Earnings Call Transcript - OBK Q2 2025

Operator, Operator

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. The format of the call includes prepared remarks from the company followed by a question and answer session. 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.

Chris Reigelman, Director of Investor Relations

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. 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 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; 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 this presentation, we will be happy to address any questions you may have. Drake, the call is yours.

Drake Mills, Chairman, President, and CEO

Thanks, Chris, and thanks for being with us this morning. At the beginning of this year, we introduced Optimize Origin, our plan to deliver sustainably leap-level financial performance. We laid out a near-term goal of achieving a 1% ROA run rate by the fourth quarter of 2025 and an ultimate target for our ROA to be in the top quartile of our peers. As we cross the halfway point of the year, we believe the actions we have taken have put us in a position to achieve this near-term goal ahead of schedule. In just a short time, we have created efficiencies within our branch network, improved the overall profitability of our commercial banking team, restructured our mortgage business, and taken multiple actions to optimize our balance sheet. These actions are the primary drivers of approximately $34 million in annual earnings improvement on a pretax, pre-provision basis. I'm proud of the results and how they position us moving forward. Our focus remains on being a top quartile performer and driving value for our employees, customers, communities, and shareholders. On July 1, we took an additional step towards our goal of high-level profitability by increasing our ownership of Argent Financial to 20%, which triggers the equity method of accounting. Next year, we anticipate this will drive additional income of approximately $6 million. We've also identified several opportunities that we believe will drive additional earnings improvement towards our ultimate profitability goal. Some of these are projects that are currently underway, others are in the early stages of implementation, and a number are in the planning phase. Areas of focus include product delivery, a streamlined organizational structure, enhanced data management, and improved expense management. Lance will provide more detail later in the presentation. As you can see, we are laser-focused on our plan and delivering results that drive value. While we acknowledge that economic uncertainty exists, we know the actions we have taken position Origin for near-term and long-term success. Now I'll turn it over to Lance and the team.

Lance Hall, President and CEO of Origin Bank

Thanks, Drake, and good morning. I want to start with our insight into our work around optimizing our commercial banking teams and the positive results that it is having on portfolio mix, portfolio risk, margin expansion, and production. Since the end of 2Q '24, Origin has reduced our FTE headcount by 8% across the bank and by 18% in our commercial banking teams, with an emphasis on data-driven decisions, profitability models, and alignment around our key bankers. Our team achieved strong C&I production in Q2, where on an average basis, our C&I loans grew at an annualized rate of nearly 13%. These strong C&I production levels are masked from a point-to-point growth perspective by large paydowns in the last 2 weeks of the quarter. Where we clearly see the enhancement in C&I client growth is in our continued lift in loan origination and swap fees as well as our growing treasury management revenue for the quarter. While economic uncertainty around tariffs and interest rate levels has clearly slowed Origin and industry expectations for loan growth, I like our momentum of originations, fees, margin, and remain encouraged by our pipelines. Optimize is not just about expense reduction; it is a blueprint to drive return levels through deeper insight into data, alignment of processes with strategic investments in technology, automation, and people. Origin's culture and geographic model create a platform that strategically allows us to attract talented bankers who have a shared vision and purpose in delivery and relationships. As we have reduced FTE levels, we continue to identify and recruit bankers that can drive significant profitable growth throughout our markets. In 2025, we have been successful in hiring highly effective business development bankers in Louisiana, Houston, and our Southeast market, while we also recently added a strong market leader in Fort Worth. Through Origin's history, we have shown an ability to attract bankers and lift-out teams as a significant growth strategy during periods of market disruption. We believe we are well positioned to take advantage of any opportunities that arise from bank mergers throughout our markets. As Drake mentioned, we continue to execute on our detailed plan to optimize Origin. Using our data-driven approach, we believe that we have opportunities to further enhance revenues in our treasury management and commercial card programs. This was a takeaway from our third-party benchmarking project. Furthermore, we believe we have significant efficiency opportunities by improving our organizational structure, which will be a sizable undertaking that we are in the early stages of developing. We believe this structure change can enhance our speed, responsiveness, and nimbleness around delivery to our clients, more effectively utilize technology, create scalable processes, improve efficiencies, and ultimately drive growth and profitability. An important part of Optimize Origin has been to better utilize data to improve strategic decision-making. This has been seen through our branch efficiency, banker profitability, and the restructuring of our mortgage business. Additionally, we are in the early stages of a large plan to centralize data within our organization to improve processes and outputs throughout our company. There are multiple strategic projects underway that should result in lower expenses and increased revenue. So far, we have identified approximately $4 million to $5 million of annualized pretax earning benefits from these projects. I'm proud of our team and their commitment toward embracing Optimize Origin. I'm confident that we have the right focus as we head into the second half of the year. Now I'll turn it over to Jim.

