Origin Bancorp, Inc.

Please ensure your device is not on mute. May I have your first and last name, please? Apologies. Due to no response, I'm disconnecting your line. Hello? Hello. David Anderson. Thank you. David, may I have your company name, please? I'm just calling the family office. Thank you very much. And lastly, your conference ID number, David. Perfect. I'll be placing you into the attendee line and you'll be muted. Have a great call today.

To 1.18% at quarter end compared to 1.14% as of the prior quarter. For the quarter, our allowance for credit losses increased from 1.29% to 1.35% net of mortgage warehouse. We did not experience any significant changes in our CECL model assumptions for the quarter and the increase was primarily driven by increases in the individually evaluated portion of the reserve associated with our non-accruals. The level of our reserve at 1.35% net of mortgage warehouse compares to a level of 1.31% at year-end 2023. Lastly, as the 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 a 47% for ADC, and 235% for CRE. I'll now turn it over to Wally.

Thanks, Jim, and good morning, everyone. Turning to the financial highlights, in Q3, we reported diluted earnings per share of 27 cents. As you can see on slide 26, the combined financial impact of notable items during the quarter equated to a net expense of $23.3 million, equivalent to 59 cents in EPS pressure. On a pre-tax, pre-provision basis, we reported $47.8 million. Excluding $7.9 million in net benefits from notable items in Q3 and $15.6 million in net pressures in Q2, pre-tax, pre-provision earnings increased to $39.9 million from $37.1 million. On the balance sheet side, loans decreased 1.9 percent sequentially and decreased 0.6 percent when excluding mortgage warehouse. Total deposits increased 2.6 percent during the quarter and 2.9 percent excluding brokered. Importantly, noninterest-bearing deposits grew 8.6 percent sequentially, improving to 24 percent of total deposits. Both total and noninterest-bearing deposits also increased on an average basis, up 0.9 percent and 1.1 percent, respectively. As Lance mentioned, we are excited about the momentum we are seeing from our relationship managers across our markets, and we remain optimistic that loan production is accelerating, though paydowns have remained a near-term headwind to reported loan balances. While we currently are anticipating that loan growth will return in Q4, the continued declines in Q3 lead us to reduce our loan growth guidance from up low single digits to essentially flat for the year. Given the positive momentum we have seen on the deposit side of the balance sheet and the typically strong seasonal inflows in Q4, we are maintaining our deposit growth guidance of low single digits for the year. Turning to the income statement, net interest margin expanded four basis points during the quarter to 3.65%, in line with our expectations. Driving most of this expansion was increased interest income from our securities portfolio, in large part due to the portfolio optimization trade executed during Q2. Moving forward, as you can see in our outlook on slide four, and due primarily to the expectation of an additional Fed rate cut, we tightened our margin guidance range to 3.65% in Q4-25 and 3.60% for the full year, plus or minus three basis points. Our modeling now considers 25 basis point rate cuts in each of October and December, as opposed to only December in our prior guide. Shifting to noninterest income, we reported $26.1 million in Q3. Excluding $9 million in net benefits from notable items in Q3 and $14.6 million in net pressures in Q2, noninterest income increased to $17.1 million from $16 million in Q2. due in large part to the addition of 1.2 million of equity method investment income from increasing our ownership in Argent Financial to over 20%. Our non-interest expense was basically flat at $62 million in Q3. Excluding 1 million of notable items in both Q3 and Q2, non-interest expense increased slightly to 61.1 million from 61.0 million in Q2, in line with our expectations. We are maintaining our guidance for Q4 and lowering our guidance slightly for the full year to down low single digits from flat to down slightly. Lastly, turning to capital, we note that Q3 tangible book value grew sequentially to $33.95, the 12th consecutive quarter of growth, and the TCE ratio ended the quarter at 10.9%, flat from Q2. As shown on slide 25, all of our regulatory capital levels remain above levels considered well capitalized. As such, we remain confident that we have the capital flexibility to take advantage of any capital deployment opportunities to drive value for our shareholders. In fact, during the quarter, we repurchased 265,248 shares at an average price of $35.85. Furthermore, We anticipate the full redemption of the remaining $74 million of subordinated debt on our balance sheet on November 1st, which will allow us to save $3 million in net annual increased interest expense. With that, I will now turn it back to Drake.

