Origin Bancorp - Q2 2023

Transcript

Operator (participant)

Earnings call. My name is James, and I'll be your Evercore coordinator. The format of this call includes prepared remarks from the company, followed by a question-and-answer session. Please note that all participants will be on a listen-only mode until the Q&A portion of the call. At this time, I will turn the call over to Chris Riggleman with Origin Bancorp. You may now begin.

Chris Reigelman (Director of Investor Relations and Corporate Sustainability)

Good morning. 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 a 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 use of non-GAAP financial measures. For those 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 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements on 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, Stephen Brolly, and our Chief Credit and Banking Officer, Preston Moore. After this presentation, we'll be happy to address any questions you may have. Drake, the call is yours.

Drake Mills (Chairman, President, and CEO)

Thanks, Chris. As we enter the second half of the year of uncertainty, I am very pleased with our overall performance today. Economic activity remains robust throughout our footprint, with strong credit conditions. As the deposit wars continue to rage, we are committed to our strategy of exiting this cycle in a position that allows us to take advantage of opportunities that fit our model. I am proud of the way our bankers remain laser-focused on relationship pricing, credit quality, and client acquisition as we navigate our market opportunities. Our culture continues to be at the forefront of how we make our decisions in building our company moving forward. The success our bankers are enjoying with new relationship acquisitions has been impressive. As an example, net account openings are up 15% year-over-year.

This is a testament to our lift-out strategy, as well as our focus to create deeper banking relationships with existing clients. This quarter's results were in line with our expectations. We finished the quarter with total assets of $10.2 billion, though we still anticipate we will finish the year under the $10 billion mark. Tangible common equity ratio at the end of the quarter was 8.3%. Tangible book value grew again this quarter to $26.71. Credit quality remained strong, with annualized net charge-offs to loans for the quarter of just 10 basis points and nonperforming loans of just 44 basis points. I've been with this company for 40+ years and leading it for more than 2.5 decades. My confidence in this management team is strong as it's ever been.

Yes, this cycle will have a short-term impact, but as we have throughout our long history, we will come out stronger than before. We continue to invest in our employees, technology, and infrastructure while remaining diligent with expense management. We remain focused on executing our long-term strategy and continue to provide value to stakeholders. Now I'll turn it over to Lance.

Lance Hall (CFO)

Thanks, Drake. Our market presidents and bankers clearly understand that we have to be smart in these types of cycles, and that to drive sustainable value, we must stay focused on building long-term relationships that value a community banking model. I consistently reinforce our commitment to our vision and to our trusted advisor philosophy. Strategically executing on this commitment remains at the center of what we do. In this period, where deposit costs are rising and margins compressing across our industry, we feel it is critical to continue to focus on technology as an essential tool to drive efficiency, eliminate manual processes, improve the speed of delivery, as well as enhance the overall client experience. We continue to grow our Robotic Process Automation, have recently partnered with a FinTech to enhance our call center and chat experience, and have created real-time data dashboards for our execs and relationship bankers.

This focus on data analytics has given us deeper insight into our deposit client trends and behaviors. From this data, we are clearly observing, hidden by industry deposit loss and the cyclicality of our public funds, that Origin is experiencing meaningful growth in new deposit clients and new deposit accounts in 2023. From the data and surveys, we can see that our teams understand and are executing on our process. Our strategy of lifting out strong banking teams has been very successful. As Drake mentioned in his opening, our net deposit account openings have increased 15% in the second quarter compared to the same period last year. New deposit customer accounts are up 26% in the second quarter of 2023 compared to the same period last year.

We will continue to focus on adding new customers and growing deposits through the second half of the year. On top of our existing 2023 banker incentive plan, we recently launched a new deposit-specific initiative with our producers and within our banking centers that will strongly incent new deposit growth. We continue to communicate how deposit growth will govern our loan growth, and that remains top of mind as we strategically loan into this cycle. We remain focused on pricing discipline and strong credit quality while never losing our relationship-based approach to growing our clients. Our bankers remain disciplined with client selection and growing loans, and our pipeline remains strong throughout 2023. Our commitment to our culture, delivering for our clients, and executing on our long-term strategy guides us in all that we do.