Jim Crotwell, Chief Risk Officer

Thanks, Lance. As I've shared on prior calls, beginning in the second quarter of last year, we began to proactively exit relationships that were determined to not fit our client selection criteria. During the second quarter, we achieved approximately $50 million in additional desired reductions, bringing the total targeted reductions to approximately $250 million since we began this initiative. While this has been a headwind to portfolio growth, this optimization of our portfolio will serve us well moving forward. Total past due loans held for investment decreased to 0.88% at quarter end compared to 0.96% for Q1 2025. Classified loans as a percent of total loans were stable for the quarter, decreasing to 1.66% at quarter end from 1.68% as of March 31. Nonperforming loans increased moderately to 1.11% of total loans compared to 1.07% for the prior quarter, primarily driven by 4 relationships being placed on nonaccrual during the quarter, offset by the payoff and payments in 2 nonaccrual relationships. Net charge-offs for the quarter came in at $2.3 million, net of $1.4 million in recoveries, a reduction from the $2.7 million in net charge-offs reported for Q1. On an annualized basis, net charge-offs were 0.12% for the quarter and 0.13% annualized year-to-date. For the quarter, our allowance for credit losses increased $415,000 and ended the quarter at $92.4 million. On a percentage basis, our allowance increased from 1.28% to 1.29%, net of mortgage warehouse. We continue to focus on the Moody's S2 scenario as the basis of our economic forecast within our CECL model. While we continue to make minor adjustments to the economic forecast portion of the reserve, we did not experience any significant changes in our CECL model since current economic headwinds are factored into this scenario. 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 49% for ADC and 228% for CRE. We continue to be pleased with the performance of our portfolio and are well-positioned to support our customers and provide strategic growth. I'll now turn it over to Wally.