Thanks, Wally. As you have heard throughout this call, we have a great deal of momentum heading into the fourth quarter and next year. I referenced in my opening remarks about the opportunities, particularly in our Texas markets, associated with disruption from recent M&A. This year alone, there have been 15 bank acquisitions in Texas with selling banks totaling $37 billion in deposits. I firmly believe that we have the infrastructure and bankers to win new business and capitalize on this opportunity. Thank you for being on the call today, and thanks to our employees who remain committed to our strategic vision of optimizing origin.

We'll open up for questions. Thank you again, team.

Ladies and gentlemen, at this time, we will conduct the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad to enter the queue. Or if you've joined via web, please press the raise hand icon on the right side of your Dio Rocho screen. Again, that's star one on your telephone keypad to enter the queue, or the raise hand icon on the right side of your Dio Rocho screen. Our first question comes from Matt with Stevens.

Matt, your line is open. You may proceed.

Thanks. Good morning, everybody.

Good morning, Matt.

I want to dig a little bit more on credit. Can you just talk about your NDFI exposure, about what this does include and maybe what it does not include? And then secondly, as you scrub the portfolio, anything you want to disclose as far as exposure to other auto lending or subprime credits? that would be of interest. Thank you.

Matt, good morning. It's Jim.

Good morning.

I'll start with a little bit of recap, color on subprime, and then kind of move through some of the questions you asked. Our subprime portfolio at the end of the quarter was about $92 million. That represented about 1.2% of total loans. The breakdown of that would be about 68% would be residential loans about 15% RV and about 15% auto. And then kind of moving to your question about subprime auto, reflect if you kind of did the math on that, it's only two-tenths of 1% of our entire portfolio, and it consists of two relationships, both of which are performing. And on both of those, as a sole lender in both of those relationships, some of the issues that we are experiencing in Tricolor the double pledging of collateral is really not an issue in the situation of these two relationships. Moving to the total NDFI portfolio, which is excluding mortgage warehouse, our NDFI exposure is approximately 5% of total loans. 61% of that is real estate related, with 15% related to capital call lines of credit. And the remaining 25% is spread across about six different categories. We've done a deep dive into this entire segment of the portfolio, and these companies have experienced management teams. The underlying loans have good income and cash flow and are long-term relationships of the bank, and we have no past dues and no performing loans in the entirety of our NDFI segment.

Okay, perfect. Thanks for the disclosures there. And then, I guess, Drake, I heard you mention the tricolor and the fraud allegations. Can you just walk us through any insurance that could offset some of these charge-offs, and what does that look like compared to the charge-offs that we just saw, and what are some thoughts on timelines around that insurance?

Yeah, you know, Matt, as I said, We are aggressively pursuing recovery on these loans. We believe in time that we will see some degree of recovery, but right now there's too many variables at present for us to sit here and quantify how much that will be and when that will occur. That's why we took the charge the way we did. It's at this point we feel very good that we have these avenues of recovery, and as I've told investors in other relationships I have, I am going to be working diligently to ensure that we have recovered. But it's unclear. That's why we took the charge the way we did. We feel confident that we will have some recovery. It's just, you know, in this Chapter 7 and going through bankruptcy and understanding the timing of this is extremely difficult to quantify anything.

Okay. Appreciate that. And then if I could just shift gears over to the long growth commentary and I think the updated guidance now calls for flat balances in 2025 year over year. If we go back to January earlier this year, I think the guidance was mid to high single digits, and that was kind of walked down each successive quarter since then. And Origin is certainly not alone in seeing some of the slower loan growth trends this year, but it does feel more acute at Origin than maybe some of your peers. So can we just take a step back and remind us about your loan growth views throughout the year and how that evolves. And then we'd love to hear any kind of preliminary thoughts you may have on loan growth in 2026. Yeah.

