about how we were able to use the PPP program to deliver for our clients in a time of need during the initial impact of the pandemic. At the end of 2021, we have $105.8 million of PPP loans outstanding with $3 million of net deferred fees remaining. We expect to recognize the balance of those fees in the first half of 2022. On Slide 12, you can see an overview of our deposit trends. We have and will continue to place a high level of focus on growing non-interest bearing deposits. In the fourth quarter, average non-interest bearing deposits increased $145 million compared to the linked quarter, and now represent over 33% of total average deposits. Year-over-year, we saw an increase of average non-interest bearing deposits of $425 million or 25.2%. Core deposits remain at the center of how we truly value a loyal relationship. Regardless of the environment, Origin clearly understands the significance of the core deposit relationship and will continue to emphasize that philosophy with our bankers. In 2021, our bankers responded by growing average core deposits by $1.37 billion or 30.3%. This growth took place while our cost of total deposits decreased 12 basis points year-over-year. At Origin, we place a high level of focus on leveraging technology to drive value for our company. During the past year, along with other initiatives, we launched a new website, increased our partnerships with FinTechs, and integrated robotics into many of our processes. This focus on technology is a major component of our vision statement and what we believe is critical to enhancing the client experience and creating long-term sustainability. Now, I'll turn it over to Jim to go through our credit quality metrics.

Thanks, Lance. As you can see on Slide 14, our overall credit quality continues to improve as evidenced by our continued reduction in classified loans. Classified loans held for investment as a percentage of total loans held for investment net of PPP loans reduced to 1.35% as of year-end, reflecting a 35% reduction from the level a year ago. Past due loans held for investment to total loans held for investment net of PPP loans ended the quarter at 0.50%, which is consistent with the levels reported throughout the year. Non-performing loans held for investment to loans held for investments net of PPP also remained stable at 0.49%. Lastly, annualized net charge-offs for the quarter to average loans held for investment came in at 0.22%, down 2 basis points from Q3, and have also been stable throughout 2021. Based on these metrics, as well as our ongoing review of our portfolio, we continue to be extremely pleased with the stability and resiliency of our portfolio, which continues to be driven by our focus on relationship banking. We decreased our allowance for credit losses to $64.6 million, a $5.4 million reduction from quarter-end Q3. As of year-end 2021, our reserve represented 1.23% of loans held for investment, and 1.43% of loans held for investment net of PPP and mortgage warehouse loans. The decrease in the reserve was driven by the improving credit quality as well as continued improving economic forecast. With that said, we continue to keep a close eye on the Omicron variant and its potential impact on economic conditions, as well as inflationary pressures, continued supply chain disruptions, and labor shortages and their potential impact. All in all, we are very pleased with the overall performance and stability of our portfolio. I'll now turn it over to Steve.

Thanks, Jim. I'll start on Slide 15. Our total yields on loans held for investment increased 6 basis points in Q4, which includes the impact of PPP loan forgiveness. Excluding the impact of PPP loans, our yield on loans held for investment decreased 4 basis points in the quarter. The top right graph shows the continued decrease in our cost of funds, as our total cost of deposits was 19 basis points for the quarter, representing a 39% decrease from the fourth quarter 2020. On the bottom right graph, you'll see our fixed and variable loan composition. As an asset sensitive bank with approximately 60% of our loans floating, increased interest rates will be beneficial for Origin. We expect to generate an approximate incremental $20 million or 9.1% in net interest income from a 100 basis point parallel shift in interest rates. At December 31, 2021, 51% of our Prime and one month LIBOR index loans have no interest rate below their floor interest rate. With an increase of 50 basis points, only 20% of our Prime and one month LIBOR index loans will have no interest rate below their floor interest rate. With a total of 100 basis point increase, that percentage decreases to 7.2%. Slide 16 shows our recent net interest income and NIM trends. The graph on the left shows our four quarter trends of income and NIM. Our net interest income increased $1.6 million representing a 3% quarter-over-quarter increase. Excluding PPP and mortgage warehouse, our net interest income increased from $42.9 million to $45 million or 5% quarter-over-quarter. We believe that our net interest income will continue to improve in 2022. The graph on the top right shows the change in net interest income, excluding PPP and mortgage warehouse loans of $2.2 million from the third to the fourth quarter. Every balance sheet component improved compared to the prior quarter, with interest from investment securities increasing $1.2 million and real estate and C&I loan income contributing $673,000. The bottom graph shows our NIM quarterly changes with lower yielding securities contributing to the largest negative impact due to the fourth quarter having a full quarter impact on the investment securities purchase that was made in the latter part of the third quarter. Slide 17 is our net revenue distribution. The top left shows our net revenue growth since our IPO and the 4Q '21 over 3Q '21 increase of $2.4 million. The bottom left graph details our non-interest income lines. Mortgage banking revenues increased 5% in the third quarter to the fourth quarter. Insurance commission and fee income, which is a seasonal revenue producer, increased 3.5% compared to the fourth quarter of 2020. We added a new table this quarter to give clarity to the components of other non-interest income, which is on the top right. During the fourth quarter, we completed the acquisition of the remaining 62% of the Lincoln insurance agency. The accounting rules require us to fair value our original 38% investment and that produced a $5.2 million fair value gain. Slide 18 shows our non-interest expense analysis; we reported total non-interest expense of $40.4 million, an increase of $1.2 million compared to the third quarter. The main driver of this increase was an additional $900,000 incentive accrual primarily due to the growth in loan production. We continue to focus on efficiencies, supporting our growth, and the bottom graph represents our quarterly operating leverage and efficiency ratio trend. Now, I'll turn it over to Drake.