I continue to be confident in our bankers in delivering meaningful results and providing value for all of our stakeholders. Now, I'll turn it over to Jim.

Jim Crotwell (Chief Risk Officer)

Thanks, Lance. Our constant focus on relationship banking continues to deliver a well-diversified loan portfolio. It's the driver for our continued sound credit profile. As reflected on Slide 12, past due loans held for investment increased to 0.26% as of June 30th, from a level of 0.16% as of the prior quarter end. It compares favorably to historical levels of 0.50% and 0.42% as of December 31st, 2021, and March 31st, 2022. Non-performing loans as a percentage of loans held for investment continues to normalize, increasing to 0.44% as of June 30th, from 0.23% as of March 31st of this year. It compares to levels of 0.49% and 0.41% as of December 31, 2021, and March 31st of 2022.

As reflected in our earnings release, a significant contributor in the increase in nonperforming loans held for investment was a transfer of $7.1 million in nonperforming mortgage loans held from the held for sale to the held for investment, the vast majority of which carried government guarantees. We continue to diligently monitor our loan portfolio and proactively address any identified issues. These ongoing efforts resulted in the $1.9 million reduction in our overall level of classified loans held for investment from 1.17% as of March 31st to 1.11% as of June 30th. Annualized net charge-offs for the quarter came in at 0.10% and compares favorably to the 0.12% level for Q2 2022.

For the quarter, our allowance for credit losses increased $2.3 million to $94.4 million, slightly decreasing from 1.25% to 1.24% as a percentage of total loans held for investment. This percentage reduction was primarily the result of mortgage warehouse loan growth for the quarter, which requires a nominal reserve due to the strong historical performance of this segment. Net of mortgage warehouse, we did build our reserve from 1.30% as of March 31st to 1.32% as of the quarter end. As to reserve levels, we continue to balance our sound credit quality and the resiliency of our loan portfolio with continued economic headwinds.

In the event we do experience an economic recession, we continue to believe that the markets we serve will also be more resilient to its impact than other areas of the country. On Slide 13, we have updated the additional information on our CRE office portfolio that we shared last quarter. As of June 30th, this segment of our portfolio totaled $389 million, with an average loan size of only $2.2 million. The credit profile of this segment remains sound, reflecting a weighted average loan-to-value of 53.8%, no past dues, only 0.22% in classifieds, no non-performing, and no charge-offs. This segment of our portfolio continues its sound performance, driven by our relationship focus. In summary, we continue to be pleased with performance and position of our loan portfolio. I'll now turn it over to Wally.

Wally Wallace (CFO)

Thanks, Jim. Good morning, everyone. Turning to the financial highlights, in Q2, we reported diluted earnings per share of $0.70. On an adjusted basis, Q2 EPS were $0.69 after excluding a $471,000 gain on the retirement of $5 million of our subdebt that we repurchased during the quarter. Starting with deposits, we continued to see a shift of non-interest-bearing deposits into interest-bearing accounts. As a result, non-interest-bearing deposits declined 5.5% this quarter, and the mix fell to 25% of total deposits in Q2, from 28% in Q1, and from their peak of 35% last Q2. Importantly, the pace of the decline in Q2 was a deceleration from the pace we saw in Q1, which we view positively.

However, we do anticipate some additional pressures over the next couple of quarters to our non-interest-bearing deposit mix. Ultimately, combined with the continued need to price up interest-bearing deposits, our deposit betas continued to increase from 35% in Q1 to 42% in Q2, which is adding continued pressure to our net interest margin. We continue to expect our deposit beta will increase in the second half of the year. These deposit pressures continue to outstrip rising loan yields, and our net interest margin contracted 28 basis points during the quarter to 3.16% as a result. Excluding $530,000 in net accounting accretion, our adjusted NIM contracted 22 basis points to 3.14%, from 3.36% in Q1.

Notably, this rate of contraction was lower than the 37 basis points of contraction from Q4 to Q1. Additionally, while we paid off our excess liquidity during the quarter, we still held portions of it throughout, which added 12 basis points of pressure to Q2 versus 6 basis points in Q1. Importantly, while down sequentially, our net interest margin and net interest income for Q2 were both generally in line with our expectations, giving us more confidence in our forward estimates. While we expect rising deposit betas to continue to pressure net interest margin in Q3 and Q4, we see these pressures waning through each quarter. Shifting to fee income, we reported $15.6 million in Q2.