Hey, good morning, Matt. It's Lance. Glad to go through it. I'm actually really bullish and optimistic about where loan growth is going in Q4 and next year. But we'll kind of step back and understand why I used the word earlier that I feel like our Extraordinary origination and production has really been masked by paydowns and payoffs. So if you think about that, we have actually been averaging the last four quarters $685 million a quarter in paydowns and payoffs, which are extraordinarily high historically for us. A combination of that is slowing things down purposefully to stay under 10B and has led to a little less than $400 million in reduction of our commercial construction and development portfolio. So that takes some time to rebuild that back up. So that is a big part of our originations for this year is getting back active and aggressive in that space. And that's one of the reasons we're very bullish on the fundings that will come from that next year. But just kind of give you a little color, that $685 million per quarter the last four quarters is, you know, compared to a little over $500 million, which would be sort of a typical quarter for us. And so, you know, part of that is tariffs. Part of that is, you know, us pushing out credits that Jim has talked about the last few quarters. But again, I think that is sort of covered up. what has been pretty extraordinary on the origination side. Our originations for the first nine months of this year are up almost 20% compared to the nine months of the year previously. Strong pipeline for Q4. I think we're expecting about 2% growth X warehouse for Q4. So even if you annualize that kind of at 8% on an annualized basis, I think our guidance for 2026 would continue to be mid to high single digits. but we're seeing really positive momentum throughout each of our markets. Texas is starting to come on strong again. Louisiana has been really strong this year. We've got about 5.5% loan and deposit growth in our Louisiana market. Really like seeing what we're seeing out of Nate and the Southeast team. Good year out of Mississippi, so We are well positioned right now, and then I'm sure later we'll talk about Optimize and kind of say how that's translating into NEM expansion and ROA expansion. And so, you know, the engine is running really well now. It's just having to kind of get past this unprecedented level of paydowns and payoffs.

Okay. Appreciate that, Lance. Thanks for the commentary. I'll step back. Thank you, Matt. Thank you again, Matt. Our next question comes from Woody with KBW. Woody, your line is open. You may proceed. Hey, good morning, guys. Good morning, Woody.

I wanted to start, I think, in the opening comments. You mentioned sort of in wake of this event, you'll be evaluating sort of the processes and systems in place to avoid incidents like this in the future, do you expect there to be any impact to the expense run rate if there's additional investments that need to be made?

At this point, we don't see any additional impact or an impact to expenses. We are going to be utilizing some, actually a move with one of our executives to come in and create a new group that is internal at this point. to really focus on credit management and credit audit process, looking at the components. As I think about Tricolor, and you can sit here and say what lessons were learned, this is a process that we're undergoing right now, and we've really identified several enhancements that we believe will mitigate risk going forward. as we better detect fraud. As an example, we've conducted a deep dive, as Jim said, and have gone through a comprehensive review of the segment in our portfolio. We're enhancing our processes and controls for monitoring and testing our collateral. But outside of that, we're expanding the role, as I said, of this executive who will build out a team of internal resources to provide additional oversight and streamline collateral protection, monitoring, and documentation. So I don't see that creating problems. or really any additional expense.

Got it.

And then, so you've essentially charged off the full exposure to Treacle. Is there any indirect exposure to the company, like personal loans made to Mr. Chu or any referrals from insiders in the business?

Yeah, while we can't necessarily speak to any specific customer information, I feel very strongly that all exposure in our portfolio has been properly identified and properly accounted for. We do have approximately a $500,000 mortgage with one of the executives that's about a 50% LTV and performing. Outside of that, we've disclosed everything but feel very confident that we've addressed any type of exposures.

Got it. That's helpful.

And then I guess just sort of excluding the impact of Tricolor, just overall thoughts on credit. Were there any trends to note and criticize your classifieds?