Thanks, Steve. Our capital position has supported our strong organic growth, while allowing us to continue building valuable partnerships. I mentioned on our last call that we would close two end-market insurance acquisitions in the fourth quarter. Those partnerships were successfully finalized in December, having a slight impact on capital. We are in a strong position, and, as I have consistently stated, we will continue to take an opportunistic and disciplined approach in deploying our capital in ways that we believe will be beneficial to our shareholders and drive long-term value. 2021 was a great year for our company. We executed on our strategic plan and delivered on what we told the market we would do. We produced strong organic growth, took advantage of dislocation in the market, attracted highly-talented bankers, effectively managed our expense structure, maintained strong credit quality and significantly grew our Texas franchise. I am proud of the employees of Origin and what they accomplished in 2021. They remain committed to our culture, which is unique and separates us from others in our market, and continues to be a competitive advantage. This was reinforced this year by being recognized by American Banker Magazine as the Third Best Bank to Work For in America. The Origin vision is to combine the power of trusted advisors with innovative technology to build unwavering loyalty by connecting people to their dreams. Our vision is clearly in focus. We are strategic and intentional about following the vision to drive us to attract highly-talented bankers who want to be a part of an award-winning culture and continue to build a best-in-class growth story. Thank you for being on the call today, and we'll open it up for questions.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. Our first question today comes from Matt Olney from Stephens. Please go ahead with your question.

Thanks. Good morning, everybody.

Good morning, Matt.

I want to start with the loan growth, and it's great to see the robust loan growth when I take out PPP and mortgage warehouse. Any more colors on the driver of the loan growth in the fourth quarter? And if you could speak to utilization rates or paydowns or anything else that you think is more notable as far as the driver? And then as you look into 2022, what type of growth do you expect ex-PPP and mortgage warehouse?

Yeah. Hey, Matt. Good morning, this is Lance. We started last year, I was very confident that we were going to get high single-digit loan growth, so I was really pleased in the third quarter and fourth quarter to see that come to fruition. We felt very confident all year on our pipelines and the conversations with our Presidents, and we kind of walked into Q4 with about a $300 million pipeline at the time and that came out great. Texas continues to be the huge driver for us, almost 100% of the loan growth came in the Texas markets as those investments in Dallas and Fort Worth and Houston continue to pay off. On a going forward basis, we just feel like we are an organization that is built to grow from our geographic management model to the culture that we have built that allows us to lift-out teams. So if you look at Slides 9 and 10 of the slide deck, we're traditionally growing about 20% in Texas, which is equating to double-digit loan growth for the company, and we think that's going to continue next year.

So Lance, if I layer in that 20% plus growth in Texas along with the other markets, do we get back to the high single-digit level on a combined basis? Is that a fair way to look at it?

Yeah. Matt, I would say from a budget perspective, we're budgeting 10% loan growth. I mean, we think we can drive double-digit loan growth. It was also great to see in Q4 our line utilization get back to historic levels. We went from 42% to 48% in utilization, which equated about $113 million in C&I growth in that area. The fact that the vast majority of this was C&I, which is where we like to drive this business. It was overall just a really, really good quarter for us and we see that continuing into next year.