Excluding the $471,000 gain on the retirement of subdebt mentioned previously, our adjusted fee income was $15.2 million, down from $16.2 million in Q1. The primary drivers of this decline were lapping the seasonal strength in our insurance business from Q1 and a decline in our mortgage banking segment revenue as mortgage trends remain relatively weak in the current interest rate environment. Our non-interest expense increased to $58.9 million from $56.8 million in Q1. Growth in salaries and benefits, regulatory assessments, and office and operations lines were the primary drivers of this increase. Notably, Q2 growth was actually slightly better than our expectations due to our renewed focus on expense management in the current environment, and we anticipate relatively stable expense levels in the second half of the year.

Turning to capital, our TCE ratio remained above 8%, ending the quarter at 8.3%. Furthermore, as shown on Slide 21 of our investor presentation, all of our regulatory capital levels at both the bank and holding company remain above levels considered well capitalized, even if we were to include our AOCI losses in the calculations. To close, with an immaterial level of securities classified as held to maturity, we remain confident that we have the capital flexibility to take advantage of any potential future capital deployment opportunities to drive value for our shareholders. With that, I'll now turn it back to Drake.

Drake Mills (Chairman, President, and CEO)

Thanks, Wally. As I've traveled throughout our markets this past quarter, I'm reminded of how special Origin is. We have an incredible team of people who have a shared vision of who we are and what we can accomplish. Our markets are diversified across our three-state footprint, including a wealth of dynamic growth opportunities in our metropolitan and larger markets, coupled with stable economies in our rural markets. While we were not public at the time, I think back to how our bank was well positioned going into the 2008, 2009 downturn, and how we were able to capitalize on opportunities and build relationships that are still with us today. We are positioned to do the same in 2023, and I'm optimistic about what we will accomplish.

Thanks to our employees who continue to do an incredible job of living out our culture and serving our customers and communities in a dynamic way. Thank you for being on the call today. We'll open up the call for questions.

Operator (participant)

Thank you. At this time, we'll conduct the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to enter the queue. If you have joined via web, please press the Raise Hand icon on the right-hand side of your Duo Roadshow screen. Again, that's star one on your telephone keypad or the Raise Hand icon on the right-hand side of your Duo Roadshow screen. We'll pause briefly to allow any questions to generate. Our first question comes from Matt at Stephens Inc. Matt, your line is open.

Matt Olney (Managing Director and Equity Research Analyst)

Great. Thanks. Good morning, everybody.

Drake Mills (Chairman, President, and CEO)

Good morning, Matt.

Matt Olney (Managing Director and Equity Research Analyst)

I want to start with loan growth. If I take out the mortgage warehouse trends that were strong this quarter, it looks like kind of the core loan growth trends slowed in Q2 from the pace that we saw in Q1. I guess if I just kind of dig down and look by segment, it looks like the slowdown was mostly from the C&I category. Any general commentary on loan growth and C&I and C&I utilizations? Just more broadly, just love to hear a bit of thoughts on borrower appetite. Thanks.

Lance Hall (CFO)

Hey, Matt, good morning. It's Lance. You're exactly right. It's interesting when you dig into the numbers. Our actual new loan production volumes were really in line with what we thought they were going to be. There was an interesting combination of timing around C&I. At the same time, we saw clients using cash or commercial clients using cash to pay down debt. Interestingly, our utilization on our C&I lines actually dropped from 51% to 48%. That was, you know, a little over $100 million in that regard. As we look at pipelines, pipelines remain strong.

You know, as we think about what the second half looks like, you know, we're going to continue to harp on loan growth is going to be governed by our ability to grow core deposits, and we're going to stay with that. You know, we would think for a low to mid-single digits on loan growth. I feel like the C&I is definitely going to come, as we've seen some really nice projects through the pipelines and kind of what we're already seeing in the quarter.