William Wallace, Chief Financial Officer

Thanks, Jim, and good morning, everyone. Turning to the financial highlights. In Q2, we reported diluted earnings per share of $0.47. The combined financial impact of notable items during the quarter equated to a net expense of $15.6 million, equivalent to $0.39 in EPS pressure. On the balance sheet side, loans increased 1.3% sequentially but decreased 1.0% when excluding mortgage warehouse. Total deposits declined 2.6% during the quarter and, excluding brokered, declined 2.3%. While noninterest-bearing deposits declined 2.5% sequentially, we note they remain stable at about 23% of total deposits, and we continue to anticipate they will remain in the 22% to 23% range through 2025. Looking at the decline in total deposits during the quarter, about 45% was driven by what we attribute to normal seasonality in our public funds customers. We also believe uncertainty in the current environment has led to some customers utilizing excess cash on hand to pay down outstanding loan balances, causing some pressure on both sides of the balance sheet. Given the loan and deposit declines on a year-to-date basis, we have reduced 2025 growth guidance to low single digits for both. Turning to the income statement, net interest margin expanded 17 basis points during the quarter to 3.61%. Included in margin this quarter was Argent's annual shareholder dividend, which was a 4 basis point benefit to NIM. As Drake mentioned, we are very excited that we increased our ownership in Argent to 20% in July. As a result, moving forward with the equity method of accounting, we will no longer be recording this dividend through net interest income. Rather, we will be recording our portion of Argent ownership through our noninterest income line. We remain pleased that deposit costs continue to trend in line with our historical beta trends, and loan pricing remains disciplined across our markets. Moving forward, we increased our margin guidance by 20 basis points to 3.70% in 4Q '25 and by 10 basis points to 3.55% for the full year, plus or minus 5 basis points. Our modeling now considers 25 basis point Fed funds rate cuts in September and December. Shifting to noninterest income, we reported $1.4 million in Q1. Excluding $14.6 million in net pressures from notable items in 2Q and $0.1 million in net benefits in Q1, noninterest income increased to $16 million from $15.5 million in Q1, due in large part to normal seasonality in our mortgage business and continued strength in our customer swap business, partially offset by a timing-related decline in fee income in our insurance business. Primarily as a result of triggering the equity method of accounting for our Argent ownership, we have increased our guidance, excluding notable items, to growth of low double digits for Q4 '25 over Q4 '24. Our noninterest expense decreased slightly to $62 million in 2Q from $62.1 million in 1Q. Excluding $1 million of notable items in Q2 and $2.1 million in Q1, noninterest expense increased slightly to $61.0 million from $60.0 million in Q1, slightly better than our expectations. In the back half of '25, we anticipate our expense run rate will be relatively flat compared to Q2, and we are maintaining our prior expense guidance. Lastly, turning to capital, we note that Q2 tangible book value grew sequentially to $33.33, the 11th consecutive quarter of growth, and the TCE ratio ended the quarter at 10.9%, up from 10.6% in Q1. Consistent with prior commentary, we believe our capital levels provide us with flexibility to deploy capital opportunistically. During the quarter, we repurchased 136,399 shares at an average price of $31.84. Yesterday, we announced the authorization of a new $50 million repurchase plan effective through July 2028. All of our regulatory capital levels at both the bank and holding company levels remain above levels considered well capitalized. As such, we remain confident that we have continued capital flexibility to take advantage of any additional future capital deployment opportunities to drive value for our shareholders. With that, I will now turn it back to Drake.

Drake Mills, Chairman, President, and CEO

Thanks, Wally. I'm very proud of the work our team is doing to optimize Origin. As we head into the back half of 2025, we are well positioned in the nation's most dynamic market, and I have full confidence that our employees will continue to deliver exceptional value to all our stakeholders. I believe there is tremendous opportunity ahead of us, and I'm excited about our ability to capitalize on that opportunity. I want to thank you for your support, and we'll open it up for questions.

Operator, Operator

Our first question comes from Matt with Stephens.

Matt Olney, Analyst

I'll start with the net interest margin. And while you mentioned you're expecting that margin to approach that 3.70% level by the fourth quarter, which obviously implies some good expansion from these levels. Can you just kind of walk us through the expectations for the third quarter? And just trying to appreciate the ramp into the fourth quarter? And what are some key items we should be thinking about that can get us to the 3.70% level from the 2Q levels?

William Wallace, Chief Financial Officer

Thanks, Matt. So I'll first point out that the second quarter did have the benefit of our annual dividend from Argent, which was a 4 basis point benefit. Outside of that, we've had tailwinds all year from our loans repricing at spreads that are relatively strong, but at loan pricing overall that's significantly higher from loans that were booked, say, 3, 4 years ago. That's a tailwind that we continue to expect moving forward, not just third quarter and fourth quarter, but through next year. In our modeling, we put 2 Fed cuts in. We had a cut in June and September. Those moved to September and December in our modeling, the forward curve suggests there's another 2 cuts, and it's close to 3 cuts through next year. We put those in our modeling, but the tailwind from the loan repricing and the securities repricing through next year would suggest that, one, we'll have benefits in the back half of this year, and we think we could hold the line through next year with those cuts. It's probably worth acknowledging that there are some pricing pressures in the market from competition on spreads. So if we see loan growth accelerating, you could see margin coming in kind of towards the lower end of that guidance range that we put in the deck. But if not, then we could come in towards the higher end. I think that's the way I would steer you as you think about your modeling.