Okay. That's great, Lance. And then on the deposit side, also some really strong growth in the fourth quarter, would love to hear your thoughts on how sticky that deposit growth is? Just trying to pit shape anything seasonal could be in the fourth quarter numbers and then same thing, expectations for deposit growth as you roll into 2022.

We have continued to incent bankers on core deposit growth, specifically NIBs and you've seen we've got our NIB and that was a stated goal, though the last few years we've had to get over 30% NIB on our portfolio, and I think we've gotten up to 33% now. From a seasonal perspective, we do have public funds here in our core markets in North Louisiana through some of the tax dollars you see $100 million to $150 million ramp up there at the end of the quarter that will work itself back out through the year as those dollars get distributed. But then we also chart that year-over-year and we always continue to see slight growth in that portfolio book of business. So something that we are continuing to strive to do and we're now at this point down to 79% loan to deposit ratio and we feel like we've got a great opportunity to put that liquidity to work in our loan portfolio.

Okay. Thanks, Lance. And then just lastly on the fee side, there were few moving pieces in the fourth quarter. I think you called out the fair value gain, but I'm guessing as we look into the first quarter we should get some more benefit from insurance income from the closing of those two deals in December. Can you point us to a range or a landing spot for us to think about for first quarter as you integrate all these different items? Thanks.

And you're talking about total fees, you're not just talking about insurance.

Correct.

Go ahead, Steve.

I'm going to start with a subset for insurance just so you could see, because that's going to be little bit larger and everything else. Insurance is about $13 million this year, we expect that to be about $20 million in 2022. Other than that, we expect mortgage to increase about 6% and all the other fees to increase low single-digit numbers. Now swap fees, we really don't think, if rates increase swap fees probably won't increase. And then the last piece really limited partnership income, we normally budget that kind of flat, but thinking maybe a $1 million a year, but that is very volatile.

Got it. Okay. Thank you, guys.

Thank you, Matt.

And ladies and gentlemen, this is the conference operator. Are you able to hear me?

We can hear you loud and clear now. How are you?

I can hear you loud and clear. I apologize for that. We were having a technical issue. I do have control of the Q&A. So our next question today comes from Brad Milsaps from Piper Sandler. Sir, please go ahead.

Hey, good morning, guys.

Good morning, Brad.

Thanks for taking my questions. May be one to start with, the expenses you guys done, really a nice job last couple of years keeping a pretty tight lid of cost. Lot of discussion about expense inflation. You guys are a growth company, I know you've got expenses coming in from the consolidation of those insurance companies as well. So Steve, just curious if you give us a good kind of jumping-off point for expenses in 2022? And maybe kind of how that relates to your hiring plans as well?

To simplify, let's start with the fourth quarter figure of $40.3 million per quarter, which translates to a run rate of $161.2 million. I'm pleased that we anticipate about a 3.1% increase in expenses for the core bank. We've dedicated significant effort to this, considering challenges like wage inflation and various pressures. After finalizing the budget, our team identified opportunities for growth that focus primarily on production. The core bank will experience a 3.1% expense increase, and when including the insurance agency's increase, that's an additional 3.4%, roughly $1.35 million per quarter. Overall, even though the total may appear as a 6.76% increase, the core bank's rise is limited to 3.1% as we head into a productive year. Much of that 3.1% increase comes from non-producers added in the last two quarters, which will soon start to show results. We're maintaining operating expenses effectively, and I'm confident about our path forward.

Thanks, Drake. So if I understand, if I kind of annualize the fourth quarter, maybe add another 3% to that plus the insurance companies that should get me pretty close.

Yeah. And I'll help add a little bit. In my calculations, it’s probably around a $43 million run rate with everything included.

Got it. Very helpful. And Steve, I think you said last quarter that your interest rate sensitivity table assumed about a 60% deposit beta, but you thought you could do better. Do you still have that 60% assumption in that table? Or have you guys altered that at all?

Hey, Brad. We did alter that a little bit. That 60% is really after a 100 basis point increase. With all the liquidity in the system right now, the first 25 we really have zero, and we did it by 25 basis points increment. So under 100 basis points it is averaging about 20%, and that's on average, and over 100 basis points it’s to our normal 60%. So there's going to be a little bit of a lag in the first 100 basis points increase.