Matt Olney (Managing Director and Equity Research Analyst)

Okay. Appreciate the commentary, Lance, on the loan side. On the credit side, in your presentation, you have a nice details there on the office portfolio. I think it's Slide 13. On the debt service coverage ratios, appreciate kind of the stress scenario there with the higher rates, that you mentioned in there. Would love to appreciate any takeaways the team had, once you guys go through the deep dive of office, and the stress test. What were your kind of general thoughts on the portfolio and, you know, how much stress are you anticipating, in that portfolio? Then any other details you have on office loans with respect to the maturities. I think we've seen some of your peers detail that, in recent weeks.

Didn't know if you had anything on office maturities. Thanks.

Jim Crotwell (Chief Risk Officer)

Matt, good morning, this is Jim. As to the portfolio and how it's performing, we feel really, really good about it. You know, I think it's a direct result of a relationship focus that we have. You know, one of the things we've also talked about is the primary and secondary sources of repayment. You know, we have a total portfolio in our CLO office of $380 million. Liquidity of the guarantor supporting those credits is $352 million. That speaks to the financial support from the secondary. You know, we shared the debt service coverage. We're very pleased when we shocked those, that they still performed well.

You know, when we looked at the fixed rate only portion of that from a debt service standpoint and shocked, you know, it looked quite, we felt really good about that as well, you know, showing at 1.75, we shocked it at 1.52. You know, one of the other things that we did is, is we looked at the secondary source repayment from an LTV perspective. You know, the original weighted average LTV for the sector is 54%, which is very, very strong. When we shocked that at a cap rate of 10%, that strength weighted average LTV at 79%.

Lastly, as far as looking forward, from any maturities, we only have $5.2 million of fixed rate loans in this sector that will reprice this year. When you look to 2024, we have about $32 million is all that will reprice. All in all, feel really, really good about this portfolio. Again, it's driven by our relationship focus throughout our markets.

Matt Olney (Managing Director and Equity Research Analyst)

Perfect. Okay, thanks for that, Jim. I guess shifting over towards deposits, deposit growth. I think Wally mentioned expectations for deposit betas to increase in the back half of the year. Would love to get much more general thoughts around this, the back half of the year, and then as it relates to the margin, thoughts on the margin the back half of the year. Thanks.

Wally Wallace (CFO)

Thanks. Matt, good morning. I said in the prepared remarks that we expect, like you said, continued increase in deposit betas, which will drive some further pressure on margins. Maybe to provide some context to how we're thinking about our deposit mix and the impact to margin in the back half of the year. The key is trying to figure out where are our non-interest-bearing deposits gonna end up as a % of total deposits. We went back and looked at rather than the cycle right before COVID, we went and looked back to the cycle in 2004 to 2006. In that cycle, the Fed hiked more aggressively, and in this cycle it's been even more aggressive.

In that cycle, our non-interest-bearing deposits, they bottomed in the mid-teens as a percentage of total deposits. In that point in time, we were only in Louisiana. What we did is we said, "All right, let's assume that our Louisiana non-interest-bearing deposits declined to the mid-teens, and then let's look at our Texas markets." Relative to Louisiana, Texas is more C&I heavy, and as a result, they have more non-interest-bearing deposits as a percentage of total. When we took Louisiana down, we assumed that our Texas markets shift down it, but remain kind of similar to where they are now on a relative basis. They come down, but they don't come down to the mid-teens. If you put all that together, that would suggest that our non-interest-bearing deposits would get down into the low 20s%.

We are now modeling a decline from 25%, where we ended the second quarter, down to about 20%-21% by the end of the year. What that has the effect of doing is increasing our deposit betas. We think we'll settle in around 50% on our total cumulative deposit beta, and that will drive net interest margin compression in the third quarter and again in the fourth quarter, but at lower rates than what we saw in the first and the second quarter. We anticipate that we'll end the year around 3% net interest margin, and we are targeting and trying to maintain that level moving forward and ultimately improve on it as we continue to see the impact of more disciplined loan pricing impact the loan side of the equation.

Matt Olney (Managing Director and Equity Research Analyst)

Okay, that's helpful, Wally. Thanks for the commentary. Just following up on one of your points there on the non-interest-bearing deposit flows. Any commentary about what you're seeing more in, in recent months and weeks, any kind of signs of stabilization there, more recently? Thanks.