Matt Olney, Analyst

Okay. And then just as a follow-up, I guess, kind of switching gears, I want to ask more about the loan growth. And Lance mentioned the paydowns in the final weeks of the quarter from some customers, just lower utilization. Any more details behind that as you talk with the customers as far as kind of why they decided to do that now? And then longer term, you've talked about getting back to a high single-digit growth level or even low double-digit at some point. Just talk more about the longer-term investments you've made? And when do you expect a more normalized kind of typical origin level of loan growth to start kicking in?

Lance Hall, President and CEO of Origin Bank

I appreciate the question. I'm optimistic about our ability to continue driving loan growth. There has been some uncertainty regarding the impact of tariffs on large commercial projects, which has led many clients to expect rate decreases that haven't materialized, putting some projects on hold. This quarter, and slightly in the first quarter, we observed an interesting trend where customers with large deposit balances chose to reduce their cash reserves to fund projects instead of taking on debt. This has created some challenges for us. Nonetheless, looking at our production, we've seen decent growth in our origination volumes, which has translated into significant increases in loan and swap fee revenue, particularly on the commercial and industrial side as well as with owner-occupied real estate. This quarter has been our best for treasury management and swap revenue, and I’m optimistic about continued growth in these areas. Thinking about the second half of the year, we anticipate modest growth in project sizes, estimating a mid-single-digit annual increase, around 2% to 2.5%. For 2026, I'm conservatively projecting mid- to high-single-digit growth. The current consolidation trends in the industry present substantial opportunities for us. Our history shows that we have successfully built a culture that attracts talented bankers and teams. As we are witnessing acquisition consolidation in Texas, North Louisiana, and Mississippi, this aligns with our lift-out strategy and positions us well for seizing those opportunities. Overall, we remain focused on our return on assets and recognize the importance of pricing discipline and our pricing models. Wally and his team have provided us with valuable information that enhances our decision-making. Our growth will not be arbitrary; instead, it will hinge on pursuing the right types of growth in appropriate industries, ensuring a favorable credit profile, and maintaining strong pricing discipline in our relationships. I am confident that we can achieve improved results.

Drake Mills, Chairman, President, and CEO

Matt, this is Drake. I want to add to that. An example of some, I guess, growth headwinds on the loan side is utilization rates went from 53% to 50%, and that was based on cash utilization our clients utilized during that, which represented about $83 million of reduction in line utilization. So again, glad that our clients have strength and are taking those opportunities that also hits us on the deposit side.

Operator, Operator

Our next question comes from Michael with Raymond James.

Michael Rose, Analyst

I'll start with the buyback. It seems you repurchased some stock, and it was at a price below tangible book value, with a new $50 million program. Now that you’re above tangible book value, hopefully, it will continue to increase. I’d like to understand your appetite for capital here. Additionally, while we've noticed some mergers and acquisitions activity, it doesn't appear to be a short-term focus for you. However, as the situation evolves, I assume you're still having discussions with banks. What is your intermediate to long-term interest in M&A?

Drake Mills, Chairman, President, and CEO

Let me address the first part of your question. We are confident in our ability to redeem $75 million of subordinated debt in the fourth quarter, which supports our Optimize Origin initiative. This means that we will have redeemed $145 million from cash over the last year and this year. This presents a strong opportunity for us to reduce leverage and manage our cash effectively. Overall, I feel optimistic about our capital utilization, and we will maintain healthy capital levels. Regarding mergers and acquisitions, we are very enthusiastic about M&A. We perform well with lift-out strategies when opportunities are local. We are engaged in ongoing discussions and are eager to grow the institution through lift-outs. However, we won't overlook other opportunities; they just need to be quality or core deposit opportunities. We continue to have those conversations.