Okay. Thank you. That's very helpful. And then final question.

I'll add to that, really the way I'm modeling it, my model is a little different from their model is about 50% with zero beta. 50 basis points, I'm sorry.

Okay, okay. Great. And then, Drake, maybe final question just kind of a bigger picture one. I think it was, on this call about a year ago, you talked about your Mississippi and Louisiana regions kind of being double the profitability of Texas, and your goal over time was to get kind of that sub-1 ROA. Texas Bank up closer to where your other regions are, closer to 2. Just kind of curious, could you update us on the progress there you made in 2021? And kind of where you might be able to be a year from now in terms of bringing the profitability of Texas up in line with the rest of the organization?

I was reflecting on this earlier while getting ready for the call. Thirteen years ago, we entered Texas, starting in Dallas, followed by Fort Worth a year later, and then mid-2013 in Houston. We've been operating in Texas for thirteen years now and have a significant presence there, alongside our efforts in Louisiana and Mississippi. The return on assets is improving nicely, and we are very focused on achieving positive operating leverage. I apologize for digressing, but going back to the IPO, if I were to sell this institution, we could manage an additional $2 billion in assets on top of the infrastructure, where we already invested $4 billion, with minimal additional investment required. We're beginning to notice a strong increase in return on assets in the Dallas-Fort Worth and Houston markets. To share a bit more detail, in Houston, we anticipate being in the 150 to 170 range by the end of the year, and for Dallas, I expect them to be nearing 2% by year-end, if not reaching it.

Okay, great. Thank you very much.

And ladies and gentlemen, our next question comes from Brady Gailey from KBW. Please go ahead with your question.

Hey, thanks. Good morning, guys.

Good morning, Brady.

When I look at period end balances linked quarter, the bond book kind of was flat at $1.5 billion. I know average balances kind of caught up in the quarter. But how are you thinking about any potential bond book growth in '22 as the long end of the curve gets a little higher?

So, Brady, we have projected loan growth to be less than 10% with deposits at 10%. If the deposits come in just below 10%, we might grow investments by around 5%, but it really depends on the timing. We had some excess cash at the end of December, which, as Lance noted, are public funds and we expect that to decrease. With interest rates up slightly, at the end of the fourth quarter, we were seeing yields of about 140 to 150, and currently, it's around 175 to 180. We plan to increase our investments a bit. Our typical runoff is between $15 and $18 million each month, so we need to add at least that amount monthly, and possibly more based on cash flow and anticipated loan growth.

All right. And then looking at the situation, we need to at least add between $15 and $18 million each month, and we might consider adding more based on cash flow and our projections for loan growth.

Yeah. Brady, this is Drake, I want to add to that. I think we are in a very good position from a liquidity standpoint to be able to truly manage expense on the deposit side and look at our relationships and continue to grow core deposits at us what I think is a slower cliff as far as any rate increases. So as we look at the portfolio, we are going to be mindful that we might run down deposits slightly that are higher costs that we don't see as long-term relationships, while we have this luxury. We also have changed our model somewhat to run a lower loan to deposit ratio overall compared to what we have done in the past. So these are all factors I think that we are going to be able to deploy to maybe put some liquidity to work in the right way and make sure that we are very focused on margin as we do that.

Okay. All right. And then moving to the mortgage warehouse, that continued to normalize lower in the fourth quarter, now at about $580 million. How are you thinking about the warehouse into '22? Is that $580 million kind of a good washed out base to grow from? Or, do you think we continue to possibly see some shrinkage? I know 4Q is a seasonally weak quarter, but how do you think about it next year?

I want to remind everyone on the call and our investors that our strategy, which we established two years ago, is to grow the mortgage warehouse to 10% to 12% of outstandings. If you look at the average year-over-year balance growth, it was 31% between 2020 and 2021. We estimate that the number is close to $600 million, and we plan to operate within the 10% to 12% range, with slight increases expected. We are still onboarding clients and will continue this process, but we will manage growth within that targeted range. I am satisfied with our current position and pleased that we have executed our plan exactly as intended. Therefore, we may see a slight increase from the $600 million, but I would expect it to remain relatively flat.

Very clear. And then the 10% to 12%, Drake, that's as a percent of loans or assets?

Loans.