Wally Wallace (CFO)

Yeah. If you look at what occurred in the 1st quarter, the shift in non-interest-bearing deposits was more than double what we saw in the 2nd quarter. We feel that that is suggesting that there is some stabilization in the trends, and we don't want to be too aggressive. We're trying to be conservative in our modeling. We are modeling that, that continues to stabilize through the course of the back half of the year.

Matt Olney (Managing Director and Equity Research Analyst)

Okay. Okay, guys, appreciate all the commentary. I'll hop back in the queue.

Operator (participant)

Thank you. Our next question comes from Michael at Raymond James. Michael, your line is open.

Michael Rose (Managing Director of Equity Research)

Hey, good morning, guys. Thanks for taking my questions.

Wally Wallace (CFO)

Morning.

Michael Rose (Managing Director of Equity Research)

Maybe just to circle the loop on the margin. You guys, the wholesale or the excess funding that you guys should cap.

paid off, that was a 12 basis point drag. I assume you'll get that back. Still, just given the increase in betas and NIB mix shift, further NIB mix shift, you're still kind of, with all that, you're still expecting the margin down around 3% by the end of the year. Did I understand that right?

Wally Wallace (CFO)

Yeah, Michael, that's correct. If you adjust for the impacts of the excess liquidity that we had in the first quarter and then that we carried in the second quarter, in the first quarter, you would have shown net interest margin compression of 31 basis points. In the second quarter, that was 16 basis points. In the third quarter, we would expect the rate of decline or compression to decline, say, maybe cut in half of what we saw in the second quarter and then down, you know, maybe half again in the fourth quarter.

Michael Rose (Managing Director of Equity Research)

Okay, thanks for that. Then I think I heard that you guys were kind of targeting, you know, flattish, non-interest expenses for the next quarter. Can you just talk about just given the spread compression that you expected to have, just what more you can do to offset, you know, some of that? I understand that you're a growth franchise and trying to balance, you know, that with trying to, you know, preserve profitability. What more, you know, can you guys do to kind of offset some of those spread income pressures? Thanks.

Drake Mills (Chairman, President, and CEO)

Michael, it's Drake. Yeah, we have a, what I would call a laser focus on expense management and areas that aren't being productive for us at this point as we move into the second half of the year. It's going to be the responsibility of this team to ensure that we continue the momentum we saw over the last couple of years of making progress, even though we're going to take a step back from an efficiency standpoint. In ROA, we will continue to focus on areas that are not being productive, as I said just a few minutes ago, and I think we can find some success there.

We, I think with the footprint growth that we have, what we're focused on from an expense management standpoint doesn't in any way impact the momentum we see from a profitable growth perspective, and that's going to be our focus.

Michael Rose (Managing Director of Equity Research)

Got it. You guys have pretty solid capital ratios. You know, we've seen a few banks, I'd say an increasing number of banks do at least some partial, you know, bond portfolio restructurings to help, you know, offset some of the NIM pressure. Is that something that you guys have or would consider? You know, if so, I mean, you know, what, what would be the kind of potential size that you could potentially look at? Thanks.

Drake Mills (Chairman, President, and CEO)

We actually had a couple of projects that Wally was working on before SVB, that gave us some opportunities to take some gains in some areas that would have been beneficial to be able to offset the losses in that portfolio to better position us. When I say better position us, probably to pay down debt would be the most efficient way for us to utilize those sales. The concern we had and the optics of that certainly put that on the back burner, and I think there's an opportunity for us to move forward with a couple of those projects. We are going to be looking at every possible trigger we can pull to put ourselves in a better position from a portfolio perspective moving forward.

I just feel like that's going to be, you know, top of mind for us in the next two quarters.

Michael Rose (Managing Director of Equity Research)

All right. Maybe finally, for me, we've seen an interesting two deals here the past few days. Seems like the chatter is picking up. you know, again, I know your currency is probably not where you want it to be, but you know, can you just talk about your expectations for the M&A environment and, you know, what you guys would, in theory, be looking for as we move into the next couple of years? Thanks.