Yeah, I'm going to let Preston. Preston and his team has worked diligently through this process to really be able to recap where we are with credit and how we feel. So, Preston. Good morning, Woody.

Clearly, we feel like the Tricolor situation was an isolated and one-off event for Origin Bank. But in terms of credit trends, to get to your question, in my opinion, we saw a normal cycle movement of credits, which in my experience can be lumpy, certainly. We saw an increase in classified loans, non-performing loans, charge-offs, and past dues in the quarter. The increase in classified loans and non-performing loans was part of our expected credit migration for the quarter. with respect, you know, looking at charge-offs, clearly we had a very elevated charge-off with Tricolor, but if you exclude that, net charge-offs would have been 16 basis points for the quarter, which is very much in line with our past experiences. And then finally, why total past due loans rose moderately in the quarter, past due 30 to 89 days and still accruing loans declined from 16 basis points last quarter to 10 basis points at the end of the quarter. And I just would say, bottom line, we do not see signs of credit deterioration in our loan portfolio.

All right. I really appreciate the detail. Thanks for taking my question. Thank you, Woody. Thank you again, Woody.

Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad to enter the queue. Or if you've joined via web, please press the raise hand icon on the right side of your Dear Bro show screen. Our next question comes from Evan with Raymond James. Evan, your line is open. You may proceed.

Morning.

Thank you for taking my questions. I know it's been a busy year with Optimize Origin. You've added new benefits to the project each quarter. You're staying under $10 billion at year end. But as we look towards 2026, can we expect that the heavy lifting on optimized origin is behind us, and will there be more balance towards balance sheet growth?

Hey, Evan, this is Lance. Thanks. Good morning.

We have a tremendous amount of opportunities still in front of us around optimized origin. I think Drake jokingly said we're in the top of the fourth inning when it comes to opportunities. So, yes, we've done a lot of heavy lift early, and you think about The tremendous progress we've made, and we commented on some of this earlier, you know, Optimize was basically crafted in 2Q of 24. And so if you look at that period of time from 2Q24 to now, as we noted earlier, I mean, ROA's up 48 bps, NEM's up 48 bps, revenue's up about 10%, expenses are down about three. We've executed on what we said we were going to do with Argent Financial, which is a meaningful lift for us. We recreated our mortgage business. We actually had positive contribution income out of our mortgage business this month for the first time in years. Our southeast market hit profitability last quarter, which is a great trend for us. We're doing a lot of really cool stuff with data. The use, and we've talked about this in the past, of our banker profitability report since we started Optimize.com. The ROA of our banker portfolios is up 32 bps on average. And that's really through the identification, understanding of where our revenues are created, where our profits are created. But man, just everything seems to be ginning in a positive way from treasury management to fee revenue. But for us, it optimizes a continuous process. There's not a stopping point to this for us. So the way that we're continuing to use a third-party benchmarking company, we have actually created an internal group that we call Performance Optimization Partners. They are digging into process improvement, revenue enhancement, expense controls, and the insights that we're getting from that group is setting what's going to be a pretty dynamic strategic planning and budget session for us here in the next two weeks. From that, I would expect continual projects that we'll be announcing on Optimize that's really going to continue to transform this company as we evolve this into a top peer ROA producer. Great. Great. That's helpful.

And then I just had another question on capital. So you mentioned the buybacks this quarter, and I think the redemption of, you said, $74 million in sub-debt in the fourth quarter. But as we saw, most capital ratios tick up.

Just kind of wondering what your priorities are on capital deployment at this point. Hey, Evan, it's Wally.