Okay. All right. And then finally, it's great to see the couple of insurance acquisitions. Are there any other fee income-based businesses that you think you would be interested in? Are you where you want to be with insurance or would you like to add the insurance side? It feels like with the growth you're putting on bank M&A could be less likely. So I'm just wondering if fee income-based M&A is still in the cards for you all?

Absolutely. There is some opportunity, I like this insurance business. We are creating some relationships as we speak that I think fill in our footprint. And I think that's an important aspect because as we look at Texas and some of the relationships that we're growing there, it is I think prime opportunity for us to continue lay our fee income. We're going to drive this thing to where it's a 70%-30% split between spread income and fee income, and I feel like that's going to create the valuation that we need.

All right. Great, Thanks, guys.

And our next question comes from Kevin Fitzsimmons from DA Davidson. Please go ahead with your question.

Hey, good morning, everyone.

Good morning, Kevin.

Drake, just to follow on Brady's last question. So, I was going to ask something similar in terms of that new with the organic growth you have sitting in front of you that why even look for traditional bank deals. But I believe in the past you've mentioned the prospect of getting into a new market in Texas is possibly being something you might be interested in. So I didn't want to jump so fast to rule that out or give you the chance to rule it out and how you feel about traditional bank M&A?

Well, first off, I wouldn't rule that out, but our organic growth is allowing us to be in a position of luxury, let's say. It allows us to stay disciplined and focused on creating partnerships that I think fill in gaps in our markets, but staying within the same footprint that we're in. This is all for me. After 38 years of building institution, culture and everything else, truly, hopefully we could find partnerships that allow us to continue to do what we're doing, bring in very good markets and production, and that's what we're looking for. So, I wouldn't rule that out, but it's going to be a disciplined approach, and it's going to be something that's truly going to benefit our shareholders if we pull the trigger on something.

Okay, great. Thank you. And then just one follow-on on the margin. I appreciate all the asset sensitivity position. But as we look at all the moving parts between PPP fees running off, and then positive tailwinds from mix shift and then rising rates, is it fair to say that maybe the margin might have bottomed in the first quarter, if that's going to be a heavier quarter for PPP fees running off, and then the mix shift and then the effective rates start to more than offset in second quarter and then over the balance of the year? Is that a way to think of the percentage margin trajectory?

I think that's fair. And I think the important point here is that, we feel that we've bottomed from a margin standpoint and there is upside. I love our asset sensitive position we're in. The fact that our own Board and with our new production people are bringing own relationships that aren't as price-sensitive, if you are out there just fresh territory. So I'm pretty bullish that we've bottomed and we will see somewhat of a flat environment without significant increases.

Thanks, Drake. I found it interesting when you mentioned deposits, especially since we don't often hear about it due to the industry's abundance of cash. Do you think there could come a time in the next few quarters when industry deposits might start to decline? It seems like we've been accustomed to significant increases in deposits and excess cash flow, but if that changes, the impact on net interest income could also shift. We could see a scenario where, although there's a decline in earning asset growth from liquid assets affecting the percentage margin, other banks without your level of loan growth might struggle with their average earning asset base. I'm interested in your perspective on this situation within the industry.

I have been here 38 years, and as I mentioned earlier, I believe strongly in the long-term value of building strong deposit relationships. This is a vital focus for us, and we incentivize it as well. Our goal is to create value through core deposits. The amount of liquidity we possess doesn't concern me because eventually, liquidity will change, and we will need to drive loan growth again. This process is ongoing, and I truly believe it is what generates long-term value for organizations like ours.

That's great to hear. Thanks, Drake.

And ladies and gentlemen, our next question comes from William Wallace from Raymond James. Please go ahead with your question.

Thanks. Good morning, guys.

Good morning, Wallace.

I would like to follow up on Kevin's questions. I believe we are expecting a 9% increase in net interest income in a parallel shift of 100 basis points. It seems that Steve indicated you are modeling loan growth to be accompanied by deposit growth. Does this imply that there is no assumption regarding liquidity deployment? It appears you still have some excess liquidity even with the funds that are maturing. If you have excess cash and choose to deploy it, I would assume that would increase the 9% net interest income expectation in the parallel shift scenario. Did I understand that correctly?