Drake Mills (Chairman, President, and CEO)

This is one of the, I would say, exciting aspects of this market. There's always opportunities when you look at challenges and the relationships that we've built in these markets. The opportunity we had with BTH to create a partnership and also a reputation of how we're going to manage these opportunities have been highly beneficial to us. I'm excited about what the outlook is. I know the currency is not where we want it to be, but when you build partnerships and you take opportunities, there are opportunities, even where the market is today, for an upside down the road. I think that's partially job one for me, is to continue to look through those opportunities and hopefully something comes to the forefront that's meaningful.

If we do something, this is our best utilization of capital at this point, it will be meaningful, and it'll be what I think our investors would expect in this type of market.

Michael Rose (Managing Director of Equity Research)

Great. I'll step back. Thanks for taking my question.

Operator (participant)

Thank you. Our next question comes from Brady at Keefe, Bruyette & Woods. Brady, your line is open.

Brady Gailey (Managing Director of Equity Research)

Hey, thank you. Good morning, guys.

Drake Mills (Chairman, President, and CEO)

Good morning, Brady. How are you today?

Wally Wallace (CFO)

Doing all right. I just wanted to clarify the expense guidance of stable in the back half of this year. If I look at the expenses in the first half, it was about $57 million and then about $59 million in 2Q. Is it based on the 2Q level or kind of an average of the first half of the year? Thanks, Brady. That's a good point. Our expectation is that it'll be flattish from the second quarter number.

Brady Gailey (Managing Director of Equity Research)

Okay. All right. Then, so back under 10 billion by the end of this year, you'll most certainly probably cross next year. I think in the past, you guys have talked about a Durbin impact of about $5 million. Is that still the right way to think about it? Is there anything you can do to, you know, offset that revenue headwind?

Drake Mills (Chairman, President, and CEO)

Yes, that Durbin impact is about $5 million. That will hit us mid-year 2025, if we're successful this year, which I think we will be. We have talked about non-interest income opportunities that we will continue to, I think, drive and be successful at them. Not only insurance, but some other opportunities that we have. You know, unfortunately for us, multiples, as we've talked about in the past, and on these agencies, have gotten a little bit out of hand in a market where I think is the top of the market from how hard the market is, even though we feel like that'll be extended for a little bit longer period of time. Just not a good time to be there.

I do think mid-year next year, we should be able to tee some opportunities up and hopefully get back in there. We do feel that there is an opportunity to replace that revenue with non-interest income. It makes a tremendous amount of sense.

Brady Gailey (Managing Director of Equity Research)

Okay. Then finally for me, low to mid-single digit loan growth. I think in the past, you guys have talked about, you're hoping that deposit growth would be even above loan growth. Is that still the goal and the right way to think about it for the rest of the year?

Drake Mills (Chairman, President, and CEO)

It is. As we said in opening remarks, it's interesting, as you know, this institution has always focused on core deposit growth. We've been sending core deposit growth for years. Some of the activities that we have going on and programs we have going on internally to incent significant deposit growth, and when I say deposit growth, I mean core deposit growth, I think we'll see some success there. We're starting to see stabilization in a lot of areas.

Historically, I always want to make this point, you go back for the last seven years, the second quarter for us has been a tough deposit quarter because of the outflows, not only public funds, but the utilization of non-interest-bearing deposits and, you know, through our companies. We typically see a strong move in the third and fourth quarter, we're expecting that in the third quarter. We're expecting a lot of stabilization in the third quarter from a couple of areas. I am hopeful. I do feel that we're in markets with inward migration that will give us the opportunity to see positive deposit growth. That is a challenge for us at this point.

We've been dedicated, committed to maintaining lower than traditional loan deposit ratios. That's what's driving our loan growth at this point. It's also given us an opportunity to focus on profitable pricing and to make sure that we're being highly selective in the credit and credit qualities. The client selection process we're going through right now couldn't be more pleased with. Relationship managers are doing an awesome job, high focus on deposit growth. I think we'll see some success.

Brady Gailey (Managing Director of Equity Research)

All right, great. Thanks, guys.

Drake Mills (Chairman, President, and CEO)

Thank you.

Operator (participant)

Thank you. Next question comes from Kevin at D.A. Davidson. Kevin, your line is open.

Kevin Fitzsimmons (Managing Director and Senior Research Analyst)

Hey, good morning, everyone.

Drake Mills (Chairman, President, and CEO)

Good morning, Kevin.