Michael Rose, Analyst

Helpful, Drake. And then maybe just given the reduction in growth expectations, it does look like you are going to be able to stay under $10 billion in assets. Is that kind of the plan? And then can you just remind us on maybe the thresholds could be moved? There's been some talk around the $10 billion and what that could mean. It doesn't seem like Durban would go away, though. So just any sort of considerations we should think about $10 billion by the end of the year. And then when you do cross it, I think you have all the expenses kind of in place and the run rate, but just anything we should be thinking about related to crossing?

Drake Mills, Chairman, President, and CEO

I can't say I'm excited that we'll remain under $10 billion, especially since it means we won't see the stronger growth we anticipated this year. However, I appreciate our team's dedication to focusing on ROA growth, which is leading us to make the right choices. This also allows us to postpone Durban, which would be a $6 million impact for us for another year. Currently, our model indicates we'll finish the year just around $10 billion with projected growth. So, we'll remain below that threshold this year and begin to progress. Nonetheless, we are not limiting our teams or missing opportunities as we aim to stay under $10 billion for now.

Operator, Operator

Our next question comes from Woody with KBW.

Wood Lay, Analyst

I wanted to follow up on capital utilization and touch on the securities restructure we saw in the quarter. Just wanted to get your thoughts on sort of why this quarter to execute on the restructure? Is it a reflection of loan growth pulling back? And then how do you evaluate future restructures from here?

William Wallace, Chief Financial Officer

Woody, we actually had this restructure trade teed up in the first quarter. We like the payback math on it. We felt like we had the capital levels to absorb the impact on the regulatory capital levels. Obviously, it's already carried in tangible capital levels. We backed off of the trade when the markets got extremely volatile around the tariff announcements. We saw an opportunity early in the second quarter to take advantage of some spread changes, where we executed a small portion of the trade. As the quarter played on, we saw volatility improve significantly. So we decided to go ahead and bring that trade back to the table. This is one that we've been considering as part of Optimize Origin since the end of last year. The payback math, as you can see, is a little bit higher than it was in the one that we executed towards the end of last year. As far as large loss trades go, this is it. We don't see any other opportunity in our portfolio. That said, we monitor markets on a daily basis. And if there's any spread opportunities that create opportunity for us to, on the margin, make decisions that improve the risk profile or improve the earnings profile of the portfolio, then we will discuss and make a decision on whether or not to execute those. But I think that we're not looking at any large-scale trades from here.

Wood Lay, Analyst

Got it. That's helpful. Maybe shifting over to Origin, seeing the announcement was encouraging. Is there a possibility of increasing ownership in the future, which would enhance fee income, or are you satisfied with the current ownership level?

Lance Hall, President and CEO of Origin Bank

Woody, this is Lance. No, I think you're going to see us stay consistent kind of in that 20% to 25% ownership level. And you never know what happens in the future, but that's our strategic plan for the moment.

Wood Lay, Analyst

Got it. Lastly, could you share some high-level insights on how your ongoing efforts to review expenses are progressing and the timing for any additional expense opportunities?

Drake Mills, Chairman, President, and CEO

We are focused on enhancing revenue as much as we are on cutting expenses through Optimize Origin. We've been transparent about collaborating with a third-party benchmarking firm to reorganize the company. We believe there are opportunities to consolidate some market expenses for greater efficiency. Our initiatives aim to enhance revenue, utilize data more effectively for better decision-making, and empower our relationship managers to prioritize returns on equity through stronger relationships. We expect process improvements could lead to reduced expenses, and we are continuing to leverage robotics to streamline manual processes, which will enhance efficiency. AI will also play a role in advancing our technology for improved data-driven decisions. Ultimately, our goal is to increase the capacity of our bankers, allowing them to spend more time with clients through these ongoing processes. Therefore, you can expect a blend of revenue enhancement, expense management, and growth in revenue streams in the upcoming months. Optimize Origin is progressing well, and we are confident you will witness further advancements in the coming quarters.