For the most part, we are going to take a stance on deposit growth. We don't expect deposit growth to keep pace with loan growth this year because we believe we can maximize margin and yield and concentrate solely on that. A few years ago, we had brokered deposits and various other strategies. Now we are focused, and I want to commend our Houston team and our DFW team for essentially funding themselves. This is a position we haven't experienced before in DFW. We can genuinely concentrate on developing a deposit franchise that holds significant value, as I mentioned earlier with Kevin. We no longer need to rely on broker deposits as we did in the past, allowing us to reduce them. You may see a 3% to 5% increase in deposits this year, in contrast to double-digit growth in loans.

Okay. All right. That's very helpful. So the 9% assumes you're having less deposit growth and deploying all liquidity into the loan portfolio.

Yes, absolutely.

Matt, you mentioned a pretty significant increase in line utilization in the fourth quarter from 42% to 48%. To hit your 10% budgeted target in 2022, do you need continued increase in line utilization? And if so, where do you need to go and where were we pre-COVID? No, I don't think that we do. So we're at 48%. Our historic number is like 49%. We were 49% pre-COVID. So this quarter we got back to historic levels. If we got continued lift that would be a benefit, but we feel like we could do 10% based on producers and production levels. I mean, I’m just kind of going back and looking year-over-year, we had a new loan in line production up 36% year-over-year, fee income up 23%, treasury management up 11%. So we feel like the growth engine can do that without additional line utilization, but that would be a nice benefit.

Okay, great. And then maybe just along the lines on the lending side. I know you guys are always going to be opportunistic as it relates to new hires. Are you actively and aggressively continuing to try to build the production side? Or, are you now at a point where you feel like opportunistic is truly the best word?

I think that you're always going to see us looking for good talent. Now at the same time, we feel like we have a lot of capacity in the group that we have now from the lift-outs we've done in the previous years to the producers we had in last year. From the 7 producers last year we produced about $122 million in loans which turned into $112 million in growth and $636,000 in fees. I mean, we have much higher expectations as that begins to normalize, so we're going to be able to get the benefit of those producers versus our existing teams. Now at the same time, we are closely watching dislocation, we're closely monitoring talented people, we're close into these communities. And as we've built the bank we've done it through lift-outs, and so that strategy is not going to stop.

And Wally, I want to throw something in here. The talent that we attract is in line with our portfolio mix and our desire to grow C&I institution. So we've passed on a number of opportunities for lift-outs and additional teams that are, let's say, real estate focused or have relationships that just don't fit. So who we're lifting out and who we're bringing on, we think a long-term producers that produce the portfolio mix that we desire moving forward.

Thank you for that information. I believe I heard Steve mention that you expect a 6% increase in mortgage. However, there are significant challenges anticipated, including expected declines in volumes of around 25% to 30%, along with likely pressures on gain on sale margins. Could you remind us about how you have ramped up your mortgage production team that gives you confidence in achieving the 6% growth in mortgage?

Yes, we are particularly focused on increasing our hiring of mortgage loan officers in Texas, and based on our current pipeline, we anticipate a 6% increase in mortgage volume. We are aware that market competition might affect our gain on sale margins, but we plan to utilize our mortgage servicing rights hedge more efficiently than before to mitigate that effect. We believe that the market normalization and traditional flows will enable the hedge to function more effectively than it has in the past. As a result, we expect significant growth in the mortgage sector this year.

Okay, great. For my last question, I want to delve into a more philosophical area. Lance, we've discussed the importance of technology for over a year now. I know your team has invested in systems that enhance lending and operational efficiency. Are you also exploring partnerships with FinTech companies in a banking-as-a-service framework, or is your focus primarily on leveraging existing offerings from FinTech firms to improve your banking operations and efficiency?

Thanks for the question. It's a combination of factors. If you examine our budget for the year and the ongoing investments we're making, we are focused on enhancing our Commercial and Operations areas. We're expanding into the consumer segment this year, which will bring more automation and efficiency to our operations and provide a smoother experience for clients. We've been investing in robotics process automation and recently discovered that by streamlining manual processes, we've saved 4,000 man hours annually, equating to 2.25 full-time equivalents. We are continuing this initiative within our mortgage and operations teams. Additionally, we are implementing fraud detection software, improving data management, and conducting real-time client surveys to measure our service delivery. We have partnered with Podium to gather immediate feedback and net promoter scores. Moreover, we have invested in FinTech equity funds to ensure we have insights into what can provide the greatest benefits as we enhance client experiences and automation efforts. We are taking a comprehensive approach to identifying improvements for our company, focusing on driving efficiency and automation to enable greater production.

Thank you, Lance. I appreciate. That's all I had, I'll step out.