Kevin Fitzsimmons (Managing Director and Senior Research Analyst)

Hey, hey, Drake, just to follow up on M&A. I know this is a longer-term thing, but just given, you know, the focus on deposits today, you've obviously built up the company mainly organically with... and become, you know, a Texas growth story. Do you see your deals, if there are deals, and I'm talking 2 or 3 years down the line, are they, you know, is it gonna be more front of mind, you know, loan growth opportunities deeper in Texas and maybe more opportunities in East Texas? Or will you be looking in more slower growth states or, you know, good bases of core deposits, or is it both? I'm just trying to get a sense for where those rank in terms of opportunity.

Drake Mills (Chairman, President, and CEO)

Our primary focus. We have at this point, I'd say 2 to 3 relationships that we continue to build on, that I think could be highly productive for this company. It'd be great partnerships. Those are focused in geographies that we are currently in, in growth areas. The upside of these opportunities is they have strong rural deposit franchises that are meaningful and always have been meaningful to us. We understand how to build those type of markets, and we do feel that there is a strong need for us to continue to focus on rural deposit franchises. That's what we're looking at now, and I hope it's not 2 to 3 years.

I hope that there's opportunities for these partnerships to form and, and work for the upside, and that's the approach we're taking. It's currently focused in footprint. It's focused on continuing the Texas growth story, core deposit, rural core deposit opportunities that make sense for us. That's the focus, and that's the opportunity we have at this point.

Kevin Fitzsimmons (Managing Director and Senior Research Analyst)

Great. Thank you very much.

Drake Mills (Chairman, President, and CEO)

Hey, Kevin, I would say that for us to cover up some of this cycle's impact to earnings, those are highlighted more, earnings and their ability to earn is gonna be another driver for those decisions.

Kevin Fitzsimmons (Managing Director and Senior Research Analyst)

Got it. It makes sense. One quick question. I know the low to mid-single-digit growth for loan, that outlook is most likely ex-warehouse. I'm just curious where you see warehouse going from here. I know it had a big bump this quarter, but where do you see those balances going?

Drake Mills (Chairman, President, and CEO)

Yeah, I think we'll be down, you know, let's say, you know, $30 million-$40 million in the third quarter and probably finish up the end of the year around $300 million.

Kevin Fitzsimmons (Managing Director and Senior Research Analyst)

Got it. Okay, thanks very much. That's all I have.

Drake Mills (Chairman, President, and CEO)

Thank you, Kevin.

Operator (participant)

Thank you once again, ladies and gentlemen. If you would like to ask a question, please press star one on your telephone keypad to enter the queue. If you have joined via web, please press the Raise Hand icon on the right-hand side of your DealRoadshow screen. We'll pause here briefly to allow any questions to generate. Our next question comes from Stephen, from Piper Sandler. Stephen, your line is open. You may proceed.

Stephen Scouten (Managing Director and Senior Research Analyst)

Great, thanks so much. Good morning, everyone. Drake, I just wanted to follow up. You said, any potential M&A would be meaningful. I guess I'm just curious what you mean by that explicitly. Is that a, is that a comment on what the size of a potential deal could be? If so, do you have a, kind of size range that you think about of what, what becomes meaningful or impactful for you guys at this point?

Drake Mills (Chairman, President, and CEO)

Yeah, meaningful to me is that it'll be, it'll hit the metrics that I think investors and myself would like to see from the standpoint of earn back and the accretive nature of it, the impact it has on the deposit franchise as a whole, the ability to grow that deposit franchise, the people that are behind those M&As and the relationships that are, I would say, partnerships and those relationships that we bring in. That's meaningful to me. From a size perspective, it's just getting difficult, with the expense and the stress it has on organizations and everything for us to look at a deal that's, you know, less than $1 billion. I think that's where we try to focus that and above.

Stephen Scouten (Managing Director and Senior Research Analyst)

Okay, super. That's very helpful. I'm kind of curious how you guys are thinking about balance sheet mix composition from this point forward, how you can make the balance sheet more efficient, I guess maybe somebody said a little bit earlier. Within that, how you think about your securities balances, if we would expect those to continue to run down and repurpose those funds into loan growth or otherwise?