Lance Hall, President and CEO of Origin Bank

I would just add, Woody, that in the script, you might have heard the comment I made that our expectation for expenses in the back half of the year are flat run rate from the second quarter after notable items. So I wouldn't expect to see declines in expenses.

Operator, Operator

Our next question comes from Manuel with D.A. Davidson.

Manuel Navas, Analyst

I just have 2. It's hard to kind of learn a lot more about Argent. Can you talk a little bit about your expectations on growth there? And potentially, would there be a write-up? I just haven't heard if that could be something that happens in the third quarter.

Lance Hall, President and CEO of Origin Bank

So this is Lance. Thanks for the question. Wally, Drake, and I have a deep understanding of the relationship. It's a bit sensitive for us because Argent is a private company in which we are an investor. We don’t own or control Argent, so sharing their information beyond a high level isn’t entirely within our discretion, although we maintain a strong working relationship with their management. There was recently some public information regarding their acquisition of Huntington's Corporate Trust business, where they projected approximately $175 billion in assets under administration. Wally collaborates closely with their CFO, which allowed us to estimate a pro forma $6 million contributing to our income statement in 2026. Over the years, we will work with them to provide you with the meaningful information you need, and we commit to that.

William Wallace, Chief Financial Officer

Yes. So in the third quarter financials, due to the transactions that occurred that we were a part of, we weren't the only transaction. The valuation that those transactions occurred and will result in a write-up of the final, if you will, carrying value of our investment in Argent. That write-up equates to about $7 million. Moving forward, with the equity method accounting, the write-up of the investment will occur through the income statement, and that is the $6 million annualized benefit kind of starting in 2026. We still have some accounting work to do where we got to do a final valuation to help us understand the impact of customer intangibles to us and the acquisition that Lance mentioned has to close before we get kind of final expectations on how that will impact earnings. So yes, there will be a write-up in the third quarter, plus we expect to accrue for earnings and then any further changes in valuation will occur through the income statement, not through write-ups or write-downs.

Manuel Navas, Analyst

I appreciate any of these preliminary comments. I totally understand there's a lot of moving parts here. Separately, can I have a little bit of a regional update? I'm just always intrigued by the Southeast region with the Alabama and Florida business. How is that ramping? But just any kind of regional update would be fantastic.

Lance Hall, President and CEO of Origin Bank

Yes, this is Lance again. I'm really pleased with Drake, Robin, Steve, and the whole team in the Southeast. We're making good progress there. Similar to some other markets, we've experienced slight delays in pipeline execution due to tariff concerns, but the pipelines are still strong. We're very optimistic about Texas and its economy. We have dynamic teams. While growth has been somewhat muted, we're seeing solid commercial and industrial production in Houston and North Texas. Louisiana and Mississippi are performing ahead of budget this year, with about 8% growth in Louisiana and 5% growth in Mississippi, which is better than we expected. Once we understand the tariffs better and achieve normal utilization levels on our lines, I believe there will be significant opportunities.

Operator, Operator

There are currently no further questions. I will now hand it back to Drake Mills for any final remarks.

Drake Mills, Chairman, President, and CEO

I want to thank everyone for being on the call. At this point, I'm extremely pleased with our progress, the teams have made in optimizing Origin. We are extremely focused on profitable growth, which I think is underlying the change in culture. Utilization of technology to minimize expense growth has been a leader in the process of optimize origin, expanding current relationships for better customer ROEs, continue to leverage our rural deposit base to lower our funding costs, and a strong focus on strengthening credit culture through client selection has been the early wins this year as we continue to go through the second half. So our future is bright, very excited about where we are, and I'm pretty confident that we're going to be successful. I appreciate each one of your support, the time on this call, and we're available for questions if anybody needs to have a conversation with us. So again, thank you for your time. Thank you for your support.

Operator, Operator

Ladies and gentlemen, this concludes today's Evercall. Thank you, and have a great day.