As far as priorities go, I mean, I think that our number one priority would be to deploy our capital organically through balance sheet growth. We are very focused on trying to take advantage of any and all disruption in our markets. And as you know, that, that disruption has been increasing as of late. Um, we, uh, we have a successful history of lifting out teams and growing our balance sheet organically. So that would be priority number one. Um, we, we recognize the level of capitals that we have. We've, uh, we've been in the market the last two quarter buying back our own stock. Um, and we will continue to look for opportunities to, to do that. If, uh, if the stock price remains at levels that we believe are where it's attractive to deploy the capital in the market. And we are aware of M&A as an opportunity to deploy capital. I don't think that's our focus today, given where our stock is trading, but we would not take that off of the list.

All right, great. Thank you for taking my questions. I'll step back. Thank you, Evan. Thank you again, Evan. Our next question is a follow-up from Matt with Stevens.

Matt, your line is open. You may proceed.

Thanks for taking the follow-up, guys. Over the last year, we've talked a lot about this fixed loan repricing dynamic that will support the overall loan yields, and we're definitely seeing the benefits of that over the last few quarters. As we look at that into 2026 and 2027, how would you characterize the remaining benefits from this dynamic compared to kind of what we've seen more recently?

Hey, Matt Swally. So, you know, with our payoffs and paydowns being elevated, some of that benefit has been pulled forward to this year, which is great for today, NIMH. but it does take away from a little bit of the tailwinds that we have. That said, though, we still right now, as of today, have over $300 million of loans that will have planned payoffs in 2026. Those loans are yielding in the mid-fours. Today, we're putting on loans in the 690% to 7% range. So still plenty of opportunity there, and we have over a billion dollars of forecasted principal and payoffs coming for the year. So it's still a tailwind, but we have pulled some of that tailwind forward. If I look at year over year, I think our margin's up in the 30 to 35 basis point range. I don't think we'll see that much benefit in 2026. We're putting four cuts in our modeling right now and still see 10 to 15 basis points of potential margin expansion from the tailwinds that I just mentioned over the next five quarters.

Got it. Okay. That's helpful, Wally. Thanks for clarifying that. And then just one more point of clarification on the fee income guidance. I think there's some discussion in the deck about, let's see here. Yeah, kind of a high single-digit, I'm sorry, no, low double-digit growth in the fourth quarter. Can you just, there's several non-recurring items and some things that are not operating. So I'm a little confused as far as kind of what the base is. Can you, any way you can clarify the fee income expectations in the near term and kind of puts and takes around the components of that?

Sure. If you take out the items that are fee income related from the notable items table at the end of the deck, you'd get to a third quarter base of about $17.1 million. The fourth quarter is a seasonally light quarter in both insurance and mortgage. So from a sequential basis, that's probably more in the $15.5 million or so, which is up pretty meaningfully from last year's fourth quarter, where the base was about $14 million. So that's where that growth guidance is coming from, year over year, fourth quarter over fourth quarter, excluding notable items. The benefits coming from... swap fees, which have been very strong this year. We don't see the same level of swap fees in the fourth quarter that we saw in the second and third. But we also have the contribution now from Argent as another positive when you look year over year.

Got it. Okay.

That's all from me, guys. Thanks for clarifying. Matt, thank you very much. Thank you again, Matt.

And ladies and gentlemen, one last reminder. If you'd like to ask a question, that'll be star one or the raise hand icon on the right side of your VioRocho screen.

It appears there are currently no further questions.

Handing it back to Drake Mills for any final remarks.

Yeah, I want to thank everyone for being on the call. And just from a recap of why we feel so positive about moving into 26th, It's been extremely rewarding to me personally to see the deep commitment throughout our company from all our employees to deliver on optimized origin, which continues to build momentum. The momentum in all of our markets from Texas to the southeast continue to build. The dislocation in the dynamic Texas markets and southeast markets is significant for us. So as we add that to the acceleration of production, I love what's going on with our strong pipelines. I currently am very positive and optimistic about our opportunity to reach our ultimate goal of being a top quartile performer. I appreciate your support. Sincerely appreciate you being on the call.

Look forward to seeing each of you soon. Ladies and gentlemen, this concludes today's EverCall. Thank you and have a great day. The host has ended this call. Goodbye.