Wally Wallace (CFO)

Yeah, Stephen. We definitely anticipate that we will continue to let the securities portfolio pay off and be replaced with either funding loan growth or paying down borrowings. That comment is outside of any potential opportunity we have to accelerate that mix. I think that our, our ideal balance sheet kind of securities mix from an optimization standpoint would be in the 12%-15% range. I think we think that gives us the proper mix of liquidity to fund loan growth, and the ability to, you know, provide some yield for the liquidity on the liquidity that we're holding.

Stephen Scouten (Managing Director and Senior Research Analyst)

Okay, perfect. Thanks, Wally. Then maybe just last thing for me, I'm really interested in, in kind of these digital initiatives and, and the strength and new customer acquisition that seems to be coming out of that. Is there any kind of specific wins or specific benefits that you could reference that's really driving that, or is it more just an increased focus, blocking and tackling? I'm just curious if you can dig down into those digital initiatives at all to kind of speak to the benefits.

Drake Mills (Chairman, President, and CEO)

Yeah. Hey, so this is Lance. Good, good question. A couple of things there. Maybe I'll start with, really for us, we went through a deep data cleanse last year that was incredibly helpful. We talk about better insights into trends and behaviors, and I think what that showed us this year, that maybe we didn't have the ability to see clearly before, was the new client acquisition that we've obtained this year. That's not a, you know, because of the digital, but it's what the data has been able to kind of prove in our ability to call in a more meaningful way and understand why clients are moving to us. Had significant new client acquisition through the first half of the year, dramatically more than we did the first half of last year.

It's really a function of really good job from our bankers from calling efforts, but also we've talked a lot historically about our incentive plans. You know, our incentive plans have always been deposit-centric and driven. Historically, for us, $1 in deposits has been equal to $1 in loans. You create a mentality of not having lenders, but having true relationship bankers. In 2023, $1 deposits is more incentive than $1 of loans. Our bankers understand kind of what we're trying to accomplish. At the same time, we are doing a lot on the digital and technology side, as we talked about. We continue to enhance our Robotic Process Automation.

We have a goal of 8,000 manual hours this year to reduce what are being burdened on our people so that we can create and drive more efficiency. We're excited partnered with a firm called Glia, which is gonna be coming in the second half of this year, which is gonna be a much more robust and dynamic experience for our clients when it comes to chat and call services. We continue to kind of try to find best in class when it comes to mobile and a lot of other areas. I mean, we, we feel for us that technology needs to be a dramatic driver. As, you know, as an industry, I think ultimately we need to get our efficiency ratios down in the 40s, and I think technology is the way to do it.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah, hard to disagree with that. Appreciate all the color. Thanks for the time today.

Drake Mills (Chairman, President, and CEO)

Thank you.

Operator (participant)

Thank you. Once more, if you would like to ask a question, please press star one on your cellular keypad to enter the queue. If you join via web, please press the Raise Hand icon on the right-hand side of your Duo screen. We'll pause briefly to allow any questions to generate. It appears there are currently no further questions. Handing it back to Drake Mills with Origin Bancorp, Inc. for any final remarks.

Drake Mills (Chairman, President, and CEO)

Yeah. Thank you for everyone for being on the call today. I will close with saying that, you know, certainly there are opportunities for us to look at the challenges and the markets we're in, I cannot be more proud of this organization from the standpoint of the positives that we're dealing with every day. Our geography, we have strong economies, attractive demographics, inward migration. Our teams are experienced, they're cohesive. Our credit profile is stronger than it's ever been. Our client selection process through our relationship managers has never been better and stronger, we're talking to the right type of clients. Our deposit base, deep relationships, rural backgrounds in a lot of areas. We continue to see growth, new account openings, new clients, the type of accounts we're bringing over in line with our C&I profiles.

Lastly, the opportunities in our geography as we go through the next two years are strong. We are building relationships that are meaningful, that will be impactful, and they will change the outlook of this organization moving forward. Very proud of our banker activity, the client relationships we have, the position we're in. Very proud to be a part of this organization. I appreciate each of you being on the call, and I appreciate your support. We'll see you next time. Thank you.

Operator (participant)

This concludes today's call. A replay will be made available shortly. Thank you, and have a great day.