Hey, Wally, thank you for allowing us some of your time this quarter. We appreciate it.

And our next question is a follow up from Brad Milsaps from Piper Sandler. Please go with your follow-up.

Thank you. Drake, just wanted to maybe touch quickly on credit, obviously NPAs are at low levels, but the last couple of years I guess your charge-offs have run mid-high 20 basis points, which I think through a cycle, I think that's a pretty good level. But at a time when banks are having may be zero or even net recoveries, just kind of curious, is that related to some of the clean-up you've done over the last couple of years in some areas you wanted to push out as a bank? Or anything else going on there, just want to think about charge-offs and how you might treat kind of the remainder of your excess reserves going forward?

No, I'm a bit hesitant to call it necessary clean-up. As mentioned before, COVID provided us the chance to concentrate on how we envision our institution and portfolio in the future while recognizing some of the pressures. We seized the opportunity to make some adjustments and push out some credit, which is why I'm proud of our 9.9% growth rate. We pushed out nearly $60 million of credits that didn't match our profile. There were some improvements made, particularly in the assisted living sector and similar deals, and we addressed a few legacy deals as well. I'd like Jim Crotwell to discuss credit for a moment because I'm extremely proud of him, Preston, and their teams for the progress they've made and the strong position they've established for our institution. You're going to notice that charge-off levels will remain lower. Additionally, I want to highlight that our classified assets have decreased by 41% and past watch credits have dropped by 38%, indicating significant changes. So, Jim?

Thank you. I am very pleased with the decrease in our overall classified assets, which stood at 1.35% at the end of the year, down from 2.08% a year ago. This is a significant improvement. While other credit metrics have remained stable, I am proud of our bankers' efforts, and our past dues have consistently been at 0.50%. Our non-performing assets have also remained stable, which is a positive sign compared to our peers. Regarding our reserves, I believe we have done the necessary work by reducing them, and as we continue to see resilience and stability in our portfolio, I expect some decline this year, although not as rapid as last year due to the economic outlook. I anticipate a slight reduction moving towards the end of 2022 as we return to more historical charge-off levels. Overall, I am very satisfied with our portfolio's performance over the past two years, which I attribute to our focus on relationship banking.

And Brad, I will add just another note to that. This client selection process that we have talked about has been a very serious matter within this organization. And if you look back at our issues in the past, it's always been surrounded by core client selection and it even goes a little deeper into poor relationship manager selection, something that we changed four years ago. And if you look at the credits that we are charging off today in this clean-up process, it relates back to that client selection process and also that relationship management process. I am very pleased with where we are.

That's helpful. Thanks, Drake. And just to follow-up on your comments around Houston and Dallas pushing towards 1.5% to 2% ROA by the end of this year. If I look at consensus expectations, folks who are kind of looking for you do a one ROA in both years. It would seem, if you have got all three states pushing north of 1.5% that would need to come up, but there may be other aspects of the organization thinking about that whether the holding company etc. that's dragging that down. Just kind of want to square those comments on those two regions achieving those levels of returns vis-a-vis the consolidated ROA for the entire company.

Certainly. If you examine our metrics, including our impressive growth in earnings per share and revenue, there is one area we need to concentrate on, and that's pre-pre ROA. We recognize what needs to be addressed. We've faced challenges in the mortgage sector this year, but we've positioned ourselves well. Over the last three years, we have significantly reduced overhead in executive management. We recently brought on Derek McGee for legal, who will be instrumental as we move forward. I believe we have an efficient holding company and executive team, and the improvements in those areas will lead to higher ROAs as we progress through 2023 and 2024.

Okay, great. Thanks for taking the questions.

Okay, Brad. Thank you.

And ladies and gentlemen, with that we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Drake Mills for any closing remarks.

Well, we finished up what I think is an incredible year, a tremendous amount of obstacles that we had to deal with, but on the same side, our teams, our people, our culture is intact, and we are in a position, I think an undervalued company that's creating a tremendous amount of value. I hope investors recognize that. I appreciate our investors, I appreciate our stakeholders, and thank you for the involvement in the company, the support and all the things that you do for us. But on the other hand, we're producing at a high level, creating a tremendous amount of value, and we're doing it in a laser-focused way that does things that I think are going to long-term put this company in a very strong position. So, thank you for your support, and we hope to see you in the future pretty quickly